Tip for Today: How to smell a scam

A friend of mine emailed this to me, I'm sure a lot of you have heard of this, actually there's one in our place, without naming it, this company actually has already a total investments of P540 million in CARAGA region alone, and they say CARAGA is one of the poorest region in the Philippines-so much for statistics.


(This is part of Take Charge of Your Money, a content-partnership agreement between INQUIRER.net and Citibank Philippines, to educate readers on keeping their personal finances healthy)


Question: I just read recently about yet another investment scam that victimized a lot of people in the country, basketball stars included. They were duped in the millions of pesos and dollars. How can one tell if an investment scheme offered is a scam or not? I’d like to invest but want to be sure the plan I get is legitimate. — Joey

Answer: It’s sad to know that there are unscrupulous people who victimize unsuspecting investors. It has happened before several times, and it’s happening yet again. And this is not unique to the Philippines; investment scams have been reported all over the world for decades.

In fact, the notorious Ponzi scheme is named after Charles Ponzi, a man who cheated a lot of people in the US back in the 1920s. He became a millionaire in Boston using his investment scheme. The Ponzi scheme works this way: High returns are promised to would-be investors. The investors then plunk money into the company. More investors are enticed by the company and their money is used to pay off the promised high returns to the first investors. It goes on and on but will collapse later on as there really is no revenue generated. In the meantime, the owners of the company may have already fled with the investors’ money.

The pyramiding scheme is somewhat similar to the Ponzi scheme. However, investors are made to recruit new investors (to be called their “downlines”), and if they don’t, they won’t get much in return. There is no real product or service offered in a pyramiding scam, thus no revenue too. This scheme is also doomed to collapse, with the owners running away with the money.

Many investment scams have already victimized a lot of people in the country. In fact, the FrancSwiss Investment scam has made it to Wikipedia’s Notable Ponzi Schemes. According to that website, as of 2007, the company has allegedly victimized Filipinos to the tune of P1 billion.

How can you ensure that an investment proposition is legitimate and not a fraud? How can one tell if a scheme is a scam? Below are red flag signs to watch out for.

1. The investment plan offers or guarantees an interest rate that is much higher than prevailing market rates. In fact, these rates may be too good to be true. Beware of promises such as “50 percent return in 90 days,” or “double your money in 1 year.” These are unbelievable rates of return which the legitimate investment market will not be able to give.

Before signing up for an investment plan, study the prevailing market rates. Long term time deposit rates can go up as high as 6 percent per annum. Research on the Internet and go to legitimate websites of Philippine banks and financial companies and see how their mutual funds and unit investment trust funds are performing to give you an idea of the yearly average rate of returns. These may run up to only 20 percent per annum. Clearly then, a 100 percent return on your investment is very fishy.

2. The company does not take time to explain the concept of the investment thoroughly and pressures you into making a decision. They may give you testimonials of “satisfied” investors and just make a quick run down on the kinds of investments they will handle for you. Or they present you with awesome presentations of high risk investments you are not thoroughly familiar with, such as accounts receivable factoring, dollar hedging, commodities trading, etc., capitalizing on people’s unfamiliarity with such forms of investments and promising high returns.
Before you get into any investment, you should be given all the details of the offer or plan. You should also be given as much time as you need to study your options. Don’t ever be bullied into making an investment decision.

3. The company has no track record. When you get an investment proposal from a company you have never heard of, be extra cautious. Find out all that you can about the company: who started it, when was it incorporated, and what is the track record of the company so far. Some scammers may brag that they are a new offshore branch of a company based abroad that is why they have never been heard of. That’s even more reason to be cautious.

You can get information from the Securities and Exchange Commission, and from knowledgeable people among your network. When in doubt, do not transact business with that company. Instead, deal only with banks and established financial investment companies.

4. The company does not have a physical office address. If the company is legitimate and will handle investments from many people, they have to have a reputable office address, one that you can go into at any time of the day, or call by phone anytime during office hours. Take note though that there have been some companies with physical addresses that still turned out to be swindlers so be careful.

5. When you do finally invest, you have difficulty getting your money after some time. The returns may be very attractive at first, but in the long run, their checks may start bouncing, or you may be given promissory notes for the returns promised to you. Or they suddenly impose strict procedures, such as not allowing withdrawal for a very long period of time contrary to what was explained to you at first. When any of these happen, contact the Securities and Exchange Commission right away.

Investing is a good way to manage one’s money. Just make sure you go into it with legitimate entities.