- Four legal questions can help investors identify the warning signs of a Ponzi or unlawful investment scheme before investing.
- Registration, high promised returns and polished platforms do not prove an investment is legitimate or independently verified.
- The guide explains how to verify FSCA authorisation, test promised returns against the law and spot schemes driven by recruitment.
In August 2020, the Financial Sector Conduct Authority (FSCA) urged clients of Mirror Trading International (MTI) to ask for their bitcoin back as soon as possible. The FSCA said MTI was not licensed to conduct the business it claimed to be conducting and that its reported returns appeared far-fetched.
The warning was clear. Yet by December, MTI claimed to have 280 000 members around the world. The scheme collapsed that month. In 2023, the Western Cape High Court declared its business unlawful and described it as a pyramid and Ponzi-type scheme.
Why did the warning not stop more people from joining or persuade more members to leave? Because many of the signs in front of them appeared to show that MTI was legitimate. It was a registered company. Members could log into a polished platform and watch their balances grow.
Some had withdrawn money successfully. Many had been introduced to the scheme by someone they knew and trusted. None of this proved that the underlying investment was real. But together, these things made it look real.
That is how many schemes persuade investors. They use company registration details, professional-looking platforms, impressive account statements and early payments. They also rely on personal recommendations. An offer feels safer when it comes from a friend, relative or colleague who believes in it too.
This is why intelligence and financial literacy do not always protect an investor. The investment itself may be difficult to understand. The trading model may be technical and the language unfamiliar. Even a financially informed person may assume that they do not know enough to challenge the explanation.
But you do not need to understand every aspect of bitcoin, forex trading or an artificial intelligence model to test whether an investment may be unlawful. You can ask simpler questions.
Is the person or business authorised to do this with your money? Does the promised return cross a line set by law? Can anyone outside the scheme verify what you are being shown? Does your return depend on bringing in other investors? The product may be difficult to judge. These four questions are not.
1. Are they authorised to do this with your money?
When an investment provider says it is registered, ask a second question: registered to do what? Registration with the Companies and Intellectual Property Commission confirms that a company exists. It does not give the company permission to accept your savings, invest your money or provide financial services.
Start by identifying the exact legal entity you will be dealing with. Look at the investment agreement and the name on the bank account into which you are being asked to pay. The names should match. Then search for that entity on the FSCA’s register of authorised financial services providers.
Check three things:
- Is the licence current?
- Does it belong to the same legal entity that will receive or control your money?
- Does it cover the financial service being offered?
The third check is important because financial authority is specific. A provider may be authorised to give financial advice or sell certain products without being authorised to take control of your money and trade it on your behalf.
Check the person dealing with you too. That person should be recorded as a representative of the authorised provider. If the company name, bank account, licence or representative details do not match, do not rely on a verbal explanation. Ask for written proof and verify it independently.
A valid licence is not a guarantee that the investment is sound. It does not mean that the regulator has approved the product or promised that you will earn the advertised return. It confirms only that a particular provider is authorised to perform particular financial services.
Do not ask only, ‘Is the company registered?’ Ask, ‘Are this company and this person authorised to do what they want to do with my money?’
2. Does the promised return cross a line set by law?
‘Too good to be true’ is not a particularly useful warning when you do not know what a realistic return should be.
A salesperson may tell you that new technology, an automated trading system or a little-understood market makes unusually high returns possible. Without specialist knowledge, how are you expected to judge that claim?
For one type of prohibited scheme, South African law gives investors a calculation they can make. The Consumer Protection Act prohibits a multiplication scheme in which a person offers, promises or guarantees an effective annual interest rate at least 20 percentage points above the repo rate that applied when the investment was made.
At the time of writing, the repo rate is 7%. Add 20 percentage points and the threshold is 27% a year. MTI promoted returns of approximately 10% a month. An investor did not need to understand bitcoin, forex trading or MTI’s technology to recognise that the promised return crossed the statutory threshold.
The calculation could be made before the scheme collapsed, before payments stopped and before anyone knew what had happened to the money. The repo rate changes, so use the rate that applied on the date of the investment.
This test also has limits. It identifies one category of prohibited scheme. A promised return below the threshold is not necessarily lawful, genuine or safe. It means only that this particular test has not been triggered.
The return is not the only part of an offer that the law examines. How the business receives and uses investors’ money matters too.
A business that regularly accepts deposits from the public may be conducting the business of a bank. Only a registered bank may do that. Calling the payment a membership fee, trading contribution or investment does not change what the business is actually doing.
This issue arose in litigation involving UST Consultants. The business described itself as a private investment club whose members’ money was pooled and traded offshore. Calling investors ‘club members’ supported an argument that the money had not been taken from the public. The legal question, however, was what the business actually did with the money, not what it called the people who paid it.
Do not ask only, ‘Does this return sound unusually high?’ Ask, ‘Does the promised return cross a line that the law has already drawn?’
3. Can anyone outside the scheme verify what you are being shown?
One of the most persuasive signs that an investment is succeeding is the statement showing that your money has grown. But who produced that statement?
A number on a screen is not independent proof. Before relying on it, ask who holds the money, who decides what the investment is worth and who records its performance.
If the people selling the investment also control the money, calculate its value and produce the statements, every part of the proof comes from the same source. The scheme is confirming its own claims. Matters litigated by Vezi de Beer Inc. show how this can happen.
In Eureka Limited, the scheme controlled the market and the price. In granting a provisional winding-up order, the Western Cape High Court found that shares were traded through an internal trading room that operated unlawfully as an unlicensed securities exchange. The court described a prima facie case in which shares had been taken from the company without value being given in return and then offered to members at a price determined by the founder. There was no independent market showing what those shares were worth.
In Finalmente Global, the scheme produced its own record of success. Investors received weekly updates and computer-generated statements showing the supposed value of their investments, although no actual profits were paid. The statements did not confirm that the investments were performing. They showed investors what the scheme itself said their investments were worth.
Even a successful withdrawal does not prove that the underlying investment is genuine. Ponzi schemes often pay early investors. Those payments reassure existing members, produce convincing testimonials and help attract new investors. The payment may be real even when the investment activity behind it is not.
Do not ask only, ‘Can I see my balance?’ or even, ‘Has someone been paid?’ Ask, ‘Can anyone independent of the scheme verify where the money is held, what the investment is worth and whether the reported returns are real?’
4. Does your return depend on bringing in other investors?
Many schemes spread through people who know one another. Finalmente rewarded recruiters through uplines and downlines. MTI used a network-marketing structure. Offers moved through families, congregations, workplaces and community groups.
The person who introduces you may genuinely believe that the investment works. They may have seen their own balance increase or received a payment. They may not know that anything is wrong. That personal connection makes the offer easier to trust. It can also cause you to skip checks that you would have performed if a stranger had approached you.
Ask how the person who introduced you is paid. Then ask whether any part of your own return depends on recruiting other investors. Recruitment does not by itself prove that an investment is unlawful. The important question is where the money used to pay returns comes from.
Does it come from genuine profits earned by an underlying investment? Or does it come from money paid in by new members? If new investors’ money is being used to pay earlier investors, the scheme can continue only while more money keeps arriving. Once recruitment slows or too many people try to withdraw, the payments cannot continue.
There is also a personal consequence. If you introduce other people, their loss may begin with the trust they placed in you.
If you have already invested, preserve the evidence
You do not need to prove the entire scheme before you report your concerns. Save your transfer confirmations, the bank account details, agreements, application forms, account statements and marketing material. Keep emails, voice notes, group messages and the details of the person who recruited you. Download what you can while the platform is still accessible.
These records can show which entity received the money, what return was promised, who made the claims and where the money may have gone.
The detail matters. The Prudential Authority can act on a complaint about suspected illegal deposit-taking only when it has enough information and documentary evidence to assess what happened. Where appropriate, it may investigate, direct that money unlawfully obtained be repaid and appoint a repayment administrator to manage that process.
Report suspected unlicensed financial services to the Financial Sector Conduct Authority. Report suspected illegal deposit-taking to the Prudential Authority at the South African Reserve Bank. Suspected fraud or other criminal conduct may also be reported to the South African Police Service.
The product may change. The questions do not.
The next scheme may involve property, cryptocurrency, forex, artificial intelligence or a product that does not yet have a name. The explanation may be technical, and the platform may look convincing. You still do not have to begin by deciding whether the product works.
Begin with the four questions. Are the provider and the person dealing with you authorised to do this with your money? Does the promised return cross the legal threshold? Can anyone independent verify the money, the value and the returns? Does payment depend on recruiting more investors?
If the answers are unclear, inconsistent or supported only by information from inside the scheme, do not invest until you have verified them. You may not know enough to test the trading model. You can still know enough to decide whether the people asking for your money have earned your trust.
| FOUR QUESTIONS BEFORE YOU INVEST | FOUR QUESTIONS BEFORE YOU INVEST |
| 1. Authorised? | Are the provider and the person dealing with you authorised to perform the service being offered? Do the legal entity, bank account and licence details match? |
| 2. Above the legal line? | Add 20 percentage points to the repo rate that applied on the date of investment. A promised effective annual interest rate at or above that figure meets the Consumer Protection Act’s multiplication-scheme threshold. |
| 3. Independently verified? | Can anyone outside the scheme confirm where the money is held, what the investment is worth and whether the reported returns are real? |
| 4. Dependent on recruitment? | Does any part of your return depend on bringing in other investors? If so, ask whether returns come from genuine profits or from new members’ money. |
More about Vezi de Beer Inc.
Vezi de Beer Inc. is a vanguard South African law firm experienced in insolvency, business rescue and commercial litigation.
Its practitioners serve on the Master’s panels as liquidators, trustees and curators, and are members of SARIPA, bringing frontline insight into failed investment schemes and the work of tracing and recovering assets.
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This article provides general legal information and does not constitute financial or legal advice. Readers should obtain advice specific to their circumstances. If you need to consult or have a question on these matters, email expert@conviction.co.za
