Personal Finance

Avoiding fraudulent investment schemes


You must do due diligence before getting into any investment scheme to verify its authenticity. ILLUSTRATION | SHUTTERSTOCK

In recent years local investors have suffered losses due to investing in fraudulent schemes in Kenya. These gullible investors are attracted by the promises of getting rich quickly and throw all caution to the wind in the process.

There have been several such scandals in Kenya ranging from fraudulent land buying schemes, saccos and pooled investment schemes.

There have also been a lot of fraudulent investment schemes hinged on technology, including in cryptocurrency and bitcoin.

In this series, I will highlight steps to take before you invest and what to do if you have been defrauded.

The first thing to do before investing is to understand that aggressive marketing campaigns do not always represent the truth. Therefore one should look beyond the promises made during the sales period. These could be promises on the performance of such investments and returns. The investment scheme will usually not be bound by what it presents to you during the sales period as it will often have you sign a document with a clause absolving them from any liability.

You must do due diligence before getting into any investment scheme to verify its authenticity. Often the aggressive sales team will have you sign an offer letter to enable you to participate in the scheme. Do not sign the letter of the offer until you have gone through all the documentation that will bind you to the scheme. The letter of offer will often refer to a superior agreement that will be entered at a later stage and that by signing the offer letter you agree to be bound by those new terms.

Request, in writing, if possible, all the documents that you would be required to sign as a member of the scheme. If they are reluctant to allow you to peruse these documents, that should raise the red flag as to the authenticity of the scheme. Even if they give you the documents, you ought to carefully go through the terms preferably with a lawyer and understand the fine print. The agreements will bind you and will supersede any verbal representations made.

Important clauses to look out for include the returns clause; how much do you expect to make from the investment, the dispute resolution clause and any indemnity clauses.

Further due diligence include doing a background check on the investment scheme. Some simple checks include ascertaining if the scheme has an office, check their website and internet searches on the scheme. Other checks to do include company searches. Who are the owners of this scheme? You need to also check if the scheme is licensed by the relevant regulatory authority. If it is not licensed, you should not invest as chances are it could be a fraudulent scheme.

If you can do a background search of the investment itself, that would be prudent. For example, if it is land you bought, search for the title deed of the land to verify that the property is owned by the scheme and that it is not encumbered.

It is important to do a site visit on a land investment to verify the location and beacons.

It is important to remember that such schemes ought to be regulated. Your lawyer will help you ascertain that the scheme is compliant with the law before you invest. According to the Consumer Act, the scheme is required to disclose all terms of the scheme and there should be no hidden terms.