Senin, 01 April 2013

Recurring investment fraud, a delusion of grandeur


Recurring investment fraud, a delusion of grandeur
Hendi Yogi Prabowo ;  Director of the Centre for Forensic Accounting Studies at the Islamic University of Indonesia, Yogyakarta; He obtained his Masters and PhD in Forensic Accounting from the University of Wollongong, Australia
JAKARTA POST, 21 Maret 2013

  
Nearly half a decade has passed since Bernie Maddof’s massive Ponzi scheme was uncovered, and yet every now and then similar fraud schemes are uncovered all over the world — with Indonesia being no exception. 

As recently covered by mass media, Golden Traders Indonesia Syariah (GTIS), a Malaysian-based investment company, has been accused of perpetrating a Ponzi-like fraud using its gold investment scheme. 

The investment scheme offered by GTIS is simple. A customer buys its gold at a higher than normal price and he or she will receive a higher than normal return. Media reports say at least two high profile figures, the chairman of the People’s Representative Council and the chairman of the Indonesian Ulema Council (MUI), have both endorsed GTIS’ investment scheme. 

Recently, GTIS’ customers grew restless after news spread of the disappearance of its director together with a huge amount of company’s fortunes. According to the head of the Futures Exchange Supervisory Board (Bappebti), several investment companies in Indonesia have been running similar schemes involving investment in gold.

Experts say similar things have happened in Malaysia, where several companies similar to GTIS have run gold investment schemes and attracted many customers who then end up not receiving what they have been promised (i.e. investment returns).

Public suspicion of anything looking like a “get-rich-quick” scheme is not without reason. 

Last year, for example, Koperasi Langit Biru (KLB) made the news by defrauding its investors with investment packages that were no more than “robbing Paul to pay Peter” schemes — otherwise known as Ponzi schemes — that pay investors not from the return on their investments but from their own money and the money of subsequent investors. 

GTIS has denied running an investment fraud scheme, since unlike other fraudulent investment companies, its customers have received the gold they have purchased. Nevertheless, there have been reports of late payments of promised returns to GTIS customers, which indicates possible problems within the company.

Whether GTIS’ investment is really fraud has yet to be determined by the authorities’ investigation. However, evidence suggests that just like the rest of the world, a “market” seems to still exist for Ponzi schemes in Indonesia with many of the victims those who know almost nothing about investment. 

More than a few of these victims are those who are supposedly smart enough to realize that such investment schemes are nothing more than cons. No experts these days know exactly why reasonable and educated people can still be victimized by a century old Ponzi scheme. One hypothesis is that the temptation to become a millionaire in a short period of time overwhelms their logic.

In most if not all cases, a Ponzi scheme is not detected until it collapses. In the GTIS case, many customers believed that since one of its websites contained testimonies from two high profile figures, the company’s activities must be 
legitimate. 

Also, after expanding its business to Indonesia, the company has also received a halal certification from the MUI as proof of compliance with Islamic laws. The certification was believed to be a key factor in attracting customers in Indonesia.

Anti-fraud experts believe that, based on existing cases, to sustain a Ponzi-like investment, the number of investors (victims) need to grow exponentially. For example, it is estimated that to sustain the scheme for six months alone, 64 investors are needed. To have it running for 16 months, over 65,000 investors are needed. 

This explains the need for fraudulent investment companies to rapidly expand their business to sustain its existence. In cases where there is a shortage of investors in the country, they may choose to expand to other countries.

Evidence suggests that not all Ponzi investments began as such. Some started as legitimate businesses. Bernie Madoff, a former non-executive chairman of the NASDAQ stock market, was believed by many to have started out as a legitimate wealth manager but then turned to fraud. One of the most common reasons why investment managers turn into Ponzi fraudsters is to save their reputation after making investment mistakes. 

Generally, Ponzi fraudsters are often seen as persuasive and charismatic individuals who are able to influence others to do their bidding. To ensure that victims place “emotion over logic”, fraudsters use social engineering methods to explain that, for example, many high profile figures as well as companies have participated in their investment products. 

There are ways for investors to prevent themselves from being conned in such a way. The first is understanding what fraudulent investment is in its various forms. Secondly, always rely on logic over emotion. One needs to understand, among other things, what is and what is not a legitimate investment. 

For example, a scheme that offers a guaranteed higher than normal return is almost certainly not a legitimate investment. A scheme that says it will yield a higher than normal return but cannot be logically explained by its investment manager is almost certain to be illegitimate. An investor needs to understand investment’s law of nature — the higher the return, the higher the risk. 

As evidenced by Ponzi fraud cases worldwide, the support, endorsement and in some cases, the certification from high profile private or government institutions are sometimes not enough to prove that investment is not a scam or will not become a scam. The best defense is always the awareness and common sense of investors. 

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