HOW TO IDENTIFY AN INVESTMENT PONZI SCHEME; HERE ARE 8 WARNING SIGNS TO LOOK OUT FOR

Ponzi scheme

An investment scheme which operates on the coarse principle of “robbing Peter to pay Paul”, specifically paying profits to earlier investors with funds gotten from newer investors, can be referred to as a Ponzi scheme. Named after one of its most popular promoters; Charles Ponzi, a Ponzi scheme typically has no underlying business that generates revenue to meet up with the promised high return on investment, hence the fever for attracting new investors.

In the early 1920s, Charles Ponzi who was an Italian immigrant to the United States perpetrated one of such schemes in which he promised investors 100% returns on their investment after 90 days, and 50% ROI after 45 days. He purportedly traded in International Reply Coupons, only for it to be discovered upon his arrest that he was simply taking money from new investors to pay old investors.

With the absence of a sound business model to multiply funds, a Ponzi scheme only lasts as long as there is a continuous trooping in of new investors, and old investors as well are willing to roll over or leave their money in the system for longer. Usually, when returns due to be paid begins to exceed new investments, the system begins a downward decline. As it is with our experience in well-known Ponzi schemes like MMM, Twinkas and Ultimate cycler, the website usually crash along sides victims’ hopes; Or the more recent Wazobia investment where the promoters move the website to a new address and attach more stringent conditions for investors to cash out.

WHY PONZI SCHEMES THRIVE

One would not be wrong to wonder why people still patronize Ponzi schemes despite its notoriety. Well, it is said that when it comes to investment, greed is your worst enemy. People who fall victim most times are at their greediest before the scheme unravels because they enter, hoping to make huge profits within the shortest possible time. Others too might be due to a limited knowledge on investments, gullibility, and a huge appetite for risks. As a matter of fact, some phony investment schemes might not be as glaring as the status quo, but all the same the end is still disastrous for the investors when the perpetrators abscond with the funds.

How to identify an investment Ponzi scheme

HOW TO IDENTIFY AN INVESTMENT PONZI SCHEME

Now to the main focus of this article, how do one identify an investment Ponzi scheme? The following are 8 warning signs or red flags to look out for.

#1. THEY PROMISE ABNORMALLY HIGH RETURNS WITHIN A RIDICULOUSLY SHORT PERIOD OF TIME

Genuine investments do not offer such high returns especially within such a short period, because it is economically impossible to attain. In Nigeria, hardly any moderate risk investment will offer a return of 20% within the shortest period of 90 days. So my dears, when someone offers to pay you 50% of your capital in returns, within 3 days or any of such ‘too good to be true’ offers, RUN! Because if it’s too good to be true, it probably is.

#2 EMPHASIS ON GUARANTEED RETURNS

Asides government securities like treasury bills and sovereign bonds, no other investment guarantees returns. Typically, high yield investments go hand in hand with equally high risks.

The difference however lies in the fact that when a legitimate investment fails, the investor usually does not lose his entire capital because registered operators are regulated by the Securities & Exchange commission (SEC) and there exist some form of protection for the investor such as deposit insurance, investor protection fund and government bail outs.

On the other hand, the promoters of Ponzi schemes in addition to the unrealistically high return on investment promised, use ‘guaranteed returns’ to bait the gullible and the greedy.

#3 VAGUE BUSINESS MODEL

This, in my opinion is the most obvious of them all. Truth is, if an investment scheme does not provide a clear explanation on how it generates revenues enough to pay investors and still make profit, then you have no business parting with your money. Also, investments that cannot be understood or do not give complete information fit into this category.

#4 NEED FOR MORE INVESTORS

Ponzi scheme Promoters are always under pressure to bring in new investors because they know that the survival of the scheme is solely dependent on ‘New Money’ from new investors. Hence, they offer attractive incentives for referrals. They may also employ the pyramid strategy whereby an existing investor is required to bring in another before he/she can cash out.

#5 PRESSURE TO ROLL OVER OR UPGRADE

Ponzi scheme promoters routinely encourage participants to “roll over” investments and sometimes promise even higher returns on the amount rolled over. Still, they make it mandatory for members to upgrade, in other words increase their investment capital after cashing out a few times in order to ensure that too many people do not withdraw their money at once.

#6 UNREGISTERED OPERATORS

Be wary of investment outfits that are not licensed or registered under a government regulatory body which in this case is the Securities and Exchange Commission (SEC), Nigeria.

#7 STEADY RETURNS

Considering how volatile the money market is, it is therefore abnormal to get consistent returns regardless of how the market performs. Ponzi schemes, at the start pay steady returns to early investors in order to look convincing enough to attract new investors.

#8 PROMOTERS ARE FACELESS

The people behind Ponzi schemes are usually faceless, and more so do not have a physical address. While some of them are short of something as basic as a website; They operate via groups on social media only.

If you enjoyed this article, kindly subscribe to our Newsletter by providing your name and email address in the box at the bottom of this page.

Share your thoughts in the comments box.

Avatar

Author: Juliet Jonathan

Hey there, My name is Juliet Jonathan. I am an O&P graduate, social media manager, creative writer for Right-Vision Premium Consulting Ltd. I am your favourite personal finance coach because I love to talk about money, investments and whatnot. Please stay tuned as I bring you up to date with all you need to know about money matters; personal finance hacks, budgetting, finance trends & investment. You can reach me via e-mail: julietjonathan995@gmail.com, Thanks for reading the blog!

8 thoughts on “HOW TO IDENTIFY AN INVESTMENT PONZI SCHEME; HERE ARE 8 WARNING SIGNS TO LOOK OUT FOR”

    1. Juliet Jonathan

      Thank you Chidi for suggesting the topic of this article. And you are right too, Ponzi type activities have made it into Crypto mining as well. Perhaps I’ll write an article about mining Cryptocurrencies soon. Cheers.

  1. Wow! Juliet. You’re this good with your pen? You did a beautiful job here dear.
    This too I like especially because of the wisdom deposited in it. Its such a nice piece for one to read and ponder on. I did MMM too but then I just knew that with the approach of Christmas people will definitely need cash for spending so I just stopped putting in money in it two weeks to 25th and am happy the little wisdom I had then guilded me. Now the latest is this Bitcoin stuff…shaa they won’t see my back.
    Once again thank you for such a beautiful article. It’s admirable of you. Know that you’ve gotten a fan in me and I’m happy your my friend. So with these kinds of piece it’s a friend raised to power 2 from me to you…😃 Keep it up girl, you’re doing well.

    1. Juliet Jonathan

      Oh… Michael this is so heartwarming. I am really glad this article was helpful. P.s – I enjoyed reading your comment too. 😉

  2. Juliet Jonathan

    Hello Everest, thank you for your comment. Expect our soon to be published article on mining bitcoins. Hearty Cheers.

Leave a Comment

Your email address will not be published. Required fields are marked *