Red flags: How to recognise an investment scam

Given the rise of fraudulent schemes targeting unsuspecting individuals seeking to grow their wealth, and a series of high-profile fraud cases surfacing in recent months, Faizil Jakoet warns investors to be vigilant, sharing some red flags to look out for.

Consumers have been hard hit financially over the last few years, with interest rate hikes, fuel price increases as well as the general cost of living being more expensive than in the recent past. This trying environment makes for fertile hunting ground for crafty criminals, and the fact that technology has made instant investing even more accessible has widened their net.

Last year, South Africa was rocked by the United African Stokvel scandal which is currently under investigation by the Financial Sector Conduct Authority (FSCA) for defrauding over 600 investors – many of whom lost their retirement savings, homes and discretionary savings. Victims have said that the company appeared legitimate, given advertisements on reputable sites and endorsements by well-known brands.

This is a sad story in that so many victims were lured by what appeared to be a slick operation. However, there were signs that trouble was on the horizon, such as the fact that the scheme was not registered with the FSCA. In addition, investors were promised they could triple their money within six months – a typical feature of an investment scam, as legitimate investments cannot make guarantees about returns.

Technology can be used to make scams more convincing

Since the explosion of artificial intelligence (AI) tools, like ChatGPT and others, there has been a significant increase in investment fraud. According to reports, scams making use of new AI technology like deep fakes and voice cloning contributed to a record amount lost to investment fraud in 2022, with the USA recording a 128% increase in stolen investments.

It is becoming increasingly harder to spot the con artists, especially with informal communication channels such as WhatsApp being used for both social and business purposes. This makes it a popular choice for scammers who can pose as legitimate businesses.  

At Allan Gray, none of our employees will ever solicit investments from you via WhatsApp or social media channels.

While there is no such thing as a risk-free investment, one of the best ways to mitigate risk is knowing what you are getting yourself into from the beginning, and understanding the safeguards that are, or are not, in place to protect you.

At Allan Gray, none of our employees will ever solicit investments from you via WhatsApp or social media channels. While we have a presence on some social media platforms, such as LinkedIn and Instagram, these platforms are used for sharing information about the firm and investing. We strongly recommend making investments using the verified Allan Gray banking details on your banking platform as opposed to details provided by a third party to avoid being taken advantage of.

Look out for these red flags when starting a new investment

Fortunately, regardless of the mode or mechanism of operation, there are alarm bells that can signal a scam.

1. An investment that requires you to recruit new investors to realise the return on your investment is a pyramid scheme. Be wary of tiered investment products that classify investors or have multiple levels (e.g. bronze, silver, gold, platinum and diamond).
2. If you don’t understand how an investment product generates its returns and there are no clear underlying assets, you should be cautious.
3. Fraudsters want to create a sense of urgency to limit the amount of time you spend researching and considering the potential investment. Anything sold as a “once-in-a-lifetime opportunity” should be avoided.
4. Though past performance doesn’t guarantee future returns, you should consider financial service providers with decent track records. Most scams will promise great returns, without a supporting track record to back them up.
5. Media exposure or advertising are often used to legitimise an opportunity. Do your own research, ask questions and check whether the investment is registered with a mainstream financial body, like the FSCA. You should also contact financial bodies to verify the registration of any financial entity that is relatively new or not well established.
6. A legitimate investment should invest your money in an underlying fund or asset. You should be able to ask to see proof of this (e.g. by requesting a fund factsheet). If you have trouble getting this information, then it is best to take your money elsewhere.
7. The adage still applies: If it seems too good to be true, then it probably is. Trust your gut – it will help you avoid permanent capital loss.

If you are looking for personalised advice and guidance on which investment products are legitimate and best suited for your circumstances and goals, it is worthwhile consulting with a good, independent financial adviser.