PONZI SCHEME

My friend John Doe was introduced to a forex platform that pays a monthly interest rate of 15% plus. He had the option of investing his money for six months or a year. According to the investment contract, he might withdraw his funds before the end of the investment period, but only 70% of the amount invested would be returned to him. He was eager to join this investing platform, so he conducted a background check on the investment firm, checking their corporate affairs registration, confirming their registered address, and validating the directors of the firm, but he received no tangible information.

This investment seemed to John Doe to be a route out of his financial difficulties. He sought his employer for a staff loan after comparing the interest rate on the loan and the return on investment (ROI) from the investment firm because he didn’t have enough money to invest. His employer could not deny him the loan because he was a dedicated employee. He invested the borrowed money with the hopes of being able to utilize it to rent a new apartment for his family once he received a return on his investment.

He received regular returns three months into the investment, but rather than cashing out, he reinvested what he had earned, as the promoters advised. Six months later, John Doe received a mail from the investment firm informing him that all his investments had been cancelled and that the firm would proceed with repaying the amount invested. He was surprised by this unexpected event because another of his friends who had invested had received returns a few days before he received the mail. Despite agreeing to pay, the investment company did not reply with money two weeks later. He and his friends decided to give the company a visit because they knew the address, but they were surprised to find the office locked up and no employees.

When his rent was due and he didn’t have enough money to pay it, he discovered he’d been a victim of a Ponzi Scheme. The phrase “Ponzi Scheme” was coined after Charles Ponzi, a con artist who defrauded investors with a postage stamp speculating scheme in the 1920s.

A Ponzi Scheme is a type of financial fraud in which existing investors are paid using monies obtained from new investors. This is a deceptive investment strategy that generally offers huge profits with little or no risk. To stay afloat, it needs a steady stream of investors and money. This scheme tends to collapse when it becomes difficult to recruit new investors or when a big percentage of existing participants pay out. External market forces like a significant drop in the economy, such as the Madoff investment scandal during the 2008 market slump, might also cause a scheme to fail. This incident is the most well-known Ponzi scheme in recent history, as well as the single greatest investment fraud in the United States, and it took more than a decade to put together. According to reports, investors lost $25 billion in investment and $65 billion in fictitious profits.

Nigerians have lost a total of 300 billion naira to Ponzi schemes such as MMM, Yuan Dong, Galax Transport, Famzhi Interbiz Limited, Brisk Capital Limited, and others in the last five years. In 2016, a Russian named Sergei Mavrodi, the founder of the Mavrodi Mundial Movement (MMM) scheme, confirmed that there were 3 million MMM members in Nigeria. This scam cost Nigerians a total of 18 billion naira.

Red Flags of Ponzi Scheme

  1. High returns with little or no risk
  2. Overly consistent returns
  3. Unregistered investments
  4. Unlicensed sellers
  5. No minimum investor qualifications
  6. Difficulty receiving payment
  7. Pressure to reinvest the returns
  8. Secretive and complex strategies
  9. Paperwork issues
  10. Credibility through association.

What to do before investing

• Conduct due diligence by contacting the Securities exchange Commission

• Consult an unbiased third party, such as an unrelated broker or a licensed financial advisor, before making an investment

• Be wary of any investment opportunity that boasts unrealistic profit claims.

Conclusion

Ponzi schemes are being sprung up in different ways. Due to the Nigerian economy and the get rich quick syndrome, Nigerians especially the youths are falling victims to them as they hope to get huge profits on the monies they have invested. It is highly important to note the red flags of these schemes and what to do before delving into an investment.

Article by Adegoke Oreoluwa CFETekena Tariowei Shellowei, CFE

Author

RABLOWOODS

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