Written by: Dawn William

By now, we have all heard the terms “blessing circles” (this might be a Caribbean term), “pyramid schemes” or “ponzi schemes“. Let’s identify 6 red flags for these fraudulent investment vehicles, so that you can protect yourself and your money.

Red Flag # 1 of a Pyramid Scheme

Is your activity giving more rewards for the recruitment of members than for the sale or promotion of some product or service? Do they entice you by promoting “sexy” benefits, like being able to quit your job in 3 months, or never having to work again? If yes, then you may want to take a step back from this activity.  

Pyramid schemes thrive on the financial inputs of members – therefore, the more members, the more money fed into the scheme. Managers of these schemes will therefore push for more recruitment in order to maintain the base or make more money. They will also try to entice persons to join by stating lofty and unrealistic end-results for the members who do join.

Red Flag # 2 of a Pyramid Scheme

Is your activity giving more rewards and “promotions” or higher membership classifications, for just recruitment of new members or high levels of advertising, or engagement in more training sessions? If yes, this is a red flag.  

Think about this: if ALL the members of an “investment” group are doing nothing else but bringing in new members, or advertising for the group, or participating in training for advertising and promotion of the group, then where is the underlying money-earning activity, and who is doing it?? How are you able to earn returns of over 100% within less than 6 months, when the average legitimate investor in Barbados earns close to 5% per year? 

Investment returns take time to grow (depending on the investment type – some grow faster than others). Another indicator is the word “GROW” – i.e. if over time, the returns on your investment are diminishing (because people are leaving the group, or because not enough new members are coming in), then this is a sign that something is not right…

Red Flag # 3 of a Pyramid Scheme

Is your activity charging you for training and/or educational materials or seminars? Or, are you invited to a “secret seminar” and asked to contribute a $50 (or some other) fee? Or if, when you reach “Gold” level, you need to participate in X number of training sessions (at a fee), and recruit Y number of new members, in order for you to advance to “Platinum” level? If yes, these are red flags, and you should run for the hills!  

Additionally, if there is a mini “secret society” in your group, where no one knows exactly how to move up in the chain, or the location of meetings is kept secret, or no one can exactly pinpoint the group’s remuneration system nor the source of funds (and all of these are questions which should be asked of ANY new investment) – these are also good indicators that there is something fishy going on…

Red Flag # 4 of a Pyramid Scheme

Is your activity marketing in a “threatening” or “rushed” manner – using phrases such as “act now…” or “sign up today…” or “this offer ends soon so call now”? This urgency is another red flag.

Regular legitimate investments can be entered into at any time of the investor’s choosing. There should be no pressure to join – from anyone, including family, friends or co-workers. You should have all your questions answered before you decide to begin – you should not enter an “investment” without knowing how often you will receive returns, the likely amount of those returns, who is managing your money (i.e. the identity of the investment manager(s) ), the various types of investments available, etc.

Red Flag # 5 of a Pyramid Scheme

Is your activity requiring brand new members to “pay in” to the scheme? Is there a request from new members to submit a dollar amount (other than the investment amount itself) to join the scheme? This is another red flag which should make you cautious.

Basically, this means you are paying to recruit other members… and unless you are a boss, this is not typical investor behaviour or practice.

Red Flag # 6 of a Pyramid Scheme

Our final red flag for the identification of a pyramid scheme is the absence of an investment broker anywhere in the group or organization. If the person recruiting you is not an investment broker – i.e. the person responsible for actually investing your funds and conducting investment transactions on your behalf – neither are you able to meet an investment broker in the scheme, your radar should be going off!  

Investing, as you can appreciate, is a rather technical exercise. It requires you to know the market in which you are investing, to know when to buy and when to sell or trade, to know the various investment vehicles available for portfolio diversification, etc. Yes, regular people can manage their own investment portfolio, but I can almost guarantee you that the earnings earned by an unqualified person will not nearly match up to the returns earned by a professional investor! 

I hope you found this topic useful: if you did, please comment below and give me your feedback, and share this or any other posts you like with others you think might benefit from the content!

Article adapted from: Stabroeknews

Written by: Dawn Williams (FCCA, CIA, CA, BSc (Hons)), Managing Director of Resilia Accounting Services Inc.