A Guide to Detecting Investment Scams

It was a bright and sunny morning, Mike had just woken up from sleep. As was his usual custom for some months, he turned on his mobile internet connection to check the status of his investments. Something was off; the mobile app of the investment firm was not working. Soon after, he received a message from Jerry who was one of his friends he had convinced to invest in the platform.

Jerry wrote “Mike, there is fire on the mountain, the website of that company you convinced me to invest in has disappeared. They have deleted their social media handles. I read somewhere on the internet that they have crashed! Mike, you know it’s the money I was saving for my house rent I used to invest, what am I going to do?”

Why Do People Fall For These Scams?

Stories like these are common once an investment scheme goes burst (the latest being Pennywise Wealth Management). Why do people fall for these scams? Below are five factors we think that makes people susceptible to investment scams.

1. Perceived Scarcity of Such Opportunities

People are drawn to investment opportunities that tell them that there is nothing like it. Looking around and seeing very few investment opportunities that proclaim the same benefits, people are enticed to throw their hats in.

2. Fear of Missing Out (FOMO)

This is pressure brought on by the urgency of the offer. When the offer is communicated in such a way that implies a time restriction, people are more inclined to act. Another variant of this is when a lot of people have already invested and are being paid “profits.” This would make anyone who was initially skeptical of investing feel like they are missing out.

3. Affinity

The is when people judge an offer not on the merits of the offer itself but on the personality of the individual recommending the offer. The perpetrators of investment scams know how to leverage social bonds through relationships such as alumni groups, religious groups, civil groups or any group where there are pre-existing relationships of trust and respect. Fraudsters know people are less likely to be suspicious when an offer is being presented by a respectable member of their religious group or association.

4. Greed

All investment scams are set up to feed the inordinate desire to get so much out of little. As such, scammers use the allure of an easy financial windfall to hoodwink their victims.

5. Gullibility

Most people that fall for investment scams are too quick to believe and lack a healthy dose of skepticism.

Having considered why people fall for investment scams, the next important step is to consider particular traits of investment scams so as to aid their identification. The following are five traits of investment scams. If you notice any of these, we advise that you do not proceed with investing.

Common Traits of Investment Scams

1. The presence of low or no risk and high returns

There is no such thing as a guaranteed return on investment. All investments contain risk. Hence, any investment offer that claims there are no risk or low risk while promising high returns is a scam. Keep this in mind, high returns are associated with high risk and low returns are associated with low risk.

2. The presence of complexity or secrecy

When asked how the scheme works or how they generate the income to pay dividends, investment scammers might use jargon or give an explanation that is incomprehensible due to its complexity. Don’t put money into something you don’t understand.

3. No physical address

Any investment firm worth their salt will have a physical office space where they transact their business. If there is no physical address listed on their website or you verify and realise that the address given is wrong, you’re dealing with a scam.

4. Unknown owners/management team

You should be able to tell those behind a scheme. They should be well known and a way to contact them should be available. An investment scheme where the owners or management team are not known is a huge red flag.

5. It should be registered

Most fraudulent schemes involve unregistered firms. A legitimate investment firm should be registered with the Securities and Exchange Commission (SEC) in the country where they operate. For instance, if the firm is operating in Nigeria, it should be registered with SEC Nigeria. Note that registration with the Corporate Affairs Commission (CAC), while good is not sufficient as they are not the organization tasked with regulating investment firms.

To reiterate, if one or more of these five traits are present, then we advise you to not go ahead with investing (especially No. 5). Abiding by this should keep you safe from most investment scams but like some things in life, there are no guarantees.

In conclusion, here’s a quote you should always keep in mind when the disciples of the latest investment scheme in town approach you. It is from Oluwatosin Olaseinde, Financial Literacy Expert and Founder, Money Africa:

“They paid me isn’t due diligence”