Ponzi (Pyramid scheme) is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from profit emanating from legitimate business activities. The operators could be individuals or corporations. This kind of scheme was named after Charles Ponzi who was infamous for using this fraudulent technique to dupe unsuspecting Americans, on his arrival in the US in the 1920’s whilst America was in deep financial straits. An example of a Ponzi or Pyramid Scheme is MMM (Mavrodi Mundial Moneybox) which emerged some years ago and doled out mouth-watering interest rates to its teeming subscribers before its sudden and unsavory crash in 2016. It is instructive to note that Nigerians lost billions of naira to MMM.
It is instructive to note that MLM (Multi-Level Marketing) is legal and differs entirely in all ramifications from MMM. Here are some ways to identify a Ponzi Scheme:
1. They grab the attention of new investors by offering short-term returns that are either abnormally high or unusually consistent. This is the ‘magnet’ they employ in hoodwinking unsuspecting public into believing they are authentic.
2. They focus all their energy into attracting new clients to make investments. Why? Because they need the new investments to provide returns to old investors. You can liken it to robbing Peter to pay Paul. When this flow eventually runs out, the scheme falls apart or crashes.
3. They usually promise well-above average returns. For example if the banks are offering a low single digit percentage return on your deposit, pyramid scheme offers high double digit percentage returns on your deposit. This is a ploy to ensure you fall for their bait.
4. Ponzi schemes are illegal. From time to time, the Central Bank of Nigeria (CBN) and the Securities & Exchange Commission (SEC) usually issue advisory statements warning Nigerians to be wary of such shady and illegal schemes which they often refer to as ‘wonder banks’.
5. They use vague verbal guises such as ‘Hedge Fund’, ‘Hedge Futures Trading’, ‘High Yield Investment Programs’ or ‘Offshore Investment’ to make it look legal and attractive.
6. They tacitly take undue advantage of the client's lack of investor knowledge or competence.
7. Very often, such phony high returns encourages investors to leave their money within the scheme, so the operator does not actually have to pay very much to investors. The promoter will simply send bogus statements showing how much they have claiming such funds or balances are being re-invested.
8. In the long run, investors within a Ponzi scheme may eventually face difficulties when trying to get their money out of the investment.
9. Ponzi schemes sometimes commence operations as legitimate investment vehicles such as hedge funds. However hedge funds can easily degenerate into a Ponzi or pyramid scheme if they unexpectedly lose money or fail to legitimately earn the returns promised/expected.
So do well to avoid such pyramid schemes. Consequently, if you are desirous of investing, take time out to do your due diligence before making any monetary commitment especially if the promised returns are too good to be true.
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