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Be watchful, investment frauds on the rise

Businessman stretching hand to take money from trap. Buinsess methaphor of easy money wanting. Man grabbing money from animal trapping. Dangerous and risky business affair concept

Interpersonal trust is the fundamental feature of investment fraud. Creating false hopes of higher returns within a short duration combined with the constraints of accessing investment related information is motivation for people to fall prey to fake investment schemes. There are many types of investment fraud, like Ponzi schemes, pump and dump schemes, and app-based fraudulent schemes.

There are a hundred plus fake Apps based investment companies doing rounds over internet. and most of these Apps originate from Chinese Servers. Most popular apps are Power Bank and EZPlan Etc and these are banned and not available on App store or Play store. Existing members would be earning higher commissions if they introduce new users, a typical multilevel marketing scheme. The approach is “you get cheated to cheat others”.

Reasons for fraud not getting detected at an early stage:

  • Diminishing Moral Values
  • Poor Governance
  • Ineffective Internal Control Systems
  • Compliance in letter and not in spirit
  • The securities market is extremely volatile.
  • Lack of Investor Awareness

Legislations that govern and regulate deposit collecting activities:

  • The Banning of Unregulated Deposit Schemes Act, 2019
  • The Chit Funds Act of 1982 (the Chit Funds Act) governs the operation of chit funds.
  • Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
  • Companies Act of 2013, as amended by the Companies (Acceptance of Deposits) Rules of 2014.
  • Securities and Exchange Board of India Act, 1992 & 1999

I. Ponzi scheme:

It’s an investment fraud that usually pays existing investors with money collected from new investors. Fraudsters promise to invest your money and generate high returns at zero risk, but in reality, the fraudsters do not invest the money. They pay money to new investors, which is collected by the old investors, and they keep the majority of the shares for themselves.

Most investment frauds have no legitimate earnings, and such schemes require a continuous flow of new money to survive. When it becomes hard to recruit new investors, they just vanish into thin air.

Some red flags of Ponzi schemes are (a) high returns with zero risk. (b) consistent high returns from the start of the investment.(c) bought from unregistered companies. (d) bought from unregistered sellers (e) Inadequate Paperwork (f) Difficult payment-receiving procedures

II. Pump & Dump scheme:

It’s an investment fraud where advisers try to pump (Inflate) the price of shares by providing misleading information to investors. They try to increase the price of the cheap shares by giving the fake propaganda. First, these fraudster do investment by buying a cheap shares at a large volumes and then send fake WhatsApp, SMS or E-mails to crores of investors recommending them to buy that shares which they have artificially inflated.

Looking at the increased number of people buying, the price of that share starts increasing and as soon as the share price reaches a good value, then these investment advisers sell (dump) their shares and get good returns and vanish in thin air. What happens at the end is that these artificially inflated stocks fall and the retail investors (victims) lose their money. Most of the time, those who invested are first timers, and sometimes they even know that it’s a fraud.

III. Apps based schemes:

Scammer’s trick to investors is through fake websites appearing to be legitimate and also use fake apps (Not in App store / Play store) and often send phishing emails showing fake images of Wallet Balances to lure them to invest in cryptocurrencies, stocks or e-commerce products.

The Modus operandi is i.e. (a) Firstly the victims are requested by known friends to join WhatsApp groups. (b) They are asked to download apps via links and all these new joiners get a joining bonus which shows on their wallet. (c) Trading happens (victims are asked to perform tasks) i.e. selling / buying of shares or e-commerce products. (d) Victims are asked to introduce new people to the system and they get an incentive for all tasks they perform, and the introduced person gets incentive added to their wallet (e) Based on the tasks performed the wallet accumulates money. (f) When victim tries to withdraw their earnings from the wallets they will not be able to withdraw and they are asked to pay income tax, processing fee, GST fee etc. (g) Once the requested fees are paid, the apps don’t work and show an error and any efforts to reach the customer service are futile.


I. A few common signs to avoid getting caught in a trap.

  • Promising abnormally high guaranteed returns
  • Requesting high initial investment
  • Complicated and Unsustainable business model
  • Promising to Pay back for losses
  • Investing in Apps not listed in App Store or Play Store

II. Do a little due diligence, instead of blindly believing investment advisors

  • Ask for proper regulatory/ compliance approval.
  • Do not issue cheques in advance
  • Regularly checking account statements
  • Watch the performance “Promised vs Actual.”
  • Don’t do Financial Transaction on Apps that are downloaded from App Store / Play Store Only
  • Don’t do Financial Transactions during phone conversations or while on screen sharing sessions.