So How Do I Know If It’s a Scam?

After penning an article decrying the spread of shady financial schemes in our communities, an Anash.org reader follows up with some pointers to look out for to avoid such scams.

By @Craftsmanbob

For part one: ‘Where Have We Gone Wrong?’ click here.

Get rich quick scams and financial fraud have been around for as long as the modern monetary system has existed. The rise of targeted advertising and aspirational frum investors has meant many of these dubious financial schemes have recently affected frum communities. 

We all know victims who were damaged by fraud and I personally fell victim to an ill-fated financial venture. Ever since my unfortunate experience, I have made a point to thoroughly examine any ads that promise suspicious financial returns. Sadly, I have observed a proliferation of these promises that specifically target our communities. The best way to safely guard your family’s precious finances is to be vigilant about which investment vehicles are trustworthy for your hard-earned dollars.

While this article talks specifically about Ponzi schemes, the principles I outline apply to any situation where someone is asking you for money, in any capacity. While you may already be familiar with the concept of a Ponzi scheme, there are specific aspects I wish to highlight that I believe make reading the description that follows worthwhile. 

It’s important to note that many scams and fraudulent activities do not start off as fraudulent. They are often started by an otherwise honest person who—due to a single bad business move—needs more money in order to stay afloat. Banks will not lend to them and they cannot find someone to bail them out.  So in an effort to obtain an investor and the needed funds they lie about the state of the business.

It becomes a Ponzi scheme when the payment is due and the investor wants their money back. Unfortunately, the money went into the business and did not generate the promised returns. In order to pay back the initial investor his investment along with the promised returns, the business owner is forced to borrow even more money than he initially borrowed. He tells the new “investor” that the money will be used to generate returns in his business or investment. In truth, however, it is just being used to pay back that first person, who is none the wiser. 

His original lie turns into an endless cycle of borrowing ever-growing amounts of money to continuously pay back everyone he has borrowed from plus their promised returns. As this goes on, he needs to rope in more and more people, eventually turning to flashy advertisements touting high returns, offers to “help you” manufacture spending to hit sign-up bonuses and earn points on your credit cards, etc. But, eventually, the pot runs dry and the whole thing comes crashing down. The money simply does not exist.

It’s not hard to imagine why in a community such as ours these schemes have such great appeal. The high cost of living, pressing bills, and anxiety about how to pay off weddings can blind our judgment and tempt us into falling for big promises and easy money. This, coupled with the high level of trust we tend to have in our fellow Yidden, is a recipe for disaster, as we have unfortunately seen time and time again.

To be clear, this can happen to anyone. Yes, even you! This is why we must do all we can to protect ourselves and spot the signs of fraud and dishonesty. Countless very smart and financially literate people have fallen for Ponzi schemes and other financial scams. Scammers can be very good at covering up their fraud, creating fake personas and often even swindling their own family members. Remember, most don’t intend to start out this way, but they got where they are due to desperation, and they will do anything to protect themselves, their business, and their money.

Here are a few pointers to keep in mind:

When it comes to money, especially when a situation becomes dire, everyone has their own best interests in mind. If he has an option between you getting paid or him, he will pay himself first. What’s worse, if he can pin the fraud on you, instead of himself, he will. Even if you find that hard to believe, do you really want to take the chance to find out?

Trust your gut. If it’s too good to be true, it probably is.

There is no “secret sauce” to investing. There are good investments, and bad investments. There are less risky investments and more risky investments. Everything should be above board. If someone can’t tell you exactly what it is they are doing with your money, don’t hand it over to them. Always independently—either by yourself or a third party that YOU choose—verify the information, the financials, and make sure you understand the numbers and risks involved. Remember, it’s your money! And again, refer to rule #2.

Higher returns necessitate higher risk. If someone knew how to overcome this rule, you would be the world’s first trillionaire.

If they are promising a safe method for above-average returns, be very skeptical.

Ask yourself: “Why is he asking me?” If someone indeed has a “secret sauce,” an investment that is promising above average returns, or easy access to credit, why are they only advertising in frum publications, on WhatsApp groups, and among the frum community?

If they are raising capital and touting great returns, they should be advertising to everyone to gain access to a much larger clientele and greater access to capital!  Similarly,  on the flip side: how come you never see such ads in reputable national publications? When was the last time you saw an “increase your credit limit to 1 million dollars in just 7 days” advertisement in the New York Times, the Wall Street Journal, or the Subway, all of whom are far more likely to vet their advertisers and their claims than your WhatsApp group?

Statistics and numbers can often be very misleading. “16% growth!” is meaningless if you don’t know the timeline. 16% growth over a 1-year period could be part of a larger trend of significant losses. Also, nominal growth can often be made to sound more impressive than it actually is, by stating large numbers when in truth it is only a small percentage of the overall fund or investment. Always look for the bigger picture.

“In business since 2009” does not guarantee success, honesty, or legitimacy. Businesses can restructure, fall under new management, and go through better or worse times.

On the other hand, a brand-new business that seems to have grown too quickly should also raise some concerns.

People use industry-specific words to obscure and obfuscate. Don’t let someone use fancy words and big concepts to give off a false sense of expertise and trustworthiness. If he’s truly good at what he does, understands it, and is honest, he, or someone from his team, should be able to explain it to you in terms you can understand. If a doctor can do it, so can they.

Someone doing something in your name—particularly if they use your identity, such as your social security number or bank and credit accounts—can easily wipe himself clean of any wrongdoing and pin it on you if he is smart about it, or can threaten that if he goes down, you go down with him. This can express itself in subtle ways. 

Presentation matters—and it doesn’t. A company that is doing well should be able to afford a nice website and an advertisement that wasn’t done on Microsoft Paint or even Canva.
At the same time, don’t be fooled by fancy presentations and a sleek website. 

There is no such thing as free money. If someone is promising you free access to capital, ask yourself: “What is in it for them?” You don’t want to be caught up as an unwilling participant in a money-laundering scheme!
If someone claims they can get you money by bypassing the traditional routes such as credit checks and financial statements, ask yourself: “Why would anyone lend money without the regular rigorous processes that are in place to protect both the lender and the borrower?”

This list is not exhaustive. However, I hope that this can help people begin asking the right questions, and help you keep your money safe, secure, and in honest hands.

The views expressed in op-eds are those of the authors and do not necessarily represent or reflect the views of Anash.org.

Anash.org does not take responsibility for any financial advice offered.