In recent years, financial fraud and Ponzi schemes (investment scams) have become a rising concern in the Philippines. With many Filipinos seeking investment opportunities to grow their hard-earned money, it’s crucial to recognize and avoid Ponzi schemes—fraudulent operations where returns are paid to earlier investors using the capital of newer ones, rather than legitimate profits from business activities.

What is a ponzi scheme?

A Ponzi scheme is a type of financial fraud where returns to earlier investors are paid using the money from newer investors, rather than from legitimate profits. The scheme promises high returns with little or no risk, attracting more participants. However, it relies on a continuous influx of new investors to keep functioning. Once new investments stop or too many people withdraw their money, the scheme collapses, leading to significant financial losses for most participants. Ponzi schemes are illegal and unsustainable because they lack a real business model to generate profits.

To help you safeguard your finances, here are the top five ways to avoid falling prey to investment scams or Ponzi schemes:

1. Understand the Business Model

A legitimate investment offers a clear business model and revenue stream. Ponzi schemes often lack transparency and do not disclose how profits are generated. Always ask, “Where does the profit come from?” If the answer is vague or the process seems suspiciously simple, that’s a red flag. Trustworthy investments will have clear, verifiable, and sustainable methods of generating income.

Tip: Avoid any investment that promises consistent, high returns with minimal or no risk, as legitimate businesses are always subject to market fluctuations.

2. Check for Proper Licensing and Regulation

In the Philippines, all investment companies should be registered with the Securities and Exchange Commission (SEC). The SEC maintains a list of legitimate businesses and investment schemes. Before investing, make sure to verify the company’s registration and check if it is licensed to offer investment products.

Tip: Visit the SEC website or contact them directly to verify a company’s credentials. If a company is not registered or has complaints filed against it, stay away.

3. Beware of Unsolicited Offers

Ponzi schemes often target individuals through unsolicited offers, whether it’s via phone calls, social media, or emails. These fraudsters use aggressive marketing tactics, appealing to emotions like greed or urgency. They might offer “too good to be true” returns, pressure you to invest quickly, or claim that opportunities are limited.

Tip: Be cautious of any investment offers that come out of the blue, particularly if they pressure you into making quick decisions. Always take time to research before committing any money.

4. Understand the Risk-Return Trade-Off

Ponzi schemes thrive on offering unusually high returns that defy market logic. If someone guarantees you a return of 20% or more in a short period, this should raise immediate concerns. No legitimate investment can guarantee such high returns without corresponding risks.

Tip: Understand that higher returns usually come with higher risks. If an investment promises extremely high returns without explaining the risks involved, it’s a red flag.

5. Consult Financial Experts

Before making significant investment decisions, seek the advice of a certified financial advisor or a licensed investment consultant. Financial experts can help you assess the legitimacy of an investment opportunity and ensure that it aligns with your financial goals and risk tolerance.

Tip: Choose advisors who are registered with the appropriate regulatory bodies such as the SEC, Insurance Commission, or Bangko Sentral ng Pilipinas (BSP) to ensure they are legitimate professionals.

Always be careful!

Protecting yourself from Ponzi schemes requires vigilance, research, and a healthy dose of skepticism. By staying informed, verifying credentials, and consulting experts, Filipinos can make smarter financial decisions and avoid the devastating losses associated with fraudulent schemes. Always remember: if it sounds too good to be true, it probably is.

Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows over time. Proverbs 13:11, NLT