How to spot an online scam

Phiko Peter is a client relationship manager in strategic markets at Allan Gray. (Image: supplied)
Phiko Peter is a client relationship manager in strategic markets at Allan Gray. (Image: supplied)

There is an interesting correlation between our need for instant gratification and the rise of digital. Technology makes our lives easier and more efficient, but it also taps into the part of our brain that is wired for instant gratification. 

Neuroscience research suggests that the “like” buttons or “hearts” on our social media accounts are directly connected with the social reward pathway in the brain, so the more likes or clicks you rack up, the more likely you are to feel rewarded, creating a cycle to continue chasing the ‘like’ to get your next ‘fix’ or reward. 

Many researchers claim that the rise of social media, together with other digital advances, have made millennials in particular more impatient than previous generations. They claim that our need to experience immediate fulfilment has affected everything from our expectations in the workplace, to our spending habits and the way we approach our health and wellbeing. 

This impatience is also extended to the way many of us approach investing: We want great returns and we want them now. This ultimately makes us even more susceptible to fraudulent get-rich-quick schemes. The first step in protecting yourself against these schemes, is being able to identify them. 

The WhatsApp pyramid con

The traditional pyramid scheme has, thanks to the advent of social media, moved to social networks. With a reported 1.5bn active users in over 180 countries at the start of 2019, WhatsApp has proven useful for con artists who operate using pyramid schemes, as they can now communicate efficiently and encourage recruitment with relative anonymity, spreading their con far and wide. 

Essentially the scam is the same: A con artist introduces an amazing financial opportunity, promising unbelievable returns to a small group of investors. Each investor is then encouraged to sign up and recruit new investors (friends, family, acquaintances and colleagues). 

In turn, these new investors recruit even more investors, and a multi-level pyramid structure is formed, with the fraudster firmly on top.

Each time an investor invests in the scheme, their contributions are funnelled upwards and used to fund the returns due to some of the investors higher up the pyramid. The scheme is unable to provide returns to its investors over the long term and inevitably collapses, leaving investors with permanent capital losses.

Separating fake from real online investment platforms 

The Financial Times earlier this year reported that the UK’s financial sector watchdog, the Financial Conduct Authority (FCA), said that the number of crypto and forex fraud claims jumped alarmingly from 530 to over 1 800 in little over a year. The majority of the claims related to cryptocurrency. 

Fake investments on online trading platforms are especially alarming because it is hard to distinguish which ones are legitimate, and which ones are fake. There have been a number of cases in South Africa of unsuspecting victims falling for such fake sites. 

Victims are usually convinced to buy fake cryptocurrencies because the website looks convincing and uses the right terminology, or there are fake endorsements from celebrities, politicians or other ‘successful’ case studies. 

Money-flipping scams on social media 

Money-flipping scams have ripped off many local investors through social networks like Facebook, Twitter and Instagram. About 71% of Instagram’s 1bn daily users are younger than 35, making the social network an increasingly popular playground for scammers wishing to target millennials. 

Money-flipping scams promise to double or triple your money in a very short period. Victims are convinced to send funds to a scammer who promises to deliver excellent returns for a small commission. 

In SA, these investment opportunities are often sold as forex trading, binary options or offshore property opportunities.

A scammer will create a legitimate-looking social media profile showcasing exotic travel destinations, expensive cars and designer clothing. These opulent lifestyle images are used to position the scammer as a successful and trustworthy investor. Some will even boast about working for less than an hour per day, selling the dream and tapping into our need for instant gratification. 

Once scammers have hooked a victim, they may even supply detailed investment reports to show investors how their money is growing and encourage larger investments. As soon as the investor requests a withdrawal, they are met with a series of delays and may be asked to fork out even more money to release the funds. This escalates until the scammer deletes their account and ceases all contact.

It can happen to anyone

If you think scammers only get the attention of the uninformed, think again. The New Yorker bestselling author and psychologist, Maria Konnikova has studied and written extensively about con artists and believes we are all vulnerable. According to Konnikova, “It’s not who you are, but where you happen to be at this particular moment in your life.” Consumers facing large amounts of debt, financial stress and unexpected expenses are most vulnerable.

Social media gives us a false sense of security, prompting us to trust members of our online social networks. According to Konnikova, con artists use this to their advantage, and manipulate our emotions to get cash. 

Many investors fall prey to scammers because they do not have a solid financial plan, and feel pressured to catch up on lost savings opportunities. Rather follow the route of a good financial adviser who will explore your unique set of circumstances and implement a long-term investment strategy to help you reach your financial goals

Phiko Peter is a client relationship manager in strategic markets at Allan Gray.

This article originally appeared in the Collective Insight supplement in the 15 August edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.


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