Taking advantage of the tough economic times we're in, there has recently been an explosion of get-rich-quick schemes-all across the internet and social media.

Many unsuspecting and desperate people “invest” their hard-earned money or savings in these schemes with the hope of making great returns as promised by the fraudsters in control of these schemes, only to end up losing all of their money.

A pyramid scheme is a fraudulent scheme where existing “investors” are paid with funds collated from new investors. “Investors” are required to recruit other members before earning returns on their original investment.

Ponzi schemes are operated by tricksters who invite people to invest in their scheme or business and promise unrealistically large returns on the investment in a short period of time. These schemes depend on a steady stream of new investors, to pay off promises made to previous investors.

Both of the above-mentioned schemes inevitability fail, as it later becomes impossible to find enough new investors to keep the scheme going.

In terms of the South African Law, a pyramid scheme is an unlawful practice in terms whereof the newest members fund the “investments” of existing members of the scheme.

The general prohibition of pyramid and related schemes are found in section 43(2) of the Consumer Protection Act, Act 68 of 2008.

SABRIC, the South African Banking Risk Information Centre, urges consumers to be skeptical of any investment that seems too good to be true, to prevent being deceived by so-called investments that promise quick, high and guaranteed returns. 

SABRIC has the following tips to help consumers identify Ponzi and pyramid schemes.

Tips to spot a Ponzi scheme:

• The promoter promises high returns, which could not be achieved through normal conventional investment opportunities, within a short period.
• In some cases, the promoter will use fake qualifications or references to entice investors for example, an “attorney” with “many years” of experience in the stock market.
• Often high returns are paid initially and then investors are lured into investing even more money.
• They often promise guaranteed returns, No return is ever guaranteed - all investments carry some risk.
• Promoters are usually quite secretive about the actual business model.
• The promoter becomes unavailable and returns dry up.
• Usually the scheme collapses soon thereafter.

Tips to spot a pyramid scheme:

• Promoter promises high returns over a short period and your returns increase with the number of people that you recruit to the scheme.
• A fee or initial investment is required to participate in the scheme.
• Participants are asked to recruit more investors and rewarded for bringing them into the scheme.
• The scheme has multiple levels of members, all collecting commission on a single transaction.
• They are often disguised as 'stokvels' and may even use virtual currencies like Bitcoin to side-step the formal banking sector where they could be detected.
• General secrecy – e.g. no details are made available regarding where the funds will be invested, or in what. Very general terms will be used to describe the scheme.
• Schemes offer investment in “commodity trading”, “forex trading” or “virtual currencies”.
• Short investment periods – sometimes as little as 10 days – with very high rates of return and strong encouragement to reinvest automatically.

For more information go to www.sabric.co.za.

These schemes usually operate on trust and an invitation to invest can therefore often come from someone close to you, such as a family member, community leader or religious figure. 

Always consult a qualified financial advisor before investing your money and remember the golden rule: If it sounds too good to be true, it probably is!