KAMPALA – As an online Investor, there is a possibility that you might have come across tempting and pressurizing statements like “limited time only”, “special discount for first 50 investors”, or “your opportunity is now, get your capital and interest in two weeks”, “bring five other investors and double your profits” etc.
You are advised that whenever you come across such statements, you should be extremely careful so that you would not fall victim to fraudsters. Their sole aim of making such promises is to lure you to invest your money in their dubious scheme without thinking.
They would use several fictitious track records to attract and gain your trust. They would tell you that they have many years of experience, and could even say they have won several awards, all in their bid to prove their credibility.
They make use of social media platforms like WhatsApp, Instagram and Facebook, to send unsolicited messages with the purpose of defrauding their target audience. The system of digital payments is also helping them operate smoothly and efficiently.
If you are a new investor, a widow or pensioner, you should be careful so as not to fall to their gimmicks because you are usually their soft targets.
We will be discussing the common investment scams and how to detect and report them.
Types of Scams
Scammers always take advantage of poor financial literacy In Africa, and the investor’s greed, to carry out their activities. There are seven common types of scams and it is important you note how they work.
- Ponzi schemes
This is a popular investing scam which aims to swindle people by high returns with little or no risk.
Ponzi schemes always give you the impression that you are investing in something. The operators of the scheme ask you to give them money so they can invest in a business, and pay you high returns periodically.
After you part with cash, they ask you to recruit new members while waiting for your returns so you can get a commission. When you recruit new members, they also give cash to the scheme operator to invest in the so-called business and you get a commission for introducing them.
However, the beneficiaries of a Ponzi scheme are always the early investors as they get paid huge returns so they can go to town and “sell the story”
It will get to a point when returns will start slowing down, and the scheme operators will give excuses such as Government persecution or network issues. At that point, people still keep on investing and they will be urged to exercise patience while they scheme operators “sort things out”.
The next thing is that they will fold up and runaway. People are always lured in because the early investors get paid and so it looks legitimate. However, it is the money from newer investors that is recycled to pay older investors.
For instance, between 2015 to 2017, a defunct Ponzi scheme known as Mavrodi Mundial Moneybox (MMM), defrauded three million Nigerians of about N18 billion.
Over 5,000 investors in Uganda also lost $2.7 million to cryptocurrency Ponzi scheme operators called Dunamis Coin after they were promised 40% return on investments.
- High-Yield Investment Programs (HYIPs)
This is an investing scam that promises very high returns with little or no risks. You should know that this scheme is operated by unlicensed people who are scammers.
A characteristic of HYIPs is that they promise excessively high returns of more than 100% and they always use complex jargon to confuse investors. At the end of the day, the system would fold up, and the Investors won’t be able to collect their money.
- Forex Scams
A scammer could pose as an online forex guru who would boast that he has proven and favorable strategies to trade forex in such a way that it would make you wealthy overnight.
According to Karan Singh from Safe Forex Brokers, “Unlicensed forex brokers can also be forex scammers. They could operate a forex brokerage company without a license, or sometimes with a license meant for services not related to forex. Once you part with cash, you will find it difficult to withdraw. They may even send you periodic account statements to seem genuine.”
“There are 100s of unlicensed brokers operating in Africa, and these brokers are not licensed locally by any regulators or by any Top-tier foreign regulators like the FCA & ASIC.”
Most times the scam broker will ask you to deposit more cash before you can withdraw. Even when you deposit more funds, you still won’t be able to withdraw and you are finally blocked or they stop responding to you.
A good forex broker will usually be licensed by at least one regulatory body including the one in the country where it is operating.
It is estimated that more than 50% of Forex scams get their victims on social media. 34.2% through Facebook and 19.6% through Instagram
- Pyramid scheme
This is another investing scam you should beware of. It is a defrauding system where lots of investors at the bottom of the pyramid are obligated to pay money to a few people at the top. Every new Investor has to pay their way to get to the top.
A pyramid scheme starts with the man/founder at the top who charges a monthly fee from all members. The members are then required to recruit new members who will also pay a monthly fee to the founder at the top, and the person recruiting gets a cut of the monthly registration fee
Usually pyramid scheme members will be asked to buy products from the founder and sell, but their commissions don’t come from how much products they sell.
There is a major difference between Multi-level marketing (MLM) and a pyramid scheme. MLM representatives are paid a percentage commission from the sales of a product they are marketing. Pyramid scheme representatives are paid a commission based on how many new members they recruit.
When the members below can no longer recruit new members, they quit the pyramid. Just like other Ponzi schemes, this scheme always ends up falling apart and it is not a sustainable business model.
- Pump and Dump stock
This is a securities fraud which involves artificial inflation of the price of a stock. The perpetrators of this fraud do this by giving wrong and misleading statements regarding the value of the Company.
This misleading hype about the Company leads to an increase in demand for its stocks, which also leads to an increase in price of the stock. This causes FOMO to kick in, and investors buy a lot of the stock.
The scammers then quickly dump the stock by selling all their stake at a higher price after the stock has increased in value. If you are the new owner of the shares, you will likely lose a large part of your capital because the security’s price will fall rapidly. These kinds of stock are also known as meme stocks.
- Advance Fee fraud
This is another form of investing scam where you would be required to pay a certain sum of money in advance to help the scammer secure an investment. The scammer will promise to reward you handsomely if you can help him. However, once you part with cash, the scammer will severe communication with you.
- Tax haven Fraud
Tax Haven fraud is when investors, mostly foreigners are promised that they will have to pay low or zero taxes. Some countries are tax havens and their banks do not cooperate with foreign investigation into their customers’ dealings.
These countries attract people who want to launder questionable money, and so open accounts with Banks in these s0 called tax-havens.
A fraudster can capitalize on this and offer you a tax-free investment opportunity in a tax haven. If you are looking to evade taxes. You might take up the fraudulent offer and once you part with cash, the fraudster runs away with your money.
How you can easily spot online investment scams
- Ensure you ask questions like Is the Investment too good to be true? Is this a time limit to invest?
- Check if the investment is registered with the capital market regulators of your country
- Carry out a Google search bout the investment
How to report an Investment Scam
If you come across any fraudulent investment scheme, you can report to the capital market regulator in your country. Uganda has the Capital Market Authority (CMA), South Africa has the Financial Sector Conduct Authority (FSCA), and Nigeria has the Securities and Exchange Commission (SEC) etc.
Don’t be the next victim
My final take is that online investment scams are real, and the menace keeps increasing with people falling victims on daily basis. Therefore, don’t rush in taking any Investment decision. Do your research well, have proper understanding of the investment, and seek advice from the right sources.