Guarding against Illegal Financial Market Operators

Obinna Chima writes on the need for Nigerians to become security conscious and be able to identify fraudsters and fraudulent investment schemes

Poverty, lack of financial literacy and greed have been identified among the reasons for the growing number of persons that fall for the activities of illegal investment companies as well as Ponzi scheme operators.

In addition, the undying and unrestrained appetite for get-rich-quick syndrome has also seen operators of such schemes swindle unsuspecting members of the public. Ponzi scheme operators also capitalise on the harsh economic environment to offer unrealistic returns on investments to gullible persons with Nigerians reported to have lost billions to criminals masked as investment portfolio managers. These illegal schemes have also expanded through the use of online services.

Unfortunately, there had been reported cases of retirees who have fallen victims by mistakenly ‘investing’ their severance package on such schemes and are either heartbroken or had been forced to commit suicide.

A Ponzi scheme, according to Investopedia, is a financial arrangement where investors contribute money to portfolio managers who promise them high return and are paid out with the incoming funds contributed by later investors. It is closely related to a pyramid because it revolves around continuous recruiting, but in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new members. Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment.

In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.  The Mavrodi Mondial Movement (MMM) which saw Nigerians lost billions of naira is an example. Other Ponzi schemes to which many Nigerians had in the past lost monies included the popular Nospecto, Galaxy Transport and Famzhi Interbiz Limited, MBA Trading & Capital Investment Limited, Imagine Global Solutions, Chinmark Investment, Chymall, among several others.

Indeed, the pervasiveness of Ponzi schemes undermines regulatory efforts in developing the capital market, and also negatively impacting investors’ confidence.

That is why regulators have continued to use every opportunity to warn Nigerians against the activities of these corporate fraudsters.

For instance, the Central Bank of Nigeria (CBN) had issued several cautions, warning unsuspecting members of the public to beware of the so-called financial providers who’ll go at great length to induce and deceive prospective customers with mouth-watering returns that cannot be matched by authorised and registered institutions and operators in the financial services playing field.

The CBN has also through its Financial Services Regulation Coordinating Committee (FSRCC), been advising and persuading Nigerians to stop dealing with such firms.

The FSRCC had stated: “The general public is advised to refrain from dealing with unlicensed or illegal financial operators, who lure and defraud unsuspecting members of the public by offering extra-ordinary returns on investments as bait,” and had called on members of the public to visit the websites of the CBN, the Securities and Exchange Commission (SEC) and other relevant member agencies of the FSRCC to verify the registration and license status of such companies and schemes before investing in them.

“You are also advised to report any individual or entities suspected to be involved in such nefarious activities to the law enforcement agencies,” it added, pointing out that the financial regulatory agencies would continue to carry out all necessary due diligence before registering or licencing any operator under their regulatory purview.

Similarly, the Director, Corporate Communications Department, CBN, Osita Nwanisobi, advised Nigerians to play a role in stopping some of the Ponzi scheme institutions.

“You must be conscious of any institutions that ask you to bring your money with an extremely very high interest rate. CBN licenced institutions are recognised and regulated. So, it is your responsibility to ensure that wherever you are putting your money, or whoever you are doing any financial business with is recognized by the CBN,” Nwanisobi said.

Also, the Director-General of SEC, Lamido Yuguda, said the devastating impact of the Covid-19 pandemic on the economy, the low-interest-rate environment coupled with the increasing use of online services spurred the resurgence of illegal investment outfits.

He urged Nigerians to stay away from fake financial experts who would promise to double their money within a short time.

The Nigeria Deposit Insurance Corporation (NDIC) has also advised Nigerians not to patronise services of Ponzi schemes and illegal fund managers also called “wonder banks.” 

To Ayodeji Ebo, an analyst at Chapel Hill Denham, Ponzi scheme operators take advantage of low interest rates period by providing attractive interest rates to investors and working on the desperation of the investors to beat inflation rate or multiply their savings.

This, he said, has negative impact on the economy as funds that should support productive activities are taken away fraudulently. In addition, investor education is key. Investors should seek professional advice when in doubt.

On his part, Relationship Manager, Corporate Banking at FSDH Merchant Bank, stressed that Ponzi schemes and activities of illegal finance houses are not good for the economy and the financial markets.

He added: “Real wealth takes time to build. And it can only happen through long term consistent investments in products that contribute to economic growth and through licensed operators.”
Chief Research Officer, Investdata Limited, Mr. Ambrose Omordion stated, “In the first place, people who fall victim to these schemes are people who are either greedy or do not have knowledge of other certified investments. They also do not know much about the capital market and how they can get returns on investment from it.

“The SEC has been preaching against it for years now and so the onus is on Nigerians to be very careful about investing in these fraudulent outfits or wonder banks. The federal government should keep working and finding out the culprits behind these schemes and they also have to make the capital market more liquid by creating the awareness on the benefits of investing in the capital market.”
Also, the Chief Executive Officer, Centre for Promotion of Private Enterprises (CPPE) and Economist, Dr. Muda Yusuf said the development calls for tight regulatory action.

“There should be much greater consequences for those committing infractions in the name of investment. There is also the aspect of citizens themselves. They get carried away by the so-called returns on investment. They refuse to learn from the experiences of the past.

“Investors should be less greedy, be more cautious in investing and be more realistic in their expectation of the return on investment so as not to fall prey to these schemes. Before investing, it’s good cross check first from due diligence about those companies asking people to invest.

“Many of them are not registered, they are not under the regulatory radar of the regulatory institutions. So, citizens have a part to play in safeguarding their own interest. Within the economy more and more people are losing their money. It’s like fraud. It’s a crime. When you offer people returns that are not sustainable, it’s an act of criminality and any act of criminality has an impact on the economy. So there has to be consequences.

“If the rules are not tight enough, let us tighten the rule so that anybody caught will face the law. Once people know that there are consequences for flouting the rule, they will sit up. The problem in the country is that people commit crime and get away with it. If we have a more effective consequences management system, it will ensure there are consequences for infractions, so that we don’t create room for people to rip people of their money and go free.”

In order to address the proliferation of illegal investment outfits and ensure that the apex regulator is well equipped to stem the tide, the National Assembly is proposing a bill that will empower SEC to impose stiffer punishment on promoters of Ponzi schemes and other unregistered investment schemes.

This was part of an amendment to the Investment and Securities Act 2007, being proposed by the House of Representatives.

The bill was proposed by Babangida Ibrahim representing MalumFashi/Kafur Federal Constituency, Katsina State.

According to Ibrahim, the proposed legislation was necessitated by lots of complaints by Nigerians on the activities of illegal investment schemes that promise unreasonably high returns but rather fleece Nigerians of their hard-earned money.

Under the document – ‘A bill to repeal the Investment and Securities Act 2007 and to enact the Investments and Securities Act, 2021’ – SEC will be empowered to address the challenges of Ponzi schemes.

However, in order to avoid becoming a victim of investment fraud, members of the public are advised to use only licenced, registered and trusted financial companies; shun investment windows that promise returns t that is unnaturally high or steady, the warning alarm should start sounding.

Individuals nearing retirement should be especially wary of their investment status. Chances are, you are counting on the money you’ve invested to guide you during your retirement years. Make sure all investment decisions are made with sound judgment.

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