Ponzi Schemes

Last week, the Securities and Exchanges Commission of Nigeria - SEC came out with a terse warning to all unsuspecting Nigerian Investors - that some concerns masquerading as "investment business" offering mouth watering returns on "investment" are actually "Ponzi Schemes"

Since that piece of advise was issued, the Country has been torn into two - those for and those against.

Just like any other platform in Nigeria, those benefiting from that platform never see anything wrong with what is going on; they are willing to defend it to the high heavens even when they know the basic truth. And the truth is Ponzi Schemes have no viable business model - most of them are MONEY EXCHANGES or MONEY SCHEMES - bring money and take money. Some might even throw in one or two services inbetween but the major source of income is REGISTRATION OF NEW MEMBERS.

For as long as there are new persons bringing in money, the Scheme will continue to survive but once "investors" begin to decline in number and less money flows into the scheme, it would create havoc to the system and the Scheme will fail - leaving wastages in its trail and sometimes even suicides.

An Entrepreneur is a RISK TAKER and not just  FOOLISH INVESTOR; being a Risk Taker means that he carefully assesses the risk to be taken and then takes a calculated risk.

An Entrepreneur doesn't jump into the fray because of the mouth watering return on investment because just as it is usually said, "if it's too good to be true, then it sure is"

Any investment offering you more than 10% PER ANNUM as ROI is definitely a suspect.

And by the way, what is Entrepreneurial about Ponzi Schemes?

Entrepreneurial Schemes and Projects offer SOLUTIONS to the PROBLEMS of people but Ponzi schemes offer huge returns on monies received by them and which at the long run are not sustainable.

When you work hard for your money, you do not want to lose it. And if you invest your hard-earned money, you want to see great returns. But if you’re looking to invest money, be careful!

We have an expression: If a deal is too good to be true, it probably is.

There are many ways to be tricked out of your money. There are frauds, schemes, scams and cons carried out by fraudsters, schemers, scammers and con artists.

A Ponzi scheme is an investment trick.

Ponzi scheme is named after Charles Ponzi. In the 1920s, Charles Ponzi tricked thousands of people into investing in a postage stamp scheme.

In a Ponzi scheme participants believe they are actually earning returns from their investment.

Dividends but no real investment

One of the simplest yet most effective investment scams is the ponzi scheme. The promoter promises investors a return on investment and says it is secure, but there is no real 'investment'.

The promoter convinces people to invest with their scheme. They then use the money deposited by early investors to pay the first 'dividend' until investors feel comfortable and decide to invest more.

Some investors then encourage their family and friends to join.

Eventually the scheme falls apart because the promoter starts to spend the money too quickly or the pool of investors dries up.

Warning signs of a ponzi scheme

The rate of return is sometimes suspiciously high (maybe as high as 10% per month or 120% per year)  - but it can also be just the usual rate of return

The person who tries to recruit you is someone you think is trustworthy, like a neighbour or someone in your church or community group

The recruiter may have already invested in the scheme and received great dividends

Where do ponzi schemes operate?

Fraudsters and operators of unlawful investment schemes sometimes target community groups such as churches to find victims.

In some cases, members of the community group have innocently encouraged each other to put money into the illegal scheme.

This means that when the scheme collapses, not only do the investors lose their money but relationships break down between friends, neighbours or community group members.

How long can the scheme last?

If the promoter of the scheme is disciplined about how much money is left in the account to pay 'dividends', the scam can go on for many years.

Ponzi schemes only require a few people in their early stages to be successful.

How ponzi schemes work

Here is an example of how a ponzi scheme works and it is shown in the table below. In January, the promoter convinces Katie to invest $100,000 in his scheme. The promoter then pays Katie $10,000 each month using Katie's own money.

As Katie receives $10,000 each month she doesn't suspect anything is wrong and happily recruits friends and work colleagues to invest too.

After 3 months, Katie's neighbour Adam decides to invest $100,000 after hearing about Katie's great returns.

After both Katie and Adam have invested their savings, the returns continue to come in April. But in May they don't hear anything from the promoter. They try to contact him but his number has been disconnected.

The promoter has taken off leaving two devastated people in his wake. Katie lost $70,000 and Adam lost $90,000. The promoter got $160,000 out of the scheme.

This is example has only two victims but in reality these schemes can have dozens or even hundreds of victims.

Katie and Adam invest in a ponzi scheme

Month	Katie	Adam
January	Invests $100,000	-
February	$10,000 returned	-
March	$10,000 returned	Invests $100,000
April	$10,000 returned	$10,000 returned
May	No contact	No contact

What to do if you have invested in a ponzi scheme

Stop investing any more money

Check if the company is the list of banned Companies

Check the company's license number on SEC

You should also warn your family and friends, to stop them from becoming victims.

The biggest telltale sign of a ponzi scheme is the suspiciously high rate of return. That old saying applies here: if it sounds too good to be true, it probably is.

Before you invest in any scheme you should do independent checks to see how the returns are really going to be made.

Don't just trust the word of the person selling you the scheme.

Source:     MoneySmart