The biggest Ponzi scheme recorded was that of Bernard L. Madoff, a well-known Wall Street figure who was the former Chairman of the Nasdaq Stock Exchange. He was able to accumulate around $50 Billion from various investors worldwide, including Banks, Investment Funds and Insurance Companies.
We, Filipinos, are on the hand more familiar with the “Pyramid” scheme. One popular example of “Pyramid” is the one that of Ms. Rosario Baladjay (a.k.a Pyramid Scam Queen)who was convicted of several estafa cases with her investment scheme through her company Multitel.
A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula. The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the”business” expands.
To help us avoid falling into these types of financial scams, we may want to consider the following points:
- Returns are too good to be true. High return means higher risk. Remember that there is no safe investment that will provide you with high returns over a short period of time. If someone promises you double than market rate with lesser risk, you should know what to do. Smile and turn your back.
- Actual operations not visible. “Pyramid” agents usually meet their prospective targets in public places. You may want to check out their office and staff to prove the company’s legitimacy.
- Relies solely on reputation. A lot of ponzi schemes are marketed by family, friends and sometimes by well-known celebrities. Investors instead of analyzing the investment, simply rely on the reputation of these personalities. Madoff used his stature to solicit funds for his scam. He is well connected and wealthy and has been working in the financial sector for over forty years.
- Flashy Websites. With the growth of internet-based transactions, investors might be the target of online financial scams. Investment opportunity promises and internet offers such as latest penny stock opportunity are common schemes that can be fetched online.
- Absence of Regulatory Oversight and Audit. Companies which offer investment opportunities in the Philippines are regulated or licensed by a corresponding regulatory body. Regulatory bodies such as the Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP) and Insurance Commission (IC) monitor the soundness and lawfulness of the different institution for the safety of the investing public. Furthermore, as a precautionary measure, investors should take into consideration possible affiliation of a company with an external auditor. Auditors help in providing protection for investors because they examine transactions, review internal controls, accounting procedures and financial reporting systems of a company. Most schemes are either not audited or have obscure external auditors providing inaccurate and biased presentation of the company.
Future scam operators are likely to take steps to find ways to further exploit clients. Investors should be more skeptical and vigilant in choosing investment advice and outlets for their funds. By taking a careful study of the company and the investment using the pointers above, being a victim of investment fraud can be avoided.