By Nicolette Dirk
In a bid to educate people on Ponzi and pyramid schemes, the South African Reserve Bank (SARB) has launched a national campaign to raise awareness of illegal deposit-taking investments.
Ponzi schemes were recently in the spotlight with high profile cases like former Fidentia
boss, J Arthur Brown. Brown was fined R150 000 and given a 36 month suspended prison sentence by the Western Cape High Court.
Prior to this sentence, Brown was convicted after he admitted to misrepresentations he made regarding investments entrusted to him.
The aftermath of lost investments through Ponzi schemes has also led to tragedy. In May this year, pensioner, Bohuslav Kautsky (67), committed suicide outside a syndication company’s offices in Waterkloof Heights, Pretoria.
Kautsky had invested in the Sharemax
Ponzi Scheme and his daughter, Iva, told Moneyweb that he had no way of surviving because of the financial losses due to the investment.
Can this campaign prevent Ponzi schemes?
With the Reserve Bank’s ‘Don’t say bye-bye to your money,’ members of the public are encouraged to exercise extra caution when choosing potential investment opportunities.
Hlengani Mathebula, head of group strategy and communications of the Reserve Bank, said the campaign would educate people on how to recognise illegal deposit taking schemes and avoid them.
“You can never be too careful when it comes to protecting your hard-earned savings. Get advice from an accredited and registered financial services provider before you invest your money.
Accredited financial services providers are regulated and supervised by the SARB, the Financial Services Board or the National Credit Regulator. Do not just rely on advice from promoters or friends who may have benefitted from their ‘investment’,” said Mathebula.
Financial planner, Louis van der Merwe from Wealthup said a good indicator that a scheme could be too risky is when it guarantees higher returns than you would get from money-market investments.
“When schemes offer such high returns they are usually making their money through high risk ventures like unsecured lending,” he said.
Mathebula said that in pyramid and Ponzi schemes, for everyone who makes money, others will inevitably lose their money.
There are also some economic consequences to illegal deposit-taking schemes. In some cases, people have raised loans with commercial banks and micro-lenders to invest in these schemes.
“The money is then lost when those schemes collapse, but still they have to keep up the repayments to the banks for loans taken.
Such schemes absorb the savings of the population, which would otherwise be invested in the country’s financial system,” said Mathebula.
The value of people’s investments in these schemes varies enormously and can run into millions of rands.
The schemes also vary considerably in size depending on how long they have been in operation.
Small schemes involve between 20 and 1 000 people, while large schemes can have as many as 500 000 ‘investors’. Mathebula said early detection of suspected schemes and consequent inspections may result in fewer people being affected.
What should you look out for?
Van der Merwe said a good indicator of a suspicious investment is a high return guarantee because such schemes usually take on risky ventures to get their capital.
If the scheme is not listed on the stock exchange, you should also be cautious.
Van der Merwe said a big mistake many unknowing victims make is investing 100% of their money into a Ponzi scheme hoping for a big return.
“When it comes to long-term investments, a good portfolio will have a variety of investments with only 6% invested in each,” said Van der Merwe.