Well, I think I can say for the most of us students, our
budget/allowances has to be one of the most constraining things of our
university life. This leaves some of us tempted to anything that can help us
gain a quick buck – easy targets for fraudsters with ‘Get Rich Quick’ schemes
which are in fact, scams.
Scam: a fraud.
Fraud: The intentional act of deception involving
transactions for purpose of personal gain.
Get Rich Quick Schemes
Get
Rich Quick Schemes offers high or unrealistic
rates of return for a small amount of investment while at the same time
promising that the investment is ‘easy and risk-free’. It is a type of fraud.
This might sound familiar to most of us who get bombarded by hyped up emails
about how we can earn over 20k in a month just by staying home etc. There are 2
types of Get Rich Quick Schemes that everybody should be cautious about: Ponzi
and Pyramid Schemes.
Ponzi Schemes
Originally
created by Charles Ponzi (known as the King of Get Rich Quick), this scheme is
an investment fraud that involves the payment of purported returns to existing
investing investors from funds collected from new investors. Ponzi schemes
still exist today in many forms and it is highly advisable to avoid them.
E.g. Investor A invests
in Scheme 123 that tells him that there is a guaranteed return of 50%. Investor
B invests in Scheme 123. With the money collected from Investor B, it is used
to pay Investor A as the ‘returns’.
Pyramid Schemes
In a pyramid scheme, participants
only make money by recruiting more members. There are two basic types of
pyramid schemes: Naked and Product-based.
Naked Pyramid Scheme: No product is sold
Product-based Pyramid Scheme: same concept disguised as a
legitimate direct sales opportunity
E.g. Person H recruits
10 people to participate in a ‘’no fail investment”. Each of them has to pay
RM500 to the recruiter. The new recruits are told to recruit 10 other people
each and to do the same. Each recruit will make a profit RM4500 from the
initial RM500 investment.
The fundamental issue
The main issue in both schemes
is that eventually it will be impossible to recruit anymore members or
investors. Even if it was possible to recruit every single person in the world,
eventually both schemes will still fail.
Based on Figure 1,
we can easily see how a pyramid scheme will fall very quickly if each recruiter
recruits just 6 members each and the new members do the same. Nobody will be
left to recruit. This is also known as saturation of the market where there is
too many sellers and no buyers.
Similar to a pyramid scheme, a Ponzi scheme will fail when the
pool of new investors run out.
When Ponzi schemes turn bad
As Figure 2
illustrates, when the pool of new investors eventually run out, the scheme will
begin to collapse and the investors will lose the most.
When Pyramid Schemes turn bad
As Figure 3 illustrates, when the market becomes too
saturated (too many seller no more buyers) or when there are nobody left to
recruit, the scheme will start to fail. When this happens, there are two
possibilities that might happen.
Either:
1) The Company will
disappear
2) The Pyramid will simply topple
With either situation, the people at the bottom will lose all their money that they
have spent on this company.
BUSTED – Get Rich Quick Schemes Uncovered
Here
are some of the famous Get Rich Quick Schemes and scammers that have been uncovered
in the past:
-
Charles Ponzi – the King of Get Rich Quick
o
His scheme caused an estimated loss of $20
million and the closing of six banks.
-
Bernard Madoff
o
Used his credentials as a stockbroker,
investment advisor, and former chairman of NASDAQ to gain clients’ trust.
o
When he was arrested
recently by the FBI he admitted that “There is no innocent explanation”
o
Estimated Losses: $65 billion
-
Genneva Malaysia Sdn Bhd
o
Sued by 1,065 gold traders for breach of
contract
o
Other illegal activities include:
§
Illegal deposit taking
§
Money laundering
§
Tax evasion and avoidance false description
(misrepresentations)
§
Appointment of agents without license
o
Involves an estimate of: RM146 million in gold
products and monies
Risks of participating in Get Rich Quick Schemes
Now some of you might be
asking yourselves with your new found knowledge: “I can go in then make a
profit then I’ll exit the scheme, right?” Well, yes, you can. But here are some
numbers to make that thought less appealing. 99.88 percent of participants of
naked pyramid schemes never make any money. It's also a mathematical fact that
88 percent of participants in any pyramid scheme will be on the
bottom level (Roos, 2008).
Not only that, victims of these schemes will
become a burden to themselves and family members. These people may also incur
additional costs as they may have to employ lawyers to bring a civil suit
against the fraudsters.
Suspicious Get Rich Quick Schemes
Disclaimer: These are
recent suspicious cases and not confirmed cases. They just fit descriptions of
the schemes discussed.
QNET – direct-sales
company.
◦
Have
to pay a fee in order to join as a member.
◦
Pyramid
Scheme that looks like
an MLM company after packaging.
◦
People
have to recruit more in order to get return from their investment.
◦
Members
at the bottom line will eventually lose money.
HERBALIFE - direct-sales Company
◦
3.7 million “members” in ~ 90 countries
◦
MLM style compensation (earnings from sales and
recruitment)
◦
The more Herbalife protein shakes that members
you’ve signed up buy, the more money you make.
◦
You and your recruits need to buy several
thousand dollars’ worth of shakes and supplements before these bonuses kick in.
◦
When company’s president was questioned on how
much of it’s sales were made outside the company’s network, to non-members, he
responded saying “We don’t track this number and do not believe it is relevant”
The Rules of the Game
With all that said, there
are a few rules to remember so that we do not fall for such schemes.
- 1. The Golden Rule – If it’s too good to be true, it probably is.
- 2. Be sceptical. Be VERY sceptical.
- 3. Don't be pressured or rushed to invest
- 4. Deal only with licensed financial institutions and authorised dealers
- 5. Check with the relevant authorities before investing/ depositing
- 6. Be extra careful with investments over the internet
- 7. In case an investment has been made, keep copies of all the investment and communications
The Bottom Line
It is easy to see how these schemes work, but participating
in one involves deception and fraud because people will lose money that is promised in return. As with all investment
plans you consider investing in, it is vital to ask the correct questions. Questions
such as: What will this money be invested in? What is the rate of return? Who
will be doing the investing? It is crucial to talk to professionals and to do
your due diligence before investing your money in anything.
With this new found information and knowledge, BYIC
sincerely hopes that you – yes, you – will do your part to share this
information with as many people as you can to increase awareness and to
hopefully reduce the number of victims of Get Rich Quick Scams.
Peace.
BYIC Research & Education Team
Prepared by:
Tan Liang Yen
Kim Kim Chia
Prashanth A/L K Palanival
Nelson Liew Cheng Yu
Fabian Au Waijune
