By Star Online: Business
7 July 2012
Know how to sniff out shady deals that promise high returns on small investments
JASPAL Singh (not his real name) remembers attending a private seminar with a cousin many years ago, where the speaker was promoting a get-rich-quick scheme that involved investing in auctioned properties.
“There were many people at the event and the scheme seemed very legitimate. It promised high returns and for the first two years, the money was good.”
“But going into my third year, the whole thing fell apart. The money stopped coming in and one day, the whole operation just ceased to exist! I lost a lot of money between RM40,000 and RM50,000,” he recalls.
Foo: ‘They offer you returns that Bank Negara would die for.’
Jaspal is but one of many Malaysians who have been victims of get-rich-quick schemes, usually run by unlicensed, fly-by-night organisations. Unfortunately, such scams have been on the rise.
In 2009, The Star reported that the number of such scams had gone up nearly 27%, with the Federal Commercial Crimes Division announcing that over 17,000 case files were opened in 2008 compared with the year before, with financial losses estimated at RM845mil.
“Many people get lured into such scams simply because of greed. It's human nature,” says AmBank wealth management head Joshua Lim.
With such schemes showing no signs of abating, here are some simple principles to follow to avoid falling into one.
If the potential investment you're looking at asks little of you but promises extraordinary returns, chances are it's a scam, says MyFP Services Sdn Bhd managing director Robert Foo.
“They offer you returns that Bank Negara would die for,” he enthuses.
According to guidelines on the central bank's website, a get-rich-quick scheme is a plan which offers high or unrealistic rates of return for a small investment while at the same time promising that the investment is easy and risk-free.
Under its guidelines, Bank Negara prohibits schemes that involve illegal deposit taking activities and illegal foreign currency dealings.
“Check with the relevant authority before investing. Don't be pressured or rushed to invest. Be extra careful with investments over the Internet and be sceptical of any investment opportunity that is not in writing.
Lim: ‘Many people get lured into such scams simply because of greed.
“In case an investment has been made, keep copies of all the documents and communication,” it says.
The important thing is that the investment must make sense, Foo tells StarBizWeek.
Try to understand what the scheme is investing in. If they tell you they're buying Genting shares, then you know that the investment is leveraging off the company's casino and leisure business.
“But if they give you all kinds of guarantee and can't explain how they derive their returns, then something is definitely wrong,” he says.
Jaspal advises potential investors to research further if they feel uncomfortable with the investment prospects that are being offered.
“The reason I got into that scheme was because I knew people who were already in it and they said they were making money. Everything seemed so legitimate and legal, especially at face value.”
According to him, the property investment scheme he was in involved the buying of auctioned properties from banks at discount prices and selling them at a profit.
“The scheme seemed like a no-brainer. You buy the properties cheap and sell them for a higher price. On paper, it looked good.”
He says that the “mastermind” of the entire scheme was in fact a lawyer. This made the whole thing feel even more legitimate.
“They had a office and made you go there regularly to sign documents. It all seemed so prim and proper that nobody bothered to check if the properties that were being purchased even really existed,” Jaspal says.
He recalls asking his frugal sister to invest.
“My sister was sceptical and I remember her asking some questions about the scheme, to which I had no answers to.”
Foo adds that most get-rich-quick schemes don't make you lose money initially.
“They try make it seem legitimate in the beginning by making it seem like those that were in early are making money. Usually what they do is they rotate the new investors' money and give it to those that have been around longer.”
Jaspal believes that was probably what was happening with the scheme he got involved in.
“I think they were taking money from the new members and giving it to the older ones. But after a while, this method stopped working and the mastermind absconded with a few million ringgit.”
Lim says potential investors should play their role and check if the scheme being offered is legal.
“Do your own investigation. Check with the regulators if it's licensed and whether the person selling the scheme is licensed.”
Bank Negara on its website advises potential investors to deal only with licensed financial institutions and authorised dealers. These include schemes authorised by commercial banks, Islamic banks, international Islamic banks, investment banks and other financial institutions (that are listed on its website).
If everything seems legitimate, but your hunch just tells you otherwise, look at the investment profile objectively, advises Lim.
“Consider if the investment matches the risk profile,” he says.
If you believe that the scheme you're involved in is in fact a scam, then get out as soon as possible, says Foo.
“If the scheme creates a run, the money may be frozen.”
Lim says victims of get-rich-quick scams should report the matter to the relevant authorities.
“Check with the regulator's website to see if there are reports on this,” he says, adding that investors who are unsure about what to do next (either before or after being scammed) can also consult a licensed financial planner for help.
Bank Negara also invites victims of get-rich-quick scams to provide details of the schemes they invested in, together with the relevant documents, to the central bank for further action.
[Source]
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