A 50-year-old contractor recently fell victim to a high-return investment scheme, losing RM624,000 in just two months. According to the police, the victim first encountered an advertisement on Facebook on July 26, promising a staggering 410% return on investment.

Following instructions from a supposed “investment advisor”, he joined a WhatsApp group and, over the course of several weeks, made 17 transactions totalling RM688,000. Initially, he received some returns, but when he attempted to withdraw further funds, he was informed that his account had been frozen.

This case is a stark reminder of the volatile nature of the investment world, where both opportunity and risk abound. But beyond market fluctuations, investors today face an even greater threat: the sophisticated and evolving landscape of financial scams. In the age of information overload, fraudsters have become ever more adept at crafting seemingly irresistible offers, only to leave investors with nothing but losses.

The underlying logic behind many of these scams can be traced back to a well-known economic theory: the Impossible Trinity. Originally used to describe the dilemma faced by countries in monetary policy — whereby they cannot simultaneously achieve free capital flow, a fixed exchange rate, and an independent monetary policy, this concept can also help decode the anatomy of investment frauds.

In the world of personal finance, it is impossible to simultaneously achieve three key goals:  i) high returns,  ii) low risk, and  iii) liquidity. 

This paradox is precisely what makes so many fraudulent schemes appear plausible. Scammers consistently lure victims by promising all three at once, creating an enticing but fundamentally flawed proposition.

In genuine investment environments, the relationship between these three factors operates much like a balancing act: high returns generally come with high risks; if you desire low risk, the return is usually modest; and when investments offer high liquidity, they often lack the potential for substantial long-term growth. Investors must understand that this trade-off is the bedrock of financial markets. Any claim to have beaten this basic law should immediately trigger suspicion.

A typical investment scam hinges on the promise of high returns. Fraudsters exploit social media, phone calls, and text messages, using eye-catching language to promote what seems like a “surefire” investment. They often claim that with a relatively modest outlay, one can reap substantial profits in a short period, without any significant risk.

To further reinforce the illusion of legitimacy, these fraudsters often create sophisticated fake platforms, where investors can monitor their growing balances in real time. Early on, investors may even be allowed to withdraw small amounts, heightening their trust in the system. This combination of fabricated returns and apparent ease of withdrawal lulls victims into believing they can enjoy high returns, low risk, and liquidity all at once, a dangerous and deceptive mirage.

But as with all scams, the truth eventually emerges. Once investors have experienced these initial “sweet returns”, the scam gradually unravels. When they attempt to withdraw larger sums, they find that their accounts have been frozen, or are asked to deposit more money to “unlock” further funds. By this point, many victims have already sunk substantial amounts into the scheme, making recovery almost impossible.

Grasping the principle of the Impossible Trinity can serve as a vital tool for spotting such fraud. In legitimate investments, high returns always come with high risks. Whether in the stock market, foreign exchange trading, or even in emerging areas like cryptocurrency, substantial profits are invariably tied to significant risk. Any investment opportunity that promises large, quick returns with no risk, is almost certainly fraudulent.

Liquidity is another favoured hook used by scammers. They persuade investors that they can withdraw their money at any time, making the investment seem even safer. This assurance of liquidity lowers the investor’s guard, but in reality, high liquidity and high returns rarely go hand in hand. For example, investments in real estate or venture capital typically require a longer time horizon to deliver returns. If liquidity were readily available, these types of investments would not be able to function. Scammers, however, exploit the desire for flexibility by creating a false sense of security around liquidity.

To avoid falling prey to these schemes, investors need to take a rational approach to any investment proposal. Investments that promise abnormally high returns should be subjected to particularly rigorous scrutiny, especially when they make claims that defy the norms of financial markets, such as offering “100% monthly returns” or “risk-free investments”.

Conducting due diligence on the background and legitimacy of the platform is also critical. Authentic investment platforms are typically transparent, providing detailed company information and being subject to oversight by regulatory bodies. A lack of such transparency is often a red flag indicating potential fraud.

Perhaps most crucially, investors must maintain a healthy mindset when it comes to risk. All investments involve some level of uncertainty. Lower-risk options may offer more modest returns, but they provide stability. On the other hand, for those who are willing to take on higher risks in pursuit of greater returns, it is essential to be mentally prepared for volatility and potential losses.

To combat these evolving tactics, the Ministry of Communications is taking proactive measures such as removing URL links in SMS to reduce access to malicious sites, becoming part of the National Scam Response Center (NSRC) for a more coordinated response, and rolling out a social media licensing framework by 2025 to regulate platforms that are frequently used by scammers. However, this is not enough.

It is important to remember that greed and impatience are traits that fraudsters are all too skilled at exploiting. Staying rational and cautious is the best defence against falling into their traps.

In conclusion, it is simply impossible to achieve high returns, low risk, and liquidity, simultaneously. This is a fundamental truth in financial markets. Once investors understand this reality, they will be better equipped to recognise the red flags of fraudulent schemes. Only by maintaining vigilance and composure in the face of enticing offers, can one navigate the complex world of investing safely and successfully.

David Chang is a research officer at BranX-ON Marketing. Sean Thum is a policy officer at the Ministry of Communications.