With the way the fraudsters are having some high degree of success, it shows that they are coming out with new strategies; and are becoming more sophisticated to the extent that even the smart ones are falling into their traps.
It has become imperative to come out with this article so that the investing public would understand their strategies and get to know how to avoid being trapped.
Record losses for Investors
Investors in Africa, mainly Nigeria & South Africa have become active targets of increasing number of HYIP scams, MLM & Ponzi schemes.
It is estimated that Nigerian investors lost over N300b to investment scams and speculative trading between 2015 and 2021.
According to a report on the Guardian newspaper, Nigerian investors lost about N900m to the Yuan Dong Ponzi scheme, N18b to the Mavrodi Mundial Movement (MMM) Ponzi scheme, and N7b to the galaxy transport Ponzi scheme. Investors also lost N2b to Famzhi Interbiz Limited and N106b to Nospecto investment.
The Nigeria's major anti-graft agency, the Economic and Financial Crimes Commission, EFCC has warmed against increasing investing scams in Nigeria & have reportedly arrested and prosecuting not less than 10 Ponzi scheme operators who have scammed Nigerians of over N12 billion between October 2020 and August 2021.
These are alarming numbers! The high success rate of investing scams means that either investor education is inadequate or the perpetrators are always a step ahead.
Why do investors fall into the trap？
There are some reasons why we fall for investing scams.
Reason One – Emotional manipulation
Scammers take advantage of your emotions in order to get you to do something for them.
They tend to want to engage you in a discussion and gain your trust. They ask personal questions like the names of your children, their birthdays etc. They could then relate it to themselves and tell you their children have similar names. They want you to think you share something in common.
The potential victim may be unsuspecting and let the scammer into his personal space. The scammer, having gained trust, begins to suggest investment schemes and makes it look like he is trying to help. This is a form of social engineering.
Reason Two – Poverty and unemployment
A report by the world poverty clock puts the number of people living in extreme poverty in Nigeria at almost 70 million out of a total population of 214 million people.
According to the World Bank, four in every ten Nigerians live in poverty. These are grim statistics that make the country ranked among the countries with the highest number of poor people.
The Nigerian Bureau of Statistics (NBS) also says that 33.3% of the Nigerian population are unemployed. This figure is one of the highest in the world.
Unemployment has caused Nigerian investors to fall for these scams who promise them huge returns on investment without bothering to confirm if these investment firms are licensed by the Securities and Exchange Commission (SEC). Some investors even see the scammers as their friend and the government as their foe.
Reason Three – Sense of Urgency
Investment scams usually engage in relentless advertising. Some may even go ahead to recruit well-known celebrities as brand ambassadors to give legitimacy to their operations. When marketing their products, they say the offer is limited and will last for only a period of time.
This makes some investors do business with them out of fear of missing out (FOMO)
Reason Four – Manipulating the ego
The scammers using this method often come up with the idea that their investment product is designed for high-net-worth individuals. They would make their victim feel like they were part of a very exclusive club.
The desire to belong to a special class of investors, could make investors patronize investment scams when they claim to offer prestige gold accounts, platinum accounts etc. Potential investors should look beyond the glitz and glamour of the investment product and first of all certify that the investment company is licensed.
Reason Five – Greed
Some people are known to be allergic to risk. They want to make returns on every trade or Investment. The malady of greed is part of the major reasons they fall for investment scams.
One factor fueling the mentality of greed is the high rate of inflation which devalues the gains of credible investments.
For instance, when Nigeria's inflation rate stood at 17% in August 2021, an investor who made less than 17% return on investment in the same period would have lost his gains to inflation except he hedged his investment against inflation.
The fear of returns on investment being eroded by inflation has made many develop a get rich quick mentality. That is the major reason why many easily fall victims to the Ponzi schemes who offer them Investment of quick returns without risk.
Reason Six – Inadequate investor education
The level of capital market literacy is still very low in Africa and scammers are taking advantage of this to perpetrate investment scams.
For example, Nigerian investors are usually confused about retail forex trading in Nigeria and this has caused scammers to take advantage and defraud them. The retail forex market in Nigeria is not yet regulated. Any forex broker operating in Nigeria, does so with a foreign license.
As per Safe Forex Brokers, in order to not fall for a scam forex broker or any other type of scam broker, an investor should check for a list of licensed brokers on the website of the regulator who issued the license. For example, if you are looking to trade via a FCA regulated broker, then you should check from regulated brokers on FCA public register.
South African investors should check if the broker is regulated with FSCA, Kenyan investors should check regulation with CMA, and Nigeria based investors should check regulation with SEC of Nigeria.
Some investors in Africa also believe that a company registration with local company registrar office like with the Corporate Affairs Commission (CAC) in Nigeria or CIPC in South Africa or BRS in Kenya means that a firm or business venture is licensed to hold investor funds, but this is not so. Company registration doesnt mean a business is licensed to do financial services business or to hold investor funds. Company registration is a one-time procedure but financial services licenses need to be renewed periodically with periodic reporting with regulator and license can also be revoked by the regulator in case of non-compliance.
This lack of awareness has caused the regulators like Securities and Exchange Commission (SEC) of Nigeria to dedicate a section on its website to investor education. Here investors can learn the fundamentals of the Nigerian capital market and watch infomercials relating to investment.
Some investors don't know that for a firm to be qualified to hold investors funds, it has to get approvals and licenses. For example, in Nigeria a firm has to be licensed by relevant regulatory agencies such as Security and Exchange Commission (SEC), Central Bank of Nigeria (CBN) or the Nigeria Deposit Insurance Corporation (NDIC).
Reason Seven – Referrals
Many investors are introduced to investment scams by people they trust and reverence. This makes them throw caution to the wind and they fail to carry out necessary due diligence before investing their funds.
Investors also fall for investment scams when popular celebrities they admire or follow on social media, endorse the scammers.
Reason Eight – Not looking out for red flags
Many investors don't carry out due diligence on investment firms before investing. They don't investigate their records to know their past operations and to find out if they are duly registered.
A simple Google search could reveal red flags like if the investment firm has had its license suspended by the regulator in the past or if the company had changed its name or was acquired by a firm with questionable credentials etc.
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