February 1, 2013

PNP MEMORANDUM CIRCULAR NO. 001-13

GUIDELINES FOR THE DETECTION AND INVESTIGATION OF INVESTMENT

FRAUD

1. Reference: See Annex "D"

2. Background and Rationale:
The recent discovery of an investment scam that proliferated in
Mindanao caught law enforcement agencies and regulatory bodies by
surprise. The magnitude of its operation (i.e., more than 8,000 victims and
involving approximately Php15 billion worth of investment) was not
anticipated. At the moment, the effect of this illicit activity to the country's
economy is beyond comprehension. It can be expected, however, that
violence perpetrated by the victims, in their attempt to recover their family
savings, will escalate. STaAcC

Recently, the Aman Futures Group Philippines (hereinafter referred to

as "Aman Futures"), has been the subject of a Cease and Desist Order issued
by the Securities and Exchange Commission (SEC) in connection with the
Php244 million worth of Ponzi scheme in Pagadian City. Incorporators and
officers of Aman Futures solicited investments by promising 15 percent to 40
percent rate of return in just a matter of 20 to 30 days for investments that
were to be made in a Malaysian company engaged in commodity trading
futures, such as manganese, palm oil, and nickel. The supposed investment
returns cannot be sustained that eventually caused its collapse since it was
an illegal scheme from the start.
Crimes of this nature victimize a magnitude of people with serious
repercussions to the local and/or national economy, and even to the victims'
personal, familial and professional relationships, not to mention the ruin of
the victims' finances, as exemplified by the Ponzi scam perpetrated by the
Aman Futures. Thus, these fraudulent activities might require the
organization of a Special Investigation Task Group (SITG), as stipulated in
Chapter-8 of PNPM-DIDM-DS-9-2, which states that "as mandated, a SITG
shall be organized whenever a major case or crime of violence occurs."
Further, the creation of a multi-agency investigation task group composed of
government entities or agencies, which have jurisdiction on the nature of the
crime, may even be imperative. But in the meantime, while the effects of
such case are yet to be realized and a special group is created, investigation
should commence right away in order to immediately address the
proliferation of the aforementioned fraud-related incidents.
3. Purpose:
This Memorandum Circular aims to:
a. Serve as a guide and provide standard policies and procedures
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 on the pro-active and reactive investigation of crimes involving
investment fraud particularly in cases of alleged
Ponzi/pyramiding scams.
b. Establish a protocol for all police personnel on how to impede the
existence of an investment scam in a locality, in close
coordination with the financial regulatory agencies of the
government; and,
c. Ensure the conduct of a comprehensive and efficient
investigation process to establish an air-tight case for the
prosecution of personalities and/or groups engaged in investment
fraud;
4. Definition of Terms:
a. Investment Fraud or Scam — refers to any and all forms of fraud
involving money, including but not limited to Ponzi Schemes,
Pyramid Schemes, Telemarketing Fraud, Nigerian Letter or 419
Fraud, Identity Theft, Advance Fee Schemes, Health Care Fraud
or Health Insurance Fraud, Redemption/Strawman/Bond Fraud,
Letter of Credit Fraud, and Prime Bank Note Fraud.
b. Pyramid Sales Scheme — also referred to as franchise fraud or
chain referral schemes, (Section 53 of R.A. 7394, also known as
the Consumer Act of the Philippines) involves ". . . sales devices
whereby a person, upon condition that he makes an investment,
is granted by the manufacturer or his representative a right to
recruit for profit one or more additional persons who will also be
granted such right to recruit upon condition of making similar
investments: Provided, That, the profits of the person employing
such a plan are derived primarily from the recruitment of other
persons into the plan rather than from the sale of consumer
products, services and credit; Provided, further, That the
limitation on the number of participants does not change the
nature of the plan." (Section 53 of R.A. 7394, also known as the
Consumer Act of the Philippines) pyramid scheme as a marketing
and investment fraud "in which an individual is offered a
distributorship or franchise to market a particular product. The
real profit is earned, not by the sale of the product, but by the
sale of new distributorships."
c. Ponzi scheme — A Ponzi Scheme is "an investment program that
offers impossibly high returns and pays these returns to early
investors out of the capital contributed by later investors." (G.R.
Nr. 10860-02, September 3, 1998) These are schemes that
"promise high financial returns or dividends not available through
traditional investments. Instead of investing the funds of victims,
however, the con artist pays 'dividends' to initial investors using
the funds of subsequent investors. The scheme generally falls
apart when the operator flees with all of the proceeds or when a
sufficient number of new investors cannot be found to allow the
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 continued payment of "dividends." (FBI definition) SDIaCT

d. Syndicated Estafa — (Articles 315 and 316 of the Revised Penal

Code, as amended), is "committed by a syndicate consisting of
five or more persons formed with intention of carrying out the
unlawful or illegal act, transaction, enterprise or scheme, and the
defraudation results in the misappropriation of moneys
contributed by stockholders, or members of rural banks,
cooperatives, "samahang nayon(s), or farmer associations, or of
funds solicited by corporations/associations from the general
public." (Articles 315 and 316 of the Revised Penal Code, as
amended) "Any person or persons who shall commit such kind of
estafa shall be punished by life imprisonment to death. (Section 1
of PD 1689, "Increasing the Penalty for Certain Forms of
Swindling or Estafa)."
e. Investment solicitor — a person who procures or induces another
to enter into an investment scheme. He may or may not be the
actual person who receives the investment money.
f. Proactive investigation — an investigation commenced in
response to information regarding an ongoing criminal activity
obtained through intelligence gathering or from reports of
witnesses.
g. Reactive investigation — an investigation commenced as a law
enforcer's response to a particular incident or complaint.
h. Entrapment — a legitimate method of apprehending criminals
used by a law enforcer wherein the information on the alleged
illegal activity of a suspect is validated by luring him into
executing his criminal plan, and that the suspect had already
committed in and continue to do so.
i. Inducement — also refers to as instigation. It involves a situation
wherein a law enforcer induces the would-be accused into
committing an offense that he would otherwise have been
unlikely to commit. This situation is prohibited, illegal, and not
sanctioned by any regulation in the PNP.
5. Policies:
a. Duty of the City Director/Chief of Police/Station Commander —
The City Director/Chief of Police/Station Commander in the
locality shall have the inherent duty to check any and all fraud-
related and syndicated criminal activities ongoing in his
jurisdiction. The presence of indicators of any fraud-related
criminal activity shall be relentlessly pursued even in the absence
of complainants. Absence of complainants shall not excuse a
police unit from initiating any investigation on a scam or fraud,
and such omission may be tantamount to Neglect of Duty that
would warrant the Chief of Police to be subjected to
administrative sanctions.
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 b. Responsibility and Accountability — The immediate superior of
the City Director/Chief of Police/Station Commander who has
jurisdiction over the area where a scam or fraud is committed
shall be equally liable for such Neglect of Duty and may be
proceeded against, pursuant to the Doctrine of Command
Responsibility.
c. Coordination with Government Regulatory Bodies — Field
Investigators shall be hereby directed to coordinate closely with
government financial regulatory bodies like the SEC, DTI, BSP and
BIR in order to be guided on what evidence to collect so as to
support the traces of perpetuation of crimes with the end of
establishing a probable cause.
6. Procedures:
Pro-Active Phase
a. Determination of the Presence of an Investment Fraud — The
City Director/Chief of Police/Station Commander upon receipt of
information regarding the presence of investment frauds or
scams within his locality shall perform the following actions:
1. Validate the report through the conduct of discreet
investigation to ascertain the presence of investment
frauds/scam in his locality for entrapment operations;
2. Identify the personalities involved and their status/role in
the reported investment fraud/scam;
3. Determine the personalities involved and their status in the
reported investment fraud/scam;
4. Verify with the Securities and Exchange Commission (SEC)
and Department of Trade and Industry (DTI) the authority to
operate business of the company involved; and
5. Prepare the necessary Case Investigation Plan and
recommend the creation of SITG if necessary.
The City Director/Chief of Police/Station Commander is expected to know in
great detail how investment fraud works and how it has pervaded the country.
For this purpose, Annex "B" (Pyramiding and Ponzi Scheme Investment Scams
and Their Mechanics) is hereto attached. ICAcHE

Reactive Phase
b. Gathering of Evidence to Establish Existence of Fraud — Once the
existence of the reported investment scam is validated, the
investigator under the supervision of the City Director/Chief of
Police/Station Commander shall immediately conduct the initial
collection of evidence as follows:
1) Secure statements from the victims and prospective
victims based on the guidelines set forth under Interviewing
Techniques (Annex "C").
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 The investigator should be aware, however, that based on
previous experiences of investigators from other police
agencies abroad, he will definitely encounter resistance from
would-be victims because they are still receiving the fruits of
their investment. According to an American private
investigator, "the investigation of these cases is pursued
much like the investigation of other financial crimes, but the
investigator pursuing them should be aware that:
The denial common to most fraud victims often escalates to
hostility and resentment in these cases. These schemes
typically pay off until the inevitable collapse that the
investigator may well precipitate. Even if you convinced them
that they have been scammed, these 'investors' do not want
the investigator to 'rock their boat,' and they typically blame
the investigator who collapses the program prematurely (from
their perspective). (Frauds and Scams.com: Bill E. Branscam)
The operator of the scheme is dependent upon the cash flow
provided by the pyramid and therefore vulnerable.
Investigation that threatens to collapse an otherwise thriving
pyramid often results in a settlement offer based upon a global
nondisclosure agreement."
2) Clearly establish the identity of the investment solicitor and
his actual participation in the fraudulent activity in the
statements of the victims.
3) Clearly state in the complaint the trail of the investment
money — from the victim up to the investment solicitor or
any other person on top of the "pyramid." The proof of
receipt of the investment money should be properly
annotated in the complaint.
4) Gather all possible documentary evidence to support the
case. The certification from the SEC or DTI, which identifies
the alleged nature or business of the company engaged in
Ponzi scheme/pyramid sales scheme, must also be
incorporated in the case folder.
5) Conduct entrapment operations, when necessary to
strengthen the case.
c. Conduct of entrapment operations — Once the involvement of a
company, person, or group in a fraudulent activity (i.e., Ponzi
Scheme/Pyramiding Scam) is established, but no complainant has
come forward yet, entrapment operations may be done. This may
result in the immediate arrest of the suspect, as well as in the
gathering of additional evidence that will strengthen the case.
Law enforcers can pose as investors/clients joining the prey of the
Ponzi. This can be a highly effective and relatively low risk and low
cost investigation technique. This can also assist investigators in
establishing an evidential chain that could establish the involvement
of the offenders in the crime of syndicated estafa and other related
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 criminal activities.
The proper conduct of entrapment operations will maximize the
potential for collecting concrete and reliable evidence that can be
used in court.
Factors to consider in determining the viability of an entrapment
operation.
Check the following key factors to assess whether or not an
entrapment operation should be undertaken:
1) What is the nature of investment being offered in this
particular case? Is it in the form of goods, like gold or other
precious metal, services or cash? — Can the investment be
entered into right away?
2) What would be the most credible method of introducing the
probable law enforcer investor — direct approach, response
to advertisement, or making an appointment?
3) What role should the law enforcer adopt — investor, client,
solicitor, or prospective employee? HICATc

4) What would be the method of payment — cash, cheque, or

credit card?
5) Are police officers with the appropriate gender, skills and
training profile available?
If an entrapment operation is viable, then execute the same with
detailed planning. It must be noted that the entrapment operation is
conducted only to get additional pieces of evidence in support to the
main case being investigated. Investigation must not stop with the
persons that will be apprehended during the entrapment operation,
they should only be used as key to apprehend the officers of the
fraudulent company.
d. Coordination with Government Regulatory Bodies — When the
investigator is faced with the difficulty of gathering written
complaints or statements, the investigator shall initiate close
coordination with other government agencies.
1. Aside from checking with the Department of Trade and
Industry (DTI) and the Securities and Exchange Commission
(SEC), Field Investigators shall verify if the investment
enterprise is operating under a Business Permit. Thereafter,
they shall coordinate with the local licensing office and
verify if there is any violation of the business permit issued,
such as whether or not the investment enterprise is
engaging in activities other than what is specified in the
permit.
2. Investigators shall also verify with the Bureau of Internal
Revenue (BIR) whether or not the investment enterprise is
paying its taxes. If not, the BIR should be advised about
such tax evasion case.
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 3. Investigators shall likewise coordinate with the Bangko
Sentral ng Pilipinas (BSP) to determine if any banking law is
being violated by the investment enterprise.
e. Determination of Applicable Violation of Laws — Coordination
with other government regulatory bodies such as DTI, BIR, SEC,
BSP and AMLC, among others, shall be made in order to
determine if any law, circular, rule and/or regulation is being
violated by the investment enterprise, and whether or not a
syndicated Estafa, in violation of PD 1689 (Increasing the Penalty
for Certain Forms of Swindling or Estafa), is being committed by
the investment enterprise.
f. Preparation of Case Investigation Plan (CIPLAN) — Preparation of
case folders for the eventual filing of charges against the
perpetrators shall be initiated by the concerned City
Director/Chief of Police/Station Commander. It is not necessarily
in conjunction with the efforts of other government agencies.
g. Creation of a Special Investigation Task Group (SITG) — As the
need arises, and to ensure effective measures in the arrest and
prosecution of violators, the creation of a formal organization and
activation of a multi-agency Special Investigation Task Group
(SITG) will be implemented. Members shall meet regularly to
establish procedures and operational plans in order to make sure
that perpetrators will not have any opportunity to evade arrest.
7. Penal Clause:
Any PNP member who fails, without justifiable reasons, to act in the
investigation and prosecution of individual(s) involved in an investment fraud
or scam shall be dealt with administratively for neglect of duty or
nonfeasance under Sec. 1 Rule 21 of NAPOLCOM Memorandum Circular
2007-001 without prejudice to the filing of a criminal complaint against him
or her.
8. Effectivity:
This Memorandum Circular shall take effect fifteen (15) days from the
filing of a copy hereof at the University of the Philippines Law Center in
consonance with Sections 3 and 4 of Chapter 2, Book VII of Executive Order
No. 292, otherwise known as the "Revised Administrative Code of 1987," as
amended.

(SGD.) ALAN LA MADRID PURISIMA

Police Director General
Chief, PNP

ANNEX A
Memorandum Circular Nr. 2012-000-0000
Pyramiding and Ponzi Scheme Investment Scams and Their Mechanics
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 Investment scams have been recorded in the country. Sometime in the
mid-1990s, the Pentagono pyramiding scheme flourished, operated by an Italian
firm, Future Strategies Srl, allegedly a licensed investment firm in Modena, Italy.
It costs US$120 to join Pentagono. A victim buys a certificate for US$40 from a
sponsor; sends US$40 to Italy with the personal bank account details of the
victim; and another US$40 is sent to the person on top of the "list." He then
receives three (3) certificates with his name in the seventh position of the "list,"
and will have to sell the three (3) certificates to others. As more people join, his
name moves up in the "list". To date, authorities have yet to determine how
much US dollar currency the national reserve of the Philippines lost because of
the Pentagono scam.
Other scams that were discovered to have victimized residents of the
country include the following: aHIDAE

1. On August 17, 2007, the NBI filed syndicated Estafa cases against 27
officers and investors of FrancSwiss Investment (FS Investment), a
Ponzi pyramiding scam on the Internet. Charged were Michael
Mansfield, Chief Financial Officer; Kurt Sandelman, Risk Management
Team Leader; Rupert Benedict Da Vinco, Investment Team Leader;
Julia Rodriguez, International Banking Team Leader; Hector Willem
Sidberg, Marketing and International Affairs; Fernando Munoz,
Customer Service Leader; Roger Smith, the British Chief Operation
Officer of FS Investment in the Asia-Pacific Region; Bensy Fong, the
Singaporean System Operation Officer; Raymond Chua, Singaporean
Marketing Officer; a certain Michelle and Mike, Filipino secretaries
and collectors of money from investors; 16 investors, including
arrested suspect Eleazard Castillo, 26, a native of Cabuyao, Ilocos
Sur. Castillo is allegedly one of the financial advisers of FS
Investment. At least 41 investors claimed they lost a total of
US$75,000 to the investment scheme. FS Investment deceived
investors in the Philippines of about Php1 billion.
2. In one of the biggest Philippine Ponzi scams, involving US$250
million, criminal charges, based on suits filed by 21,000
complainants, were filed in June 2008, before the Department of
Justice, against the officers and incorporators of Performance
Investments Products Corp. (PIPC) for violation of the Securities
Regulation Code (SRC). Said charges were filed against Singaporean
national Michael H.K. Liew, PIPC president; Cristina Gonzalez-Tuason,
General Manager; and other officers and agents, including Ma.
Cristina Bautista-Jurado, Barbara Garda, Anthony Kierulf, Eugene Go,
Michael Melchor Nubla, Ma. Pamela Morris, Luis Aragon, Renato
Sarmiento Jr., Victor Jose Vergel de Dios, Nicoline Amoranto Mendoza,
Jose Tengco III, Oudine Santos, and Herley Jesuitas.
Other cases of investment scams have been recorded not only in the
Philippines but also in other countries. In fact, the recent Aman Futures Group
scam in Pagadian City, which actually victimized other investors from Luzon and
Visayas, traces its roots to the Ponzi scheme in the United States.
What is a Ponzi Scheme?
The US Securities and Exchange Commission defines a PONZI Scheme as
"an investment fraud that involves the payment of purported returns to existing
investors from funds contributed by new investors. Ponzi scheme organizers often
solicit new investors by promising to invest funds in opportunities claimed to
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 generate high returns with little or no risk. In many Ponzi schemes, the fraudsters
focus on attracting new money to make promised payments to earlier-stage
investors and to use for personal expenses, instead of engaging in any legitimate
investment activity."
The Ponzi scheme is named after Charles Ponzi, "who duped thousands of
New England residents into investing in a postage stamp speculation scheme
back in the 1920s. At a time when the annual interest rate for bank accounts was
five percent, Ponzi promised investors that he could provide a 50% return in just
90 days. Ponzi initially bought a small number of international mail coupons in
support of his scheme, but quickly switched to using incoming funds to pay off
earlier investors."
How Does it Work?
Basically, Ponzi scheme operates on a "rob-Peter-to-pay-Paul" system. Early
investors will be paid with the money invested by subsequent investors. That is
why the later investors usually lose everything when the scheme collapses.
In addition, Ponzi schemes usually initially target respected or prominent
members of the community. They will definitely receive high returns on their
investment to promote the scheme and encourage others to join. All Ponzi
schemes, however, tend to collapse. This happens "when it becomes difficult to
recruit new investors or when a large number of investors ask to cash out." This is
due to the fact that this scheme requires a consistent flow of money from new
investors to continue and that it actually has little or no legitimate earnings.
What is a Pyramid Scheme?
A pyramid scheme is a fraudulent investing plan that has unfortunately cost
many people worldwide their hard-earned savings. The concept behind the
pyramid scheme is simple and should be easy to identify. However, it is often
presented to potential investors in a disguised or slightly altered form. For this
reason, it is important to not only understand how pyramid schemes work, but
also to be familiar with the many different shapes and sizes they can take. Many
investors do not understand how to determine the level of risk their individual
portfolios should bear.
1. The Scheme — As its name indicates, the pyramid scheme is
structured like a pyramid. It starts with one person, the initial
recruiter, who is on top, at the apex of the pyramid. This person
recruits a second person, who is required to "invest", say Php100,
which is paid to the initial recruiter. In order to make his or her
money back, the new recruit must recruit more people under him or
her, each of whom will also have to invest Php100. If the recruit gets
10 more people to invest, this person will make Php900 with just a
Php100 investment.
2. The 10 new people become recruiters and each one is in turn
required to enlist an additional 10 people, resulting in a total of 100
more people recruited in the pyramid. Each of these 100 new recruits
is also obligated to pay Php100 to the person who recruited him or
her. Recruiters get a profit of all of the money received minus the
initial Php100 paid to the person who recruited them. The process
continues until the base of the pyramid is no longer strong enough to
support the upper structure, meaning there are no more recruits. cCHETI

3. The Fraud — The problem is that the scheme cannot go on forever

because there is a finite number of people who can join the scheme,
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 even if all the people in the world join. People are deceived into
believing that by giving money they will make more money — "With
an investment of just Php100, you will receive Php900 in return". But
no wealth has been created, no product has been sold, no investment
has been made, and no service has been provided.
4. The fraud lies in the fact that it is impossible for the cycle to sustain
itself, so people will lose their money somewhere down the line.
Those who are most vulnerable are those towards the bottom of the
pyramid, where it becomes impossible to recruit the number of
people required to pay off the previous layer of recruiters. This kind of
fraud is illegal in most countries throughout the world. It is estimated
that 90% of people who get involved in a pyramid scheme will lose
their money. Lower levels of liquidity in exchange-traded funds make
it harder to trade them profitably.
5. Fraud Disguised — Because people are attracted to the idea of
making quick money with very little effort, many different forms of
disguised pyramid schemes have succeeded in fooling people.
Despite the illusion of legality presented by these revamped
schemes, they are still illegal. It is thus important to recognize the
characteristics of such so-called investment plans.
6. Many schemes will adopt the guise of gift-giving or loans that take
place in investment clubs because none of these activities are
technically illegal. However, the practice of donating a gift to
someone (the recruiter), then having to recruit people into the club in
order to receive a return on your investment (or your gift, rather) is
essentially a pyramid scheme in disguise.
Multi-Level Marketing (MLM)
1. Legal multi-level marketing (MLM) involves being recruited in order to
sell a product or service that actually has some inherent value. As a
recruit, you can make a profit from the sales of the product or
service, so you don't necessarily have to recruit more salespeople
below you. And while you may be encouraged to recruit other
salespeople whose sales would give you more profit, you can stick to
just selling the product directly to the consumer if you choose.
2. A pyramid scheme, MLM, however, will most likely sell a product with
no independent value. The product could take the form of reports of
some kind, for example, or mailing lists. In this kind of pyramid
scheme, you would be required to recruit new members into the MLM
in order to make a profit and keep the MLM alive. Joining the MLM is
the only reason anyone would buy the products sold by this pyramid
scheme.
Chain Letters
Chain letters can be received electronically or through snail mail and are
not illegal on their own. However, they take on the form of a pyramid scheme
when the letter asks you to donate a certain amount of money to the people on a
list, then delete the name of the first person on the list, add your name, and
forward the letter to a certain number of other people. The next people receiving
the letter are then asked to do the same thing, so that you can receive your
money as well. By forwarding the letter, you are asking people to give money
with the promise of making money.
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 Conclusion
It is easy to see how a pyramid scheme can work, but participating in it,
regardless of the form in which it is presented, involves deception and fraud
because not everyone will receive the money that is promised in return.
What is the Difference Between a Ponzi Scheme and a Pyramid Scheme?
While Pyramid schemes and Ponzi schemes are often lumped together, and
both are well-known forms of investment fraud, the difference between these two
types of stockbroker malpractice lie in the organization of the scam and the
number of people involved in perpetrating it.
Ponzi Schemes — Stockbroker Fraud through Misrepresentation
A Ponzi scheme is built meticulously from the ground up. What makes
these scams so difficult to detect is the care with which the deception is handled.
An unscrupulous broker begins by creating false documents, which he then uses
to lure investors. The money he gathers does not go into any real investments,
however, but into his own pocket.
As the scheme progresses the broker secures additional investors, and uses
their funds to continue to line his own bank account, as well as returning some to
the initial parties to support the illusion that their investments are creating
dividends. When there are no more new investors, this form of investment fraud
is usually exposed.
Pyramid Schemes — An Insidious Type of Securities Fraud IaESCH

One of the differences that makes a Pyramid scheme more difficult to

detect than a Ponzi scheme is the sheer number of people involved, which lends
the scam credibility in the eyes of investors. Rather than recruiting investors, the
perpetrator of this scam recruits more recruiters.
Each investor is expected to bring more investors on board working under
him, and the money is then disseminated to the levels above. This creates an
organizational structure similar to a pyramid, hence the name. Since these scams
lack a solid foundation in goods or services, the pyramid collapses once no new
investors can be found.
They May be Different, but Both are Financial Fraud
The main difference between these scams is the structure. Pyramid
schemes work in a top-down manner, involving multiple levels of investors. Ponzi
schemes, on the other hand, have a more circular structure centered around the
perpetrator of the scam, with all investors on equal, illegitimate footing.
Both, however, are not only unsupportable business models, but also
illegal. Perpetrating either of these scams can result in heavy fines and lengthy
prison sentences.

ANNEX B
Memorandum Circular Nr. 2012-000-0000
Red Flags on the Presence of an Investment Scam 1
Evidence of Ponzi and Pyramiding Schemes
1. Places — In general, most of these schemes are located in populous
areas.

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 2. Co-Perpetrators — One in every two Ponzi and Pyramiding schemes
involves co-perpetrators.
3. Company Name — These schemes commonly operate under a
company name, whether registered or not.
4. Business Type — Most schemes purport to operate legitimate
financial businesses such as investment advisory, asset and
investment management, hedge funds, real estate investment funds,
faith-based investment schemes, investment in distributorships,
leasing companies, time-shares, pension management, and
trusteeships.
5. Registration — Small schemes mostly operate as unregistered
businesses; however, large ones are registered.
6. Frequency — Their numbers increased significantly in the first
decade of the 2000s, coinciding with a bullish stock market period.
7. Termination — An unprecedented number of Ponzi schemes fell apart
in 2008 and 2009, coinciding with a financial crisis and an economic
recession.
8. Promised Return — The most common rate of return promised is
close to that available from stock market investments.
9. Investment Horizon — The majority of Ponzi schemes promise to pay
a return within a year.
10. Investors' Pool — The average number of investors involved in a
Ponzi scheme is 100 or less. Larger Ponzi schemes affect thousands
of investors.
Strategies
Besides misrepresenting their businesses, Ponzi perpetrators adopt one or
more of the following strategies to draw investors:
1. Propose investments that are high-return, no-risk, and principal-
protected;
2. Grossly inflate the amount of funds under management and the
returns paid;
3. Pretend that they are experienced and had a successful investment
career;
4. Purport to use proprietary trading software and/or special
connections;
5. Send regular account statements that show fictitious profits;
6. Provide investors a personal guarantee for their principals;
7. Claim investments are fully backed by collaterals;
8. Have auditors who will "vouch" that the investments and accounts
are legitimate;
9. Make false claims that investments are FDIC- and/or SIPC-insured;
10. Claim to be an expert in derivatives and/or foreign exchange
trading;
11. Use Bible-speak to win investors' trust; ISCaDH

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 12. Recruit through local and/or community-based ads and/or agents;
13. Target faith-based and/or ethnically or culturally based associations;
14. Target retirees.
Investment Products
Besides stock market and derivatives investments, perpetrators also
propose the following as investment products: postal coupons, accounts
receivables, automated teller machines, private investment in public equity (PIPE)
securities, pay-phone lease programs, foreign currencies, fractional interests in
discounted life insurance, gold coins, limited partnership interests in trade
ventures, oil and gas investments, promissory notes, self-styled certificates of
deposit, faith-based investment funds, real-estate investment trusts, shares in
shell companies, time-shares, and viatical settlement contracts.
Investors Recovery
There are almost no cases in which all investors involved recovered 100
percent of their investments. The average recovery rate is less than 40 percent.
Legal Charges
Most Ponzi and Pyramiding schemes are prosecuted for one or more of the
following crimes: Mail Fraud; Money Laundering; Securities Fraud; Wire Fraud;
Tax Crime; Operating Unregistered Securities Business.
The SEC Guide on How to Identify Ponzi and Pyramiding Schemes
1. High Investment Returns with Little or No Risk — Usually there is a
positive relationship between risk and return and schemes that
promise high returns with low risk need to be looked at suspiciously.
2. Overly Consistent Returns — Investment returns usually follow the
business cycle. Returns are up when the economy is booming, and
down in a recession. Investments that promise to pay the same
return, irrespective of business cycle, are often a key feature of Ponzi
schemes.
3. Unregistered Investments — Investments that are not registered with
either the SEC or government regulators should be questioned.
4. Unlicensed Sellers — National securities laws require investment
professionals and their firms to be licensed or registered. Most Ponzi
schemes are not.
5. Secretive and/or Complex Strategies — Ponzi schemes usually do not
publish detailed information about their investments. They are
referred to as "blind pools" wherein investors do not know exactly
how their money is invested.
6. Issues with Paperwork — Ponzi and Pyramiding schemes usually do
not send regular performance statements or reports on clients'
investments, and instead are more likely to be inconsistent and error-
prone in correspondences.
7. Difficulty Receiving Payments — Perpetrators usually encourage
investors to roll over their high returns and increase their investment
holdings. Investors attempting to cash out their investments are more
likely to face difficulties obtaining cash back. Ponzi perpetrators will
encourage investors who want to cash out their investment to do so
gradually or not at all.
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 8. Investors should be careful about investment proposals that promise
to pay exorbitantly in a short period of time and that are not
accompanied by prospectuses, quarterly or annual reports, and
offering memoranda. The public should be wary of "affinity scams,"
not to invest based on acquaintance alone, and to be suspicious of
investment offerings emanating from social networking sites and
chatrooms. It is also recommended that investors seek third-party
advice, for example, to contact an independent broker or licensed
financial adviser before investing. Therefore, financial planners and
advisers may face questions at some point during their careers from
clients about questionable investment schemes, and it is best for
financial industry professionals to be as well informed as possible.
9. Research has shown that some of the common features of fraudulent
schemes are random returns, too few negative returns, and too many
repeat returns. These findings suggest that increased regulatory
oversight with stricter requirements for mandatory reporting will help
to identify such schemes.
10. The following is a checklist that Field Investigators may find useful
when interviewing would-be victims about questionable investments
that might indicate a Ponzi or Pyramiding scheme.
a. In terms of returns, does the scheme promise:
• To pay a high rate of return not available elsewhere?

• To pay back in a short period of time?

• To pay a constant rate of return independent of
economic cycles?

b. The scheme manager: cCSTHA

• Does not possess the relevant qualifications and

experience to act as a money manager?

• Is not licensed by national securities law to be an

investment professional?
• Wants complete control of your money?

• Was involved in fraud or was under investigation in

the past?

• Lied to or deceived people in the past?

• Is a willing donor to charities, institutions, and
politicians?

• Is always trying to obtain political favor?

• Appears to have become rich in a very short period of
time?

• Appears to be in financial trouble because of his

lavish lifestyle?
• Is always looking for new investors at social, religious,
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 and family gatherings?

• Asks you to remain coy about the fund to people

whom you do not know or regulators?
c. The scheme or investment proposal or fund:

• Is not registered with the SEC or other government

regulatory bodies?

• Is registered abroad where investment laws are less

strict?

• Is opened to all kinds of investors?

• Conducts all transactions in-house; that is, acts as a

broker, investment manager, custodian of assets,
and fund administrator at the same time?

• Uses lesser-known or mostly unknown auditors?

• Charges very little in the form of fees?

• Employs only family members or friends or the same
people overtime?

• Has low turnover on management team and does not

grow with the size of the fund?

• Transacts mostly with small banks, unlike its peers?

d. Regarding reporting:
• The certificates received from the scheme/fund are
not registered?

• You do not have a reasonable understanding of the

investment strategies adopted?
• You do not receive regular performance statements?

• There is no person available to take/answer your

calls?
• Your calls are not answered in a straightforward
manner?

• Your adviser's firm is regularly closed during business

days?
• The firm does not allow electronic or real-time access
to your account?

e. Payments:
• Were (i.e., interest or dividend or principal) missed?

• Are persistently encouraged to be reinvested?

f. As an investor, you:
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 • Never called the SEC and/or other government
regulatory bodies to verify the scheme in which you
are invested?

• Never verified whether the fund is filing all its

paperwork with the SEC, DTI and/or DTI, * etc.?

• Contributed to the scheme based on trust (or a

friend's recommendation) and/or faith only? TCacIE

• Tend to ignore negative comments about the fund's

adviser/manager?

• Have suffered unexplained losses, but you do not

want to withdraw as you have hopes that you will
recoup your investment?

ANNEX C
Memorandum Circular Nr. 2012-000-0000
Interviewing Techniques
Introduction
The intention of this Annex is to provide an overview of interview
techniques to assist an investigator both in statement taking and general
investigation of losses.
It must be understood that the purpose of the interview is to gather
information. Such information will then be used to investigate the cause of the
incident or subject of the investigation; to allow recovery of lost items or amount
to be pursued; or for other purposes such as the establishment of quantum
ownership of goods, and other issues.
The investigator shall bear in mind that interviews make interviewees
uncomfortable. This may be due to their awareness that the information being
sought may not be to their advantage, or that in the instance of a recovery, a
disciplinary action against them may follow. If this is the case, valuable
information will not be given and it will become difficult to determine what has
occurred. Thus, investigators must make the interviewee relax by following the
guidelines listed below.
General Interviewing Guidelines
1. Interview Promptly — Short-term memory degrades. Talking with
others dilutes memories and actual observations are rationalised.
This is a common problem for the Field Investigator; thus, notes of
the initial contact should always be taken. Phone interviews shall also
be conducted if onsite interview could not be carried out promptly.
2. Make informal written notes in chronological and objective form. Do
not put personal interpretations or comments. — These informal
written notes, when read later on, often reveal items that may have
been heard but not understood. It is very easy for an interviewer to
filter items or information given by the interviewee.
3. During the Interview, ask "What happened?" — Do not interrupt the
statement. Make occasional notes of the discussion for later
assessment.
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 4. Ask open, neutral, unbiased, non-leading questions for clarification.
5. Have common questions on hand for later cross-confirmations with
other witnesses.
6. Do not lead the person into giving answers they think you want to
hear — This is particularly important when investigating business
transaction information or details. It could be the case that an
interviewee will be guided by the line of questioning pursued by an
interviewer. This is why the techniques of open questioning and
listening shall be clearly understood.

Human Characteristics — The following are human characteristics that are worth
remembering during interviews:
1. Eyewitnesses are not trained in observation and forget things.
2. Information is filtered by both the witness and the interviewer. — This
is something to be particularly aware of. From time to time, the
witness will say something that you believe is not credible or not
possible. Do not just dismiss such statement. Record every
conversation you have with an interviewee and review the recordings
later on. It is possible to get information that was initially thought of
as unimportant but will later on be considered as otherwise.
3. Recollection and communication are affected by emotions such as
shock, unfairness, peer pressure, and embarrassment. — This is true
particularly to those interviewees-investors who may have been
culpable in recruiting other investors.
4. Memory recall is not chronological, therefore review and repeat if
needed. — This highlights why modern interviewing techniques are
focused on hearing the story and recreating and/or testing it if
possible. This is invaluable in fraud cases, if for instance a detail that
could strengthen the case and that which might not be readily
available to a fraudster could be tested.
Interview Preparation for Fraud Investigation — Maximise the quality and quantity of
the information obtained. The following techniques can be useful:

1. Use a neutral location near the normal workplace (if in a commercial

situation) which will be private and where you will not be interrupted.
Make sure it is large enough for you and the interviewee to relax. This
is a particular problem in a domestic environment where quite often,
partners will be present and interrupt each other during the interview.
CHaDIT

2. Have your question checklist and topic areas prepared.

3. Have photographs, documents, operating plans, and other pertinent
documents ready to help you in clarification during the later part of
the interview. It is worthwhile to ensure that any plan or document
presented by the witness is appropriately annotated and appended to
the statement.
4. Be aware of the person's background, responsibilities, and
involvement. It is important to have an understanding of how the
person to be interviewed fits into the organisation or what his role in
the criminal activity/organization is.

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 5. Anticipate personal needs such as transport home, food, beverage,
and other personal needs.

The Interview — There are four (4) phases to the interview:

1. Develop Rapport and Trust. Develop a positive and constructive
atmosphere. Recognise that the person being interviewed is under
stress. Explain the purpose of the interview and what your job and
role are. Say what you hope to achieve. Ensure the interviewee that
anything he says or provides will be treated with utmost
confidentiality, unless, otherwise required by the court to be
presented. Also ask the interviewee for any special concern or
personal need.
2. Request the interviewee to tell you what happened in a narrative
statement. Do not ask questions. Do not interrupt, and allow the
interviewee to use his own words. Take notes as reminders for
questions later on.
3. Interactive Discussion. Ask open-ended questions for clarification of
information. Listen actively and repeat what was heard periodically
for confirmation. Use photographs, drawings, and any other
documents as needed.
4. Conclusion. Ask if there are any other facts or thoughts, no matter
how big, small, or seemingly unimportant they are, that the person
would like to add.
a. Summarise what you have heard to ensure accuracy.
b. At this point, develop a written statement in the presence of
the interviewee. Ideally, the statement should be a
chronological summary of what happened and what you have
heard; a copy of which should be given to the interviewee for
his signature. Having concluded the interview, ask the
interviewee to get back to you or call you if he remembers or
thinks of anything else that might be helpful.
c. Finally, write down notes and observations on the information
shared. Take note of any follow up questions. Evaluate key
points and insights, and look for any apparent factual conflicts
with the statements of other witnesses. These may reflect the
individuals' different view points on the incident or different
areas of what they have seen or understood. Explore these
differences in a neutral way later.

Common Interview Mistakes — These include:

1. Screening out information which does not seem to fit.
2. Interrupting people when they are talking.
3. Having too many people in the first interview. Ideally, it should be
one-to-one, since this is seen as non-threatening.

ANNEX D
Memorandum Circular Nr. 2012-000-0000
References
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 a. Criminal Investigation Manual Revised 2011 (PNPM-DIDM-DS-9-1);
b. Field Manual on Investigation of Crimes of Violence and Other Crimes
2011 (PNPM-DIDM-DS-9-2);
c. Commonwealth Act Nr. 3815, dated December 8, 1930, The Revised
Penal Code of the Philippines, as amended;
d. Republic Act Nr. 8494, dated February 12, 1998, An Act Further
Amending Presidential Decree Nr. 1080, as Amended, by
Reorganizing and Renaming the Philippine Export and Foreign Loan
Guarantee Corporation, Expanding Its Primary Purposes, and for
Other Purposes;
e. Republic Act Nr. 8799, The Securities Regulation Code;
f. Implementing Rules and Regulations of RA Nr. 8799;
g. Republic Act Nr. 9160, dated September 29, 2001, Anti-Money
Laundering Act of 2001, An Act Defining the Crime of Money
Laundering, Providing Penalties Therefor, and for Other Purposes;
h. Batas Pambansa Blg. 68, dated May 1, 1980, The Corporation Code of
the Philippines;ESTCHa

i Batas Pambansa Blg. 22, dated April 3, 1979, An Act Penalizing the
Making or Drawing and Issuance of a Check Without Sufficient Funds
or Credit and for Other Purposes;
j. Presidential Decree Nr. 1689, dated April 6, 1980, Increasing Penalty
for Certain Forms of Swindling or Estafa;
k. http://www.lexisnexis.com/community/bankruptcylaw/blogs/bankruptc
ylawblog/archive/2012/11/02/october-2012-ponzi-scheme-
roundup.aspx;
l. http://www.investopedia.com/terms/p/pyramiding.asp#axzz2D2gXs23j;
m. http://www.sec.gov/answers/ponzi.htm;
n. http://www.fraudsandscams.com/investissues.htm.
o. http://www.fbi.gov/scams-safety/fraud.

Footnotes

1. U.S. Securities and Exchange Commission www.sec.gov.

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