Home / Money / Personal Finance /  Three foolproof indicators of a potential investment fraud

There was a time when Ponzi schemes were localised. A fraudster would open an office and get people in the adjoining areas to invest. Over time, they have gone digital. Now they are done online via websites and mobile apps.

Recently, Delhi police busted one such app scam. The fraudsters used two mobile apps – Power Bank and EZPlan. It worked like a typical Ponzi scheme. The users had to first "invest" money to start earning. Users earned up to 5% returns every day. If an individual "invested" 399, the app paid 20 daily. Existing members could higher in commissions if they introduce new users – a typical multilevel marketing scheme.

The app became so popular that it was among the most downloaded apps in recent times on app stores.

"In a typical Ponzi scheme, the scammers promise unbelievable returns and high commissions to users. Initially, the payout is as promised, which allow early users to make high returns and establish trust. Then, one day, the fraudsters go missing, and people lose their money," said Mukul Shrivastava, partner, Forensics & Integrity Services, EY.

Identifying such Ponzi schemes are not difficult. Here are a few things that should raise red flags when you come across schemes that promise high returns on your investments.

High returns, low risk: No investment can deliver high returns with low risk. Guaranteed high returns are almost impossible. Stay away from companies that ask you to invest, offering 1% or 5% returns on your investment every day or offer a guarantee to double your money in a short period.

"Every scam or fraud exploit people's fear and greed. They would either tempt someone with high returns or scare them to make them act in haste. In cybercrimes, for example, scammers scare people by telling them that their account will be blocked," said Pavan Duggal, a Supreme Court lawyer and cyber law expert.

Any investment that promises you over 12% annual returns could be fraudulent as a thumb rule. On average, most investment advisors expect equities to deliver 10-12% annualised returns over the long term. There are hardly any other avenues where the average returns can be better than equities over the long term.

Investments also take time to double. An investment fetching you 12% will take slightly over six years to double your money, and one offering you 10% will take a little over seven years. Use these benchmarks to evaluate investments from little known companies.

Difficult to understand business model: If you don't understand a business model of a company, stay away. Fraudsters may use complicated way to explain how their business model works to confuse investors.

Many companies running Ponzi scheme may talk about novel business ideas. For example, they may say that they have a cryptocurrency business that yields high returns.

If you don't have a comparable business to understand returns, avoid investing in such companies.

"People can even research on promoters freely on the internet. Check their credentials and past track record. Check how old is the company. If it's a company that is two-three-year old, that's a red flag," said Shrivastava.

Shrivastava added if it's possible to know, check the investors backing the company.

High commissions for introducing new members: Typically, Ponzi schemes get investors by following a multilevel marketing model. They may offer commissions to an investor to bring others. It's definitely a Ponzi scheme if it provides high returns with low risk and commissions for referring others.

Many Ponzi schemes also display company registration certificates and other government-issued documents. Don't go by these documents, as they can be forged or not relevant to the business model.

For example, anyone starting a business can register with the Ministry of Corporate Affairs and get an incorporation certificate. Therefore, evaluate the business model to see if it's worth investing in.

"Don't blindly trust apps just because they are available on Google or Apple stores. It's not a validation that the company is genuine," said Duggal.

Always follow the golden rule: If the returns are too good to be true, stay away.

(Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts)

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