Investment scams: Just too good to be true
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Last month, the police arrested Jaya Komara who allegedly defrauded his clients in an investment scam. The scam itself began to surface when four of his alleged victims reported the scam to the police.
According to the police, the total fund accumulated from what appears to be a Ponzi scheme is estimated to be around Rp 6 trillion (US$632 million).
The fund was accumulated primarily through Jaya Komara’s cooperative-based organization, Koperasi Langit Biru (KLB) which was established in January 2011.
As stated by the police, the number of people who fell for this alleged scam is estimated to be around 125,000. KLB’s get-rich-quick scheme consisted of small investment packages (Rp 385,000) and big investment packages (Rp 9.2 million) with the promised returns ranging from 10 to 40 percent.
The Ponzi scheme itself is known throughout the world for its ability to lure unsuspecting investors by promising high investment returns in a short period of time. The scheme was named after Charles Ponzi (1882–1949), a famous Italian businessman and con artist in the US and Canada.
Throughout his criminal career, he duped tens of thousands of people through using the “robbing Peter to pay Paul” method by which he pays the investment returns to his existing investors from their own funds or funds paid by new investors. Decades later, history seemed to repeat itself when Bernard Madoff, a former non-executive Nasdaq chairman pleaded guilty to his role in a Ponzi scheme. The case was thought to be the largest Ponzi scheme at the time in the US and possibly in the world with estimated total losses of $65 billion.
In reality Charles Ponzi and Bernard Madoff are not the only Ponzi fraudsters. There are many others like them who have been making a fortune from get-rich-quick schemes. They sell false hope to people who believe that they can get rich in no time without breaking a sweat. In Indonesia, the KLB case is just one of many investment scam cases, some of which are yet to be uncovered. Ponzi schemes have also been a subject of many studies by crime prevention scholars.
Despite the differences in how they are orchestrated, studies suggest that there are more than a few similarities between Ponzi schemes and these can be used as red flags to identify the scam. All Ponzi fraudsters, for example, always offer a guarantee of low- or no-risk, above-market, investment returns which are too good to be true since a basic law in investment is “increased return equals increased risk”.
In the KLB case, for example, a guaranteed 30–40 percent return in a short period of time is ridiculously high for any investment standard. Second, just as in the case of Madoff’s Ponzi, the offenders often seemed to be unable to clearly explain the mechanism by which investors’ money was invested to yield the promised returns.
In many cases the fraudster will explain the matter in a way that even a financial expert will have a hard time understanding. The reason for this is simply because most or even all of the investors’ money is not going into any investment cycle at all as it remains in the fraudsters’ bank accounts or safe deposit boxes. Although the police investigation is yet to confirm it, this is likely to be also the case with the KLB investment scheme as well as other investment scams in Indonesia.
According to many of Madoff’s former clients, before his scam was uncovered he was known as a charismatic man who was able to easily talk others into doing what he wanted. Some experts said that he was so good at it that he was considered a true master of ingratiation and intimidation. Experts believe that the ability to influence others is a common trait shared by many successful Ponzi fraudsters all around the globe.
Interestingly, evidence also suggests that despite their well-mannered appearance, Ponzi fraudsters are also seen as distant men who do not like it when others ask too many questions about what they do. In other words, they can be approachable and mysterious men at the same time.
Ponzi fraudsters often live an extravagant lifestyle to create an impression of wealthy and successful men who everyone should follow. In the KLB case, the police say that Jaya Komara is a wealthy man who owns a number of properties such as houses, stores and land. Whether such assets are the results of his alleged fraud still needs to be determined by the police investigation.
Interestingly, some Ponzi investment scams start out as legitimate wealth-management schemes, but then the fund manager begins to have difficulties in paying his investors due to, for example, a decline in business. This is when, instead of admitting it to his investors, the investment manager begins to pay the promised return from investors’ own money.
Just like any other fraud schemes, a Ponzi scam can be perpetrated due to the existence of an opportunity to do so. Potential victims’ lack of awareness regarding the nature (what is good and what is not so good) of an investment is commonly a factor exploited by Ponzi fraudsters to set up a scam. Had the victims of the KLB investment scheme been aware of the fact that the promised return on investment was ridiculously high, for example, they may not have been so easily lured into participating in the scheme.
In Madoff’s case many of his Ponzi scheme victims were financial experts who knew more than a few things about what was and what was not a good investment. This clearly indicates that something clouded their professional judgment on the otherwise suspicious investment scheme.
Studies on the victims of the Madoff Ponzi revealed that in addition to Madoff’s charismatic appeal, it is implied that greed may have played a role in misguiding the otherwise cautious investors. In other words, investment can be a very risky business and thus one should exercise caution when deciding to take part and not let one’s greed cloud one’s judgment.
The writer is the director of the Center for Forensic Accounting Studies at the Accounting Program of the Islamic University of Indonesia, Yogyakarta. He obtained his Masters and PhD in forensic accounting from the University of Wollongong Australia.