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Beware of Scams

Updated: Sep 28, 2022

Being financially responsible is not just about saving and investing money, but to also safeguard it. With the fall of the failed land banking venture Edgeworth Properties and the public demise of gold investment company Geneva Gold, one would think that people would be more wary of investment scams. However, scams are designed to bring out the greedy monster and silence the security seeker in people. To do that, they dangle the high returns to tempt the greedy monster and guarantee returns, which soothe the security seeker.

One of the simplest and most lucrative investment scams is the Ponzi scheme. The scheme promises high returns and convinces you that it is secure when there is actually no investment taking place at all. Ponzi schemes have existed throughout history. It is named after Charles Ponzi, who started this scheme in the early 1900s, which gave 50% profit within 45 days in “postal reply coupons”. Thousands waited outside his office to give him their money. In the end, he was found out and the scheme collapsed, bringing six banks to their knees as well as a huge loss to the investors who invested their life savings.

In 2008, Bernie Madoff’s scheme also came to a halt and investors lost billions. On average, it gave about 15% consistently for years and was only offered to exclusive circles. The 15% rate of return seems achievable, so people kept believing in it until it all came crashing down.

Closer to home, I went for one of the talks on an “investment” scheme and I was promised a return of 2% per month (24% per year). Apparently, many retirees were encouraged to mortgage their homes to be able to invest in this scheme. The guarantee of 2% per month immediately triggered my suspicions. Upon being questioned about a possibility of a loss should the asset price go down, the presenter kept on insisting that it has been going up and will continue to go up. Another alarm bell!

A buddy of mine put a nominal deposit for a RM70,000 land investment in the U.K. Several days before handing the rest of the RM70,000, he decided to call the municipal where the land was located. He was told it was a green-belt area and not allowed to be developed. He quickly demanded his deposit back. He was very lucky to have made that call—how many people would have done that?

Watch out for FX companies which also give very high returns and seemingly no risk. A famous FX company got recently banned by Bank Negara. More might fall into the list too.

Investment scams can be hard to distinguish from genuine investment schemes as the former are incredibly well presented. Many investors also may not exercise due diligence before buying. The investments “smells all right” with a guarantee, a professional brochure, a swanky management office, a wonderful presentation and, the best deal of all, another investor or two who has raked in the short-term profits. The phrase “if it sounds too good to be true, it probably is” aptly describes this situation. Here are some red flags:

• It has a guarantee that is higher than FD rates. All investments have some degree of risk. Generally, a higher return comes with higher risk.

• It gives overly consistent returns, even when stock markets are bad.

• It lacks documentation. Look for stamps of approval by a regulatory body such as the Securities Commission or similar bodies in other countries.

When encountering a potential scam, discuss this with your financial buddy. If you still want to go ahead, allocate money you can afford to lose. If it does go south, you wouldn’t be too adversely affected.

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