A Ponzi scheme is an investment fraud that involves the payment of supposed returns to existing investors from funds contributed by new investors. Supposed legitimate businesses are paid “returns” on their investments from the investments of later investors.
The scheme operates by soliciting new investors with promises to invest their funds in opportunities claimed to generate high returns with no risk.
Ponzi scheme is named after Charles Ponzi, an Italian swindler who operated in the U.S. and Canada years back. Ponzi got the attention of investors by telling them that he was able to take advantage of fluctuating currency values to purchase international postal reply coupons, which he claimed could be bought abroad at a discount and then sold to at face value in the United States at a tremendous profit. He also refused to provide details as to precisely how he operated his investment strategy, claiming he didn’t want to give that information to competitors.
Ponzi promised investors a 50% profit within 45 days and a 100% profit within 90 days, and from all appearances, Ponzi was a man of his word as early investors were rewarded handsomely. This increased the popularity of the scheme and lured subsequent investors due to his phenomenal success. Within a short period, he soon had investors clamoring for him to take their money. The math, however, didn’t work. Behind the scenes, Ponzi could only pay his investors using money from new investors, not profits. Ponzi was brought down due to a series of investigative reports in the Boston Post newspaper, leading to his arrest on the 12th of August, 1990, which ultimately led to a federal criminal investigation resulting in mail fraud charges.
In Nigeria, from the days of Wonder Banks, MMM, and the likes, we have seen Ponzi schemes spring up in various forms, from an investment platform to a business with imaginary products and a pseudo cooperative contributory scheme. Despite the awareness being created by regulatory bodies, financial institutions, and financial literacy organizations, there seems to be no respite to the increasing number of Ponzi schemes. Could this be a result of sheer greed? Irrational thinking? Or the economic conditions of people? Whatever the reasons, Ponzi schemes cannot be regarded as a veritable investment vehicle to grow and preserve wealth; hence, a need for a thorough sensitization and expository on identifying Ponzi schemes in their various disguises.
Ways to Identify a Ponzi Scheme:
- Unbelievable and enticing Returns: A Ponzi scheme promises stupendous returns with little or no risk. More often, they claim to guarantee your return on investments. They achieve this by playing on the greed of investors, enticing them with the prospect of wealth and a life of luxury.
- No veritable underlying business/investment: Usually, the business or investment Ponzi schemes claim the money will be used for cannot be verified. Ponzi scheme’s business strategies or proposals are usually complex and clouded with secrecy.
- Use of influencers to champion awareness: Most Ponzi schemes choose to associate with influencers and people of repute to champion and front their dubious business. They do this to create an appearance of success, thereby luring investors to bring in their funds.
- Unlicensed Promoters: Ponzi schemes are not regulated or licensed by relevant regulatory bodies within their jurisdiction. Before subscribing to an investment scheme, ensure that such investment schemes are licensed and regulated by bodies such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), Nigerian Exchange group (NGX), National Association of Security Dealers (NASD) OTC Exchange, etc. These Ponzi schemes cannot provide affiliation or membership of regulated bodies, and most often, they inform their investors that they are in the process of getting their licenses.
- Irregular Payment: Ponzi schemes are also associated with irregular payments, and usually, they blame financial and regulatory institutions, accusing them of holding funds on their accounts or freezing their account hence, their inability to pay investors as and when due.
How to Avoid being trapped in a Ponzi scheme
- Research the Promoter: Due diligence must be carried out before committing to any investment schemes. Ensure that you research the promoter’s background and antecedents; Who are the board members? What is their credibility? Getting a good answer to these questions gives you a level of comfort on the genuity of the investments.
- Ensure investments are verified and regulated by authorities before joining or participating in any investment, ensure that the investment institutions are registered members of relevant regulatory authorities, guiding their investments with solid proof to back up their membership.
- Clear Business Model: Ensure you understand the business model of the investment firm and how they intend to make money. That way, you can ascertain their income stream and know how sustainable the business is.
- Written and well-detailed Contract: Ask for a written document or agreement highlighting relevant information about the company, such as its officers, financial records, investment documents and also what recourse you would have peradventure you are not satisfied with the investment. Ensure a learned and knowledgeable person goes through the document before committing to such investment.
- Compare the risks with the potential rewards of the investment: There is a famous quote in Investing which says, “High risk, High reward; Low risk, Low reward.” A red flag is a company promising a high return with little or no risk (assurance of investment). Ponzi schemes capitalize on the greediness of investors who are looking for colossal returns and are unwilling to bear the risk therein.
Overall, there are so many nomenclatures to Ponzi Schemes, all disguising as legitimate investment platforms. Notwithstanding, we must be on alert not to fall prey. Also, there needs to be a corroborative effort between all stakeholders, i.e., the investors, the financial institutions, the regulatory bodies, and the law enforcement agencies, to curtail the emergence and continuous proliferation of Ponzi Schemes, specifically in Nigeria.