Ponzi Scheme Warning Signs

South Africans, particularly the more vulnerable in society such as the working class and retired, lose their life savings daily to unscrupulous fraudsters through Ponzi schemes (Financial schemes that depend on enticing a steady flow of investors, whose money goes to pay off promises made to earlier investors and inevitably collapse). However, there are a few telltale signs of a Ponzi scheme according to National Consumer Commissioner (NCC) spokesperson Trevor Hattingh.

Ponzi scheme

These include pretty much anything that looks too good to be true or reeks of ‘get rich quick’. He specifies the following danger signs:

  • It offers very high returns on investments, with interest higher than that of any bank or authorised financial services provider.
  • It is never widely publicised or advertised.
  • It is not authorised by or registered with financial services providers (such as the Financial Services Board, South AFrican Reserve Bank and National Consumer Commissioner) and is not accountable to anybody.
  • And most tellingly, investors or participants primarily derive an income or return on investment from recruiting other participants (otherwise known as a pyramid scheme).

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From their side the South African Reserve Bank offers the following tips:

  • If you want to make money, do your homework first
  • Get advice from REGISTERED financial advisers after doing your own research online, such as those registered with the Financial Planning Institution (known as certified financial planners)
  • Be patient and don’t rush into anything
  • Be vigilant of anything that promises unbelievable results or talks about a ‘secret’ exclusive formula
  • Check with the aforementioned national institutions whether the scheme that is offering you investment opportunities is indeed registered with them

Unfortunately, little can be done to recoup investor losses in the case of participation in a Ponzi scheme. “Participants of a pyramid or related scheme have no recourse under the law when the scheme collapses,” said Hattingh.

The CPA prohibits any person from promoting, or knowingly joining or participating in a pyramid scheme. “In addition, a participant who knowingly participates, but demonstrates ignorance to the law would be committing an offence,” adds Hattingh.

Furthermore, investors are encouraged to ensure that their financial advisors hold enough Professional Indemnity Insurance that will cover their full investment amount should a loss occur due to bad advice from a reputable financial institution. If consumers are given bad advice and incur losses owing to a reputable advisor being led into a Ponzi scheme, they will then have a basis to make a claim against their advisors’ insurance policy.  


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