Fraudulent investments always promise higher rate of return which is mostly above the industry prevailing rate to sweeten the pot. The high rate of return is used as bait in order to entice prospective clients/customers/investors. However, the scheme offers reasonable guaranteed above-market rate, so as not to make it suspicious or attract attention.
Ponzi scheme is named after the popular Carlo Charles Ponzi who in the 1920s used an investment vehicle to take advantage of a weakening foreign currency. He purchased international postal coupons overseas to be redeemed for US postage stamps, and then he sold them off for a profit. However, over a period, it gradually became very difficult to sustain the profit due to the huge burden involved in redeeming these coupons.
Charles Ponzi instead of abandoning this unsustainable investment product rebranded and pitched a new investment product to potential investors. The new products promised a rate of return of 50% on the investment in 45 days or double the investment amount in 90days. Ponzi advised investors that he would achieve such returns through a “network of international agents,” they would purchase the postal reply coupons on his behalf. He withheld further details of how he would achieve such returns “due to competitive reasons.” In reality, Ponzi was merely paying off early investors with new investors’ funds while making no new purchases of postal reply coupons.
Ponzi schemes are dependent on new investors to pay earlier investors; by definition they are mathematically doomed to fail. Ponzi schemes are not sustainable because eventually it reaches a point at which there are no newer investors in existence to fund investment returns and returns of capital to existing investors.
The Red Flags and Warning Signs
Impact on the Economy
These fraudulent schemes mostly focus on potential victims who share a common bond, such as faith group, social club, and professions, to build especially trust. History proves that, this affinity fraud links has been the key factor to the success of most such fraudulent schemes across the globe.
Prevention by the Regulators and Citizens
Fraudulent investments schemes have some common characteristics that run through them all, the promise of high rate of return above the offering market rate, guaranteed returns and concealing of investment risk from the investor. Several fraudulent investments schemes have occurred in Ghana, some examples of these are R5 and Pyram Ghana, MMM Ghana, Savanna Gold Ltd, US Tilapia, DKM and God is Love and Menzgold etc. These investment schemes have something in common which is the offering of higher rate of return and guaranteed return.
It is very important that every individual seeks investment advice or consult professionals with experience before signing on to any investment scheme. Proper due diligence must be carried out on any non-financial investment institution/investment bank before dealing with them.