In these days of digital access, relieving someone of a large amount of money can happen without violence or close personal contact. As a result, the number of players in this unlawful field has increased, making scams a competitive industry. Competition always drives innovation, and in this case, innovation is of grave concern.
Forewarned is forearmed, even when schemes keep shapeshifting.
It is certainly useful to look back at the modus operandi of the more prominent scams that South African investors have fallen prey to over the past couple of years (although this is unfortunately by no means an exhaustive list).
MTI (Mirror Trading International)
MTI promised high returns through a Bitcoin investment scheme, claiming that funds were pooled and then invested using a sophisticated AI-driven trading algorithm. The scheme guaranteed returns of up to 10% a month; it grew its client base through a Multi-Level Marketing (MLM) structure which basically relied on “word of mouth” referrals. With the aid of social media this was very successful.
Investigations revealed that MTI was operating as a Ponzi scheme, and the estimated losses are valued at more than R30 billion in the US alone.
BHI Trust
BHI Trust promoted itself as a reliable investment targeting high-net-worth individuals and claiming to be an expert day-trading operation investing in established stocks like BHP Billiton and Anglo American. The scheme was not registered under any law and promised unrealistic returns.
The BHI Trust defrauded investors of over R2.3 billion. The mandate referred to their bank account as “Berkshire Hathaway Investments (Pty) Ltd” – fraudulently using the name of Warren Buffett’s company to create a veneer of respectability – hence the use of the initials “BHI”.
MMM Global
The MMM Global scheme promised returns of 30% per month and amassed many South African participants before it collapsed in 2016. This scheme in particular targeted low-income individuals who were enticed by the marketing which touted a “social financial network” where the community members would “help” each other.
Using MLM (multi-level marketing) style structures and offering incentives and bonuses for referrals, the scheme reached a broad swathe of South Africans. Although the South African losses are estimated at “only” R100 million or so, the financial effects are particularly devastating because these illegal profits were made by taking advantage of low-income earners with few financial resources to fall back on.
Crowd1
Crowd1 promoted itself using local celebrities including South African rugby players and influencers as an online network that offered investments in digital products like educational packages. Crowd1 had a high social media presence and like many of these illegal schemes, it offered referral bonuses.
The Financial Sector Conduct Authority (FSCA) warned the public against Crowd1, as it is not authorised to render the financial services it is providing. Crowd1 is neither an authorised Financial Service Provider (FSP), nor is it a representative of an authorised FSP. There is also no record of this entity having applied for a license with the FSCA.
Africrypt
Africrypt was a cryptocurrency investment scheme which promised high returns. In April 2021, the company claimed it had been hacked, resulting in the reported disappearance of around R54 billion. Investigations revealed that funds had been transferred to the UK from Africrypt’s accounts before the alleged hack.
Several criminal cases have been raised by out-of-pocket investors who want the Africrypt directors, brothers Ameer and Raees Cajee, arrested. The movement of the funds has proved difficult to trace, and to date very little has been recovered.
Karatbars International GmbH
The financial sector regulator issued a stern warning to stay away from Karatbars, a multi-level marketing company operating as a gold-based investment company offering a “cryptocurrency” backed by gold (KaratGold Coin or KBC) and “cash gold” products, which were supposed to provide investors with gold-backed returns.
The “investments” were done via WhatsApp.
Karatbars International has been widely criticised and scrutinised as a scam by multiple regulatory bodies and financial authorities around the world. Additionally, over time, the company has faced numerous allegations of operating as a pyramid scheme.
Spotting red flags and troublesome themes.
First rule of thumb for investing: “If it seems too good to be true, it probably is too good to be true.”
🚩 #1: if you hear about it via word of mouth, social media, WhatsApp or even around the braai, don’t be taken in by the excitement. Do your own due diligence, and ask for documentation.
🚩 #2: If “it’s too sophisticated” for you to understand exactly how it works, you’re probably being played.
🚩 #3: If it isn’t regulated, it’s stratospherically high risk; you have no comeback.
🚩 #4: If it operates like a MLM company, it’s definitely not a professional, regulated investment.
Learning from past scams – the science behind how we act.
Our emotions are powerful. Behavioural finance studies show that we are ALL susceptible to greed, the fear of missing out, and desperation. All of which are common human vulnerabilities that fraudsters play on.
At Netto Invest, we expend a great deal of time on research and due diligence. While we are focused on and work towards long-term realistic sustainable growth, we are equally mindful of the risk of not achieving your financial goals through being taken in by high-risk offerings or scams. As a result, we take great care to assess the possible risk of our solutions and to invest in infrastructure to protect your investments and personal information.
If you are ever in doubt about something you have been offered, please contact us to review it with you; an objective second opinion could literally save you millions of rands.
Make an appointment with your Netto Invest CERTIFIED FINANCIAL PLANNER® professional if you want to check the bona fides of a new investment possibility and how it could contribute positively to your personal financial goals or enhance your current investment portfolio.
By Ryan Winter, CFP®
B.Com
