How To Spot And Avoid Fraudulent Investment Scams

In recent years, countless Nigerians have lost their hard-earned savings in their quest to grow their wealth through investments. Billions of naira have vanished in the hands of so-called “investment managers,” with many individuals falling victim to fraudulent schemes, despite repeated warnings from regulatory bodies. Ponzi schemes and multi-level marketing scams are some of the most common forms of these fraudulent activities, luring unsuspecting investors with promises of high returns.
A Ponzi scheme is one of the oldest and most widespread types of investment fraud. Named after Charles Ponzi, who famously operated such a scheme in the 1920s, this scam operates by paying earlier investors their returns from the contributions of newer investors. It is, in essence, a pyramid scheme where “robbing Peter to pay Paul” is the core of the business model. Eventually, the scheme collapses when there are not enough new investors to keep up with the promised returns to earlier participants.
According to Ayodeji Ebo, an investment professional, there are several red flags to watch for to avoid falling victim to Ponzi schemes. Here are some key warning signs:
Any investment that promises unusually high returns should be scrutinised carefully. When returns are significantly higher than the interest rates offered by conventional investment options, such as fixed income instruments, it’s often a sign that something is wrong. Investors should use government treasury bills or corporate commercial papers as a benchmark for reasonable returns.
Ebo advises that when an investment opportunity offers interest rates that far exceed those offered by banks, it’s important to ask questions. For example, an investment offering 10 per cent monthly or 50 per cent biannually translates to an annual return of 120 per cent and 100 per cent, respectively. “Remember the old adage: if it’s too good to be true, it probably is,” Ebo says. Always ask where the funds are being invested.
Another major red flag is the promise of guaranteed returns, especially when the rates are higher than conventional investments like treasury bills, commercial papers, or bank placements. Except for fixed income instruments, no investment should guarantee a return. It’s important to note that even mutual funds, which are managed by professional portfolio managers, do not guarantee returns. In fact, the Securities and Exchange Commission (SEC) explicitly prohibits such guarantees.
Fraudulent schemes often offer returns more frequently than traditional investments, sometimes daily, weekly, or monthly. This frequency can appeal to investors’ greed, making them less cautious about the true nature of the investment.
In many cases, Ponzi schemes and fraudulent investment products are not registered with the SEC, which is against Nigerian law. The SEC mandates that any investment sold to the public must be registered with the agency, and the firms offering these products must be licensed. However, many fraudulent outfits bypass this regulation.
Before investing, it is critical to verify the investment product and the company’s status on the SEC or Central Bank of Nigeria (CBN) websites. Just because a business is registered with the Corporate Affairs Commission (CAC) does not mean it is licensed to sell financial products. Conducting this due diligence can help significantly reduce the risk of falling victim to a Ponzi scheme.
One crucial rule of thumb is that if you cannot understand how a company generates its revenue within five minutes of explanation, it’s best to stay away. Many Ponzi schemes use overly complex or vague business models to confuse investors and mask the true nature of their operations. If the business model seems ambiguous or difficult to explain, consider it a warning sign.
Ponzi schemes rely heavily on a constant influx of new investors to stay afloat. As such, there is often pressure on existing investors to reinvest their earnings or to recruit new participants. Some schemes promise higher returns for introducing new investors, or they offer incentives to keep you from withdrawing your funds. The scheme eventually collapses when new investments dry up, leaving many investors unable to recover their money.
Fraudulent schemes often promise excessively high short-term returns, preying on investors who are eager for quick profits. In reality, short-term returns are usually modest, and seeking unusually high returns in a short period can expose investors to unnecessary risk. Sustainable wealth is best built through disciplined long-term investing, where the focus is on consistent growth and minimising risk.
Investing in fraudulent schemes can have devastating consequences, as many Nigerians have sadly experienced. The key to avoiding such losses is to remain cautious, ask questions, and conduct thorough research before committing to any investment opportunity. By recognising the warning signs of Ponzi schemes and maintaining a focus on long-term, legitimate investment options, investors can protect their savings and avoid falling prey to scammers. Greed, as Ebo warns, is often an investor’s greatest enemy—always prioritise informed, disciplined decision-making over quick profits.