How to Protect Yourself from Investment Scams in Singapore

How to Protect Yourself from Investment Scams in Singapore

In recent years alone, there have been numerous reports of (financially uneducated) investors who have fallen prey to various investment scams or exceptionally high-risk investment opportunities.

scams

Investment Scams in Singapore 

Some infamous cases include:

Suisse International’s convoluted gold buy-back scheme that involved buying gold bars from investors and in return giving them a percentage as regular income. But, as part of the scheme, investors had to buy back gold coins, although, they could then sell back these gold coins immediately if desired. I have no idea how such an “investment” could be viable a business for the company unless it was a scam.

Genneva Gold was an elaborate illegal money-lending scheme cum pyramid scheme disguised as a gold trading scheme. It was a different scam than Suisse International as gold was not bought back but was used as a collateral for the “loans” given by investors.

Profitable Plots ran what is known as a land banking scam that offers investments in undeveloped land in a foreign country, with the potential for high returns in a few years. The company ran professional-looking ads and had spokespeople to tout the benefits of investing in land in the UK. However, the money collected was not used to invest in developing the land but was used for other purposes including to pay existing debts. Naturally, when it was time for investors to collect, there was no money to be returned. EcoHouse ran a similar property development scam but with “properties” in Brazil.

Sunshine Empire executed a classic Pyramid scheme which is “initiated by an individual or a company that starts recruiting investors with an offer of guaranteed high returns. As the scheme begins, the earliest investors do receive a high rate of return, but these gains are paid for by new recruits and are not a return on any real investment.

From the day the scam is initiated, a pyramid scheme’s liabilities exceed its assets. The only way it can generate wealth is by promising extraordinary returns to new recruits; the only way these returns can be paid is by getting additional investors. Invariably these schemes lose steam and the pyramid collapses.” (Investopedia)

Many multi-level marketing companies are structured like pyramid marketing schemes but skirt the law through legal technicalities.

“Sure Win 4 U” was a scam where “investors” funded professional gamblers with promises of great returns. What could possibly go wrong with that? It must as well have been called “Sure Make Money Lah”.

Most recently, there were reports of a multi-million dollar Ponzi scheme where a woman lured investors to invest in choice properties in prime locations in Singapore. The scheme ran for an incredibly 15 years before recently collapsing.

A Ponzi scheme is “a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors.” (Investopedia)

Investors do not suspect a Ponzi scheme as long as promised payouts are made. However, once the scammer is unable to find new investors to pay the “returns” of existing investors, the scam collapses. Think Bernie Madoff who scammed almost $65 billion from investors over decades.

In all the above cases, investors were told that they would enjoy very high returns, usually paid out on a regular basis. Most were told that the investments were very low risk and all  they have to do is put in their money and wait for their returns.

One tell-tale sign of a scam is when the directors or owners of the company suddenly start buying new cars or houses after the “investment scheme” commences.

Actually, this sounds like how some religious organizations are run. Members are strongly encouraged to donate money to a religious organization in the name of the religion and in return be rewarded ten-fold or hundred fold. In the meantime, the “leaders” of the religious organization are able to mysteriously live luxurious lifestyles, increase their personal assets/ wealth and embark on projects for their personal gratification and ego. Hmm…

MAS has compiled consumer alerts on different scams that you should familiarize yourself with here.

Bad Investments in Singapore

Some investments may not be deliberate scams but there are some investments that are just bad investments because they are very high risk and there is little protection for investors.

New Risky Businesses

One example is new businesses where investors are invited to invest money in the business in return for a stake in the company, share of the profits or in the form or a bond.

Many of these type of investments for small to medium enterprises attract investors through private invitations from friends, families or acquaintances.

Theses investments are potentially high risk for several reasons:

The business model may not be sound

The business may not take off

The market may not be right for this specific new business (For e.g., the market is saturated, the overall market is down etc)

The fundamentals of the company are not sound

The business is not well managed

While an investment like this is not a scam in any way, it can be very high risk and you may lose a large portion, if not all your money. Of course, if the business is successful, you stand to enjoy exponential returns on your investment.

Overseas Property Development Investments

One common investment scheme is for Singaporeans to invest in overseas property developments. Again, this is not a scam but it can be very high risk.

Often, a local company is set up to collect the investments which would then invest in an overseas property developer or property investment company.

Investors are assured that the property development is insured so investors’ monies are protected. You are also assured that the company collecting the monies is locally registered. On the surface, this seems reassuring. However, there are multiple possible potential problems.

1) If the overseas property developer or investment company loses the money for whatever reason (whether due to bad management or dishonest intentions), they will be unable to return the money to the Singapore registered company. In which case, the local company can become insolvent and if it has no assets, investors will be left with nothing.

2) Building on the first point, the overseas party that receives the money from the Singapore company is not regulated by MAS or governed by Singapore law. So, if any issues arise, the most that investors can do is try to find the local company that they gave their monies too.

3) Even if the property development is insured, it does not mean the insurer will pay out or pay out in full, if any problems occur. If the insurer does not want to cover the problem or takes years to investigate and offer a lesser payout, the investors lose out in time and money.

Be very careful of such investment opportunities and be sure to do your due diligence on these investments.

If you are unsure whether an investment is legitimate or high-risk, consult an experienced investor or business person.

Also read some suggestions from MAS here.

Protect Yourself the Simple Way

protect yourself

At SimplePassiveInvesting.com, the objective is to keep everything simple. When it comes to protecting yourself from investment scams and potentially bad investments, it is actually very simple.

Here are 3 simple ways to protect yourself:

1) If It Sounds Too Good to be True, It Probably is

There is no such thing as a no risk/ high return investment. Even a low risk/ high return investment is very uncommon.

There is no such thing as a guaranteed investment. An investment by nature has some inherent risk. Otherwise, it is a donation or a gift, not an investment.

Be particularly careful of any investment that guarantees anything more than 10% or more in returns, interest or dividends in a short period of time (2 years and under).

Do not invest in a project that exploits an “unknown” loophole in a system that promises high returns “legally”.

Don’t let greed cloud your judgement. That is the very thing scam artists prey on.

2) Do Not Invest in Anything You Don’t Understand

This is a fundamental rule in investing. Even the most seasoned professional investors follow this rule.

Do your due diligence on the investment, the company behind the investment and people behind the company. Understand the business model of the company, not just the investment scheme. Just because the company or organization that you invest in is a legally registered company (Pte Ltd) does not make the investment legitimate.

If the investment scheme seems usually complex, convoluted and complicated, be wary.

If the business is not sustainable or fundamentally sound, there will be no way for the company to make money and return the principle investments, let alone additional returns.

Don’t blindly make investments that are recommended by friends or family

If you do not 100% understand the investment scheme or business model of the company, do not invest in it.

3) Don’t Invest All Your Money in a Single Investment.

“Don’t put all your eggs in one basket” is probably the most important rule in investing.

The academic term for this is known as “diversification”.

No one in the history of the world has lost all their money if they diversified their investments.

Even institutional investors and venture capitalists spread out their investments. If professional investment analysts and fund managers cannot guarantee returns on a single investment, it is highly unlikely a retail investor (that’s you) can make a better call.

Any time you read of people losing all their money, life savings and/ or CPF savings, it is because they invested all their money in a bad investment or scam.

However, if you limit just a portion of your total investments to any one investment, one or two bad investments will not cause you to lose all your money. Even if one happens to be a scam and you lose all your money invested in the scam, you will still have 90% of your portfolio intact.

Be smart & safe!

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