How to pick out an investment scam

In September 2020, Emmanuel Kiptanui was approached by a friend about an online investment platform that could make him a millionaire by the end of December 2020. “He said it’s called Crowd1. To become a millionaire, all I needed to do was buy a package and start inviting friends to join in. The more friends I invited, the faster I’d become a millionaire,” he says.

At first, the deal sounded too good to be true for Kiptanui, who works as an accountant at a private international school in Nakuru County. But then, he was showed evidence of people Crowd1 had turned into overnight millionaires. 
“I was introduced to a fellow who claimed to have been one of the pioneer investors in Nakuru. He was driving a brand new Ford Ranger double cabin, and had just bought half-an-acre in Pipeline, Nakuru, where he was putting up a five bedroom mansion,” says Kiptanui, 38. 
He dropped his fears. “After all, no one ever got rich without risk,” he reasoned. He invested Sh600,000 in Crowd1. Barely two months later, Crowd1 collapsed with a staggering fortune of over Sh149 billion investor funds. A look at how Crowd1 worked reveals that it had defined itself as a high-tech crowd marketing business. Members like Kiptanui joined through referrals from sponsors and were required to acquire an education package that would usher them into a world of millions. These packages cost between Sh12,000 to Sh519,000.
Crowd1 is one of the latest scams that investors in Kenya are losing money. It will certainly not be the last. Pyramid schemes have become common in Kenya over the last few years. There are two types of investment scams in Kenya that people keep losing money to. These are pyramid and ponzi schemes.

Pyramid schemes

Scams such as Crowd1 are pyramid schemes in disguise. According to an investment cautionary note by the Central Bank of Kenya, pyramid schemes promise high profits that are based on the investor’s ability to recruit more people. The more people you recruit the higher the amount of profit your investment gets. The people you recruit are then required to recruit others so that they too can get a piece of the cake. The chain keeps growing.
Everyone – including you – who joins is required to purchase a package or make an initial deposit before they can start earning from their recruits. 

Ponzi schemes

These type of scams promise high profits within a very short time. You are required to pay money to a manager who will then pay you returns on a monthly or quarterly basis. The manager may also promise to refund your initial deposit in addition to the profits after a period of time, say six months. Investors in Ponzi schemes are not required to recruit new members to start earning profits. However, it is money from new members that is used as profits for the older members.
But what is it about pyramid schemes that keep on luring people? According to George Mangs, an investment expert and the founder of investment firm MarketCap, many people get hooked to pyramid schemes because of what is sold as their guaranteed high returns. These guaranteed returns resonate so well with people trying to escape poverty via the easy way out. “However, anyone who bothers to look under the hood the business model can easily tell that it's a classic case of new money paying away old money with no revenue generating system besides member contributions,” he says. So what are the characteristics of investment scams.

The returns

This is the first bait. According to Mangs, investment scammers usually come with promises of above-average returns in relation to the market. “The common ones in Kenya promise returns ranging from 10 per cent to about 60 per cent per month. The returns on offer vary depending on how aggressive the ‘business’ is marketed,” he says. 

Vague business models

Mangs says that over 90 per cent of these schemes have very vague business models. They are also unable to clearly explain how they manage to generate so much revenue to finance the guaranteed returns. “The pioneer (founder) creates a phantom company anywhere in the world, proceeds to sell the idea mostly to third world countries like Kenya where regulations on such companies are very lax, recruit a number of personalities to sell the idea at work places, church, and social gatherings,” he says.

Trickle down referrals

This is one of the most common features of investment scams. According to Mangs, all such schemes usually insist on recruitment of new investors. “They have incentive offerings via the popular binary system which is always a trademark for Multi-Level Marketing operations that characterise all pyramid and ponzi scams,” he says. 

Reinvestment

To make sure that people sign up stay hooked, investment scammers dangle the carrot of reinvestment and even higher returns. Mangs says that this to ensure that the scam keeps the unsuspecting investors in the fold. “Once people are hooked, there is always an emphatic drive by the recruiters to make them re-invest their capital plus profits so that their returns can be compounded,” he says. “This is just a scammer's way of making sure you stay hooked to their schemes so that when the inevitable shut down comes, the scheme disappears with as much money as is possible.” 

[email protected]

Feedback to the editor: [email protected]