Too good to be true

I BELIEVE it is important to take things with a pinch of salt when evaluating an investment proposal.

Testimonials of clients are not a good indication of the legitimacy of an investment fund. The only way to verify a prospective venture is to read the fine print and refer to experts.

Fraudsters often drop names of reputable people and claim they have endorsed the products.

Even though the fraudsters are aware that they might be under watch by the authorities, they nonchalantly keep marketing their products sometimes on a bigger scale using mainstream media. Some consumers take news broadcast on television as the gospel truth and they equate air time a company receives as an endorsement and assurance of a valid business.

I recall a story shared by an acquaintance, who is 10 years my senior, about a scheme she had joined. I got to know about the company earlier from advertisements on TV and social media, and a colleague, who often treated me to great coffee in university. The coffee had a taste that I absolutely enjoy.

My acquaintance had joined the company producing the coffee and she narrated her story. She took a loan for RM10,000 and invested the amount in the company as she was "guaranteed" to have RM500 banked into her account every month.

She did receive the promised RM500, but only for two months. When she inquired why the company had stopped banking in the money, she was told the "money was mistakenly channelled into other accounts".

The company is riding a wave and even professionals have fallen into the trap. My acquaintance had no qualms about joining the scheme as some of the people whom she looks up to, citing, among others, a respected teacher, had joined the scheme earlier. That to her was enough proof of the company being legit. I believe this is not an isolated case.

The case of Bernard Madoff whose Ponzi scheme ran into the billions also attracted a list of established figures who entrusted their money in his hands.

To a certain degree, we are influenced by well-known figures and their actions are treated as prescriptions. And this is the psychological area exploited by fraudsters who use widely known faces to legitimise their products.

In a Ponzi scheme, the basic principle lies in recruiting members, who essentially, through their capital investments, pay the dividends to the existing members. The company that my acquaintance is a member of requires her to scout for "downline" – a term synonymous with multi-level marketing. That is another red flag.

A Ponzi scheme can only thrive for as long as it draws new members.

A fraud might be able to be seen as a fraud only in hindsight as it is always dressed as a normal business venture run by a legitimate company.

But on careful inspection, what appears to be a normal business is actually a fraud. Investments promising staggering returns cannot be real especially if no risk calculation is done. Most important, think calmly and clearly: if it's too good to be true, it's probably a fraud!

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