Get. Rich. Quick.

Several investment fraud cases have made headlines in the country this year. The Binomo scam, a binary option trading platform, was recently uncovered, involving many high-profile public figures and influencers. As with any other investment scams (e.g., Fahrenheit Robot Trading, Quotex, Octafx, etc.), victims were lured by unrealistically high return of investment in short period of time. Such cases are not new in Indonesia; in fact, according to the Investment Alert Task Force, the total loss from the society due to fraudulent investment in Indonesia has reached IDR117tn (US$8.4bn) between 2011-2021. Fraudsters can easily attract and deceive many victims by taking advantage of Indonesians’ low financial literacy.

The Scheme Never Ends

When we talk about fraudulent investments, they are often time linked to a form of Ponzi Scheme. At its core, a Ponzi scheme involves bogus investment products in which early investors are paid with the investments of later investors making the enterprise appear legitimate. The name itself comes from Charles Ponzi, the perpetrator of this scheme in 1920s. who lured investors by claiming that he was able to take advantage of fluctuating currency values to purchase international reply coupons, which are postage vouchers that senders of letters from one country could include to facilitate a reply from a recipient in another country. Ponzi alleged that he could purchase the coupons abroad at a discount and then sell them at face value in the United States with substantial returns. He promised investors a 50% profit within 45 days and a 100% profit within 90 days. In reality, Ponzi was paying his investors with money from new investors, not actual profits. Ponzi was then arrested after Boston Post wrote a series of investigation reports.

80 years later with the Madoff Securities case Another notorious case of Ponzi scheme is involving a reputable financier. Bernard Madoff, a well-known Wall Street hedge fund manager and former chairman of the NASDAQ, became world-famous for operating the largest Ponzi scheme in history. Bernie, his nickname, began his career in the early 1960s as a trader in penny stock. Eventually, he formed the business, Bernard L. Madoff Investment Securities LLC, that would go on to become one of the largest penny stock brokerage and wealth management firms. Madoff’s Ponzi scheme was operated via his wealth management company. On top of his legit reputation in the capital market, Madoff attracted investors by promising them exceptionally high returns on their investments. Meanwhile, in fact Madoff only deposited the fund to his own account. To paid earlier investors, he simply used the money obtained from later investors. Investors were given their trading statements periodically which shown consistently satisfactory alleged returns. The scheme sustained for almost 20 years until 2008 financial crisis happened. FBI and the SEC finally uncovered the massive fraud and losses by Madoff’s investors were estimated at more than $50 billion. It was also unveiled that all trading statements were fabricated. Madoff was eventually sentenced to a 150-year prison term in 2009. The US government ended up offering to pay out more than $700 million to defrauded Madoff investors, but the amount is significantly lower than billion dollars of investors loss.

Now More than Ever

Over 100 years later today, even with increased improvements in fraud detection technologies and tightened worldwide laws governing investment activities, investment scams are still all the rage. Website ponzitracker.com, reported 46 US schemes were uncovered in 2020 alone with over 1 billion USD in alleged losses.

In fact, we are seeing the most creative and outrageous scams today than we have ever seen before, often unfurling right in front of our eyes. Acclaimed Canadian director Yon Motskin created an HBO Max original documentary series, Generation Hustle, which exhibits stories of young entrepreneurs who use cunning and creativity to pull off wildly inventive high-stakes ventures for the purpose of fame, fortune, and power. The series consists of 10 episodes including stories about the Fyre Festival, Theranos, Anna Delvey, WeWork’s cofounder Adam Neumann, William Baekeland, and others – most of which defrauded their investors for the sake of achieving their “successes”.

Anna Delvey

Anna Sorokin is a Russian-born German con artist and fraudster who pretended to be a wealthy German heiress under the name Anna Delvey in United States around 2013-2017. She attempted to raise $22mn in funds from City National Bank using falsified information for her Anna Delvey Foundation, an exclusive members-only club which focussed on art. Her crimes included defrauding luxury boutique hotels, hiring a private jet and forgetting to pay for it, and successfully got a $100,000 line of credit from Bank with no ability to pay it back. Prosecutors at her trial presented evidence which showed fake email accounts, photoshopped bank statements, and the use of the voice-disguising app to impersonate bankers and lawyers. Sorokin was indicted for stealing approximately $275,000 through those multiple scams.

Theranos

In 2014, Elizabeth Holmes’ company Theranos was valued at $10bn for supposedly revolutionizing blood testing solutions. Theranos promised that its innovation only required very small amounts of blood and could detect various diseases such as cancer and diabetes rapidly. Powerful people and institutions were enthralled and invested a total of $1.4 billion (including debt financing) without looking into the audited financial accounts. Notable investors include media mogul Rupert Murdoch, Oracle Executive Chairman and founder Larry Ellison, National pharmacy and retail chain Walgreens, Partner Fund Management and Fortress Investment Group. By 2018 the company had collapsed and Theranos, Holmes, and former company president Ramesh Balwani were charged with fraud by the SEC in the same year.

Fyre Festival

Fyre Festival promised a luxury music festival with glamorous accommodations and top performers in Great Exuma, The Bahamas with tickets ranging between $1,200 to $250,000. The event was supposed to take place in April 2017, when in fact people were stranded on an island without proper accommodation and resulting in the festival being postponed indefinitely and eventually cancelled. The organizer, Billy McFarland pleaded guilty to wire fraud in 2018 and is serving a six-year prison sentence for defrauding more than 100 investors out of $26 million.

Similar cases driven by generation hustle can also be found in Indonesia. Recently, renowned “young millionaires” Doni Salmanan and Indra Kenz are under investigation for IDR50 billion in reported losses caused by their roles as affiliates on binary option trading platforms which are illegal in Indonesia.

Doni Salmanan

Doni Salmanan, a.k.a “Crazy Rich Bandung”, is a Youtuber famous for his lavish lifestyle, which includes giving money and cars to people crossing him in the streets. As an elementary school graduate, Doni told stories about his poverty-stricken life and his odd jobs. He suggested that trading on a binary option platform, Quotex, changed his life drastically and encouraged his viewers to start doing the same. As a Quotex affiliate, Doni receives 80% profit for each time a member loses in the trading system. When investigated, Doni has wealth in assets worth Rp15 billion.

Indra Kenz

The 25-year-old young entrepreneur from Medan is also famous for the same reasons as Doni Salmanan. Started his life in poverty, Indra suggested that he suddenly had all the wealth imaginably possible thanks to Binomo’s binary option trading. He encouraged people to follow his investment strategy if they want to make as much as him. Sentenced to 20 years in prison, Bareskrim Polri confiscated Indra’s Rp55 billion worth of assets.

There are few common characteristics of fraudulent investment, including:

• “Guaranteed" unreasonably high return in short period

As we all know, common belief for investing is “high risk, high return” which is based on valid principle of risk-return trade off. Investors associate low levels of uncertainty with low potential returns, meanwhile high levels of uncertainty or risk typically linked to high potential yield. When there is an investment scheme that promises certain high return or profit in a short period of time with little or no risks that follow, investors must be alert and cautious toward the investment.

• Unfounded Background and Farfetched Products

Many fraudulent investments are backed by founders who seemingly come out of nowhere, often emphasizing their sad childhoods and how they have overcome them to find riches through their investment and entrepreneurial successes. Investors are often too swayed by the investment prospects to reconsider the possibility that their stories are lies. Similarly, many fraudulent investment products are promoted as this innovative high-return products that the market has never seen before, as we see in the case of robo-trading companies and Theranos. If something sounds too good to be true, it probably is.

• Business model heavily relies on recruiting new members and investment returns will be given in line with the addition of newly joined investors

Many fraudulent investments do not really have solid underlying investment products. Fraudsters would create a scheme where investors are being paid in return from their own money or the next investor’s deposit instead of actual profit derived from investment operation. This kind of scheme usually called “Ponzi Scheme”. The continuation of investment returns requires an ever-growing flow of fund raised from new investors to keep the scheme going. Due to the nature of the operation, oftentimes the person who invites us to join the scam investment is someone we know; they could be a friendly colleague, someone in your community, or even family members that were already lured by the prospect of the investment. Although the company and product might seem credible, it is important to conduct our own research and equip ourselves with objective information to make sound judgment. When a fraudulent company faces difficulty in acquiring new investors, the whole operation often fails, leaving the company bankrupt.

• Absence of valid license from authority

Legal financial-related companies in Indonesia are supervised by regulatory institutions like Otoritas Jasa Keuangan (OJK), Bank Indonesia, Bappebti, the Ministry of Trade, or the Ministry of Cooperatives and Small and Medium Enterprises (SMEs). Trading/brokerage firms need to register with OJK and Bappebti’s. Party that collects funds from public in the form of savings, must obtain a business license as a Bank from Bank Indonesia. Cooperative companies require licenses from the Ministry of Cooperatives and Small and Medium Enterprises (SMEs). Fintech firms like P2P lending, crowdfunding, microfinancing and others require OJK’s license. Registration is important because it boosts the companies’ credibility and provides investors with access to information about the company’s management, products, services, and finances.

Indonesia’s Otoritas Jasa Keuangan (OJK), in March 2022, released a list of illegal investment platforms in 6 categories.

1. Binary Option

Consistent with its name, binary, parties involved in the transaction choose only 2 outcomes; yes or no. Buyers choose whether the price of the underlying asset at expiry date will be greater than or less than the strike price. Unlike traditional trading where we can buy/sell anytime, buyers can only make yes/no decisions and will either receive a pay out or lose their entire investment in the trade.

While binary option platforms are relatively common in more developed countries (e.g. Nadex in theUS), binary option in Indonesia is still illegal in Indonesia. The product has not been regulated and no license has been issued by Badan Pengawas Perdagangan Berjangka Komoditi (Bappebti). OJK listed 10 binary option platforms operating in Indonesia, including the infamous Binomo. Bappebti’s refusal to issue binary option license is mainly to avoid the possibility of the platform manipulating their software algorithm to purposely generate losing trades, therefore retaining the buyer’s investment.

2. Robot Trading

Robot trading is a term used for automated trading system where platforms rely on technology (Artificial Intelligence) to make trading decisions (buy, sell, or hold) for users. Usually, robot trading promises high return for users and use a downline system (MLM) for their revenue.

3. Money Game

The concept of money game is similar with the Pyramid Scheme where the platform collects funds and guarantees commissions and bonuses to their members who successfully recruit new members. This system relies on new members’ deposit to payback older members. The money game takes on several forms such as unsecured loan, donation, arisan, and many other. One money game platform that is deemed illegal by OJK is Goo Flush, a buy plan-based investment app who guarantees 40% daily profit.

4. Unlicensed Crypto Assets Trading, Pawn, and Online Loan (Pinjol) Platforms

OJK has identified several illegal financial platforms which offers crypto trading, pawn, and loan services. Today, there are only 103 legal pinjol platforms in Indonesia but there are hundreds of illegal ones still operating, many of which tend to promise extraordinary returns or benefits for the users.

The Only Way Out: Financial Literacy

With the increasing adoption of technology nationwide, the role of regulators is crucial in preventing fraudulent investment cases by regularly monitoring the business model and operations of investment companies. However, laws and regulation alone will not be enough to stop new platforms with the criminal motives to pop up. If anything, the next business models will only be more and more creative. The only way out of those scams is through financial literacy. With more people realizing the danger of the scheme, these platforms will find difficulties in acquiring more users and expand their pyramid. Therefore, they will disappear due to failure in generating profit. Moreover, investors should also play their role by reporting investment company suspected with fraud before it takes more victims.

There are some factors every person must pay attention to when choosing investment:

1. Get to know the platform and financial institution

When using an app or platform for investing activities, we must first make sure that the company has legal license from OJK and/or Bappebti. OJK issues licenses for all financial activities in banking, capital market, and non-bank financial services sector such as insurance, pension funds, financial institutions, fintech, and other financial service institutions. Where Bappebti has the function of regulating trading activities, including foreign exchange (forex).

2. All Investments come with risks

Many fraudulent investment platforms promote high returns on investment with minimum risks, which as we have seen is often too good to be true. When an investment offers “guaranteed” high return, an investor must take a closer look at the risks associated with the investment.

3. Everything takes time

Instant profit should be an obvious red flag. People are always on a look out for money-making machines that can promise them quick cash. But more often than not, there is no such thing as fast and high profit.