The Return of Ponzi Schemes



By Obinna Chima

They are everywhere. The network is spreading like wild fire with the number of new ‘converts’ growing daily. A lot of Nigerians, mostly youths are excited with the huge returns from their investment, with their ears completely blocked to the dangers in staking their funds in this form of investments –Ponzi schemes. Ponzi schemes are fraudulent investment operation where the promoters usually entice new investors by offering abnormally high or unusual returns.

Indeed, promoters of wonder banks and other pyramid schemes in the country are currently taking advantage of the rising level of job losses and unemployment as well as the shrinking disposable income to attract unsuspecting prey.

The Nigerian economy is in a recession. The National Bureau of Statistics (NBS) recently revealed that the country’s gross domestic product (GDP) contracted by 2.06 per cent in the second quarter of 2016, compared to the negative growth of 0.36 per cent recorded in the first quarter of 2016. Also, national unemployment rate also rose to 13.3 per cent in the second quarter of 2016, from 12.1 in the first quarter of 2016.

Owing to this, from Lagos, Port Harcourt, Enugu and other big cities in the country, owners of these illegal businesses have been offering Nigerians mouth-watering interest rates, which cannot be found in the banking system, in a bid to attract large number of customers before they run away with huge cash.

For instance, at the Ojuelegba area of Lagos, THISDAY was recently given a small handbill advertising investment schemes that offers 30 per cent returns in 30 days.

Also, other Ponzi schemes in the country that appear to be getting a lot of patronage are MMM and the Zarfun, which without any underlying fundamentals, are spreading like wildfire. A lot of young school leavers have already signed on to this scheme, which the promoters are marketing as mutual funds.

Typically, what promoters of such pyramid scheme do is that they offer rates far beyond what is obtainable in commercial banks. This would always attract a lot of people who would always rush in to stake their funds. But, those who join the scheme late would always be the ones to lose their shirts as they would have been convinced by those that joined earlier to invest huge amounts of money.

According to Wikipedia, МММ was a Russian company that perpetrated one of the world’s largest Ponzi schemes of all time, in the 1990s, in which between five and 40 million people lost up to $10 billion. MMM was established in 1989 by Sergei Mavrodi,[2] his brother Vyacheslav Mavrodi, and Olga Melnikova. The name of the company was taken from the first letters of the three founders’ surnames.

MMM created its successful Ponzi scheme in 1994. The company started attracting money from private investors, promising annual returns of up to one thousand per cent…MMM grew rapidly. An important factor in the scheme’s success was word of mouth.

“The success of MMM in attracting investors led to the creation of other similar companies, including Tibet, Chara, Khoper-Invest, Selenga, Telemarket, and Germes. All of these companies were characterised by aggressive television advertising and extremely high promised rates of return.

“In 2015 MMM began operating in South Africa with the same business model as MMM-2011, claiming a “30% per month” return through a social financial network. The group was identified as a possible pyramid scheme by the National Consumer Commission and accounts of clients were later frozen by Capitec Bank.

“In 2016, MMM launched a website targeting the Nigerian audience. In January 2016 the Chinese government banned MMM on the grounds that it is a pyramid scheme, and it is not registered in the country (and as a fraudulent scheme cannot be registered),” the free online encyclopaedia revealed.

Also, attempts to get details of activities of ZarFund, another scheme that is increasingly attracting the patronage of some Nigerians, only showed limited information about the company.

ZarFund website only describes the company as “where wealth is predictable,” through donation by members, as well as how participants can move from one level to another.

Investors are promised impossibly high yields, either by way of profits or by way of interest paid. Such yields cannot be derived from the proper investment of the funds – so, the organisers resort to dirty tricks. The promoters use new money, invested by new investors – to pay off the old investors. Most times, investors believe that they can always outwit the organisers of the pyramid scheme, but they end up being the losers.

But experts have warned against falling for the bait of illegal deposit-taking institutions which are not licensed by the CBN, saying that their only intention is to defraud members of the public.

The Central Bank of Nigeria (CBN) has also warned Nigerians to be careful of any deposit money institution that is not insured by the Nigeria Deposit Insurance Corporation (NDIC).

The bank through its the acting Director of Corporate Communications, Mr. Isaac Okoroafor, made this known against the proliferation of wonder banks in the country in recent times.

Okoroafor said such deposit money institutions are dubious Ponzi schemes

“At times like this when the economy has suffered some decline, Nigerians should be very careful with those they deal with. Any institution that is not licensed by the CBN to accept deposits should not be given money to keep under any guise,” he advised.

He warned Nigerians to beware of the so-called wonder banks, explaining that they were makeshift institutions to dupe people.

“We can vouch for the banking system. The deposit money banks are the only licensed institutions to take deposits. If you need to deposit money in any form, go to any of the deposit money banks and put your money, you can buy fixed income instruments or invest in stocks,” he said.

Okoroafor said the CBN could not guarantee the unregistered institutions, insisting that when depositors lose money to them, the bank would not be able to help them.

“These people always come with very interesting propositions. These are fraudsters who are just out there to collect people’s money and run away as soon as they hit their target. There is no insurance because the NDIC does not even protect them against such risks when they occur,” the CBN said.

He said the CBN was intensifying efforts and liaising with the various security agencies to identify the promoters of these schemes and have such persons arrested and prosecuted, adding that anyone caught with them would also be made to face the law.