Ponzi: A Raging Wolf in a Sheep's costume

On that fateful day, the weather was calm and I just finished taking my lunch. I strolled outside for fresh air and sat on a couch nearby while sipping some soda. I was thinking of the beauty of life and all creations my eyes could behold.

 Then something happened as I was trying to keep myself updated on the happenings in the world, scrolling through some sites on my phone I read a headline that took me out of my current state of mind, and I felt like someone that was woken from his slumber by an electric shock. 

The headline was about an investment platform that just crashed and went down with people's life savings(At this time, I can now hear the song, "This is Nigeria by Falz", being played by the big guys next door). The news was so heartbreaking and it also brings old memories to life. I vividly remember how I once invested in a Ponzi scheme that promised 25% ROI after a month this was when I was naive and had no idea of how the financial market works. The Ponzi crashed three months later.

 Schemes like these do rob people of their whole life savings, make some people jobless, and homeless, and have also caused the untimely deaths of a few.

After I recovered from the shock, a question came to my mind. I ask: Why Do Nigerians keep falling for Ponzis? To have an answer, I began research on it, and a survey that lasted for two weeks was distributed to the public via social media.

Digging Deep Into Ponzi.

But what does a Ponzi scheme mean? Is it all investment platforms that can be termed, Ponzi? These questions, along with some others will be answered shortly. 

A Ponzi scheme is an investment fraud that pays current investors with the funds from the new investors. This type of fraud called Ponzi was named after a fraudster called Charles Ponzi. Charles' scheme promised investors 50% ROI within three months which was later shortened to 45 days.

Ponzi schemes rely on the money gained from new investors to survive. The scheme collapse whenever it stops receiving new investors.

To have a full grasp of how Ponzi schemes operate, we will look into MMM-one of the greatest Ponzi that has occurred in Africa. 

  

MMM meaning the Mavrodi Mundial Moneybox, is a Ponzi that started in Russia around 1989 and was founded by Sergei Mavrodi, a mathematician. The scheme started as a legitimate business and later transformed into a fraudulent investment. It collapse in 1994 only to be resurrected in 2015 in third world countries including Nigeria.

 The scheme utilized the internet as it medium of its campaign, promising Nigerians of 30% ROI within a month, which means their capital gains 1% daily. The scheme was able to make itself convincing enough by paying off its first investors, who later become the herald of this new gospel. Within 1-2 years the scheme had the money of about 3 million Nigerians. 

All these events took place during the first tenure of President Mohammed Buhari. The Nigerian government kicked against the MMM idea and the SEC also warned potential investors of the risk they are about to take. Despite all the warnings, the scheme keeps getting new investors. The scheme eventually collapsed after the demise of its founder in 2019. The scheme went away with a lot of Nigerians' money, and many haven't recovered from the shock it gave them till now. 

Mind you that this type of fraud is not only limited to a set of people or races. Ponzi scheme has been perpetrated by men, women, whites and black. One of the female perpetrators is Sarah Howe who founded a Ponzi scheme disguised as a bank for young women in 1870.

A little digging into the historical records finally revealed why people fell for Ponzi schemes. The reasons can be linked to the following factors: human nature, psychology, and the Economy. Some of these are explained below:

1. Greed: this is due to the insatiable desire of men. We always want more possession than we need. This is the reason why the perpetrators created the scheme in the first place.

2. Persuasion: this is how the perpetrators entice their victims to put down their money. This could be by promising a high interest, using Tv ads, religion, etc.

3. Gullibility: this is the tendency to be easily convinced that something is true (which is mostly false). The Ponzi scheme perpetrators do use the first payment as bait for their victims. And those who are gullible enough do reinvest and lose it all at the end of the day.

4. Trust: it's unlikely for someone to place one's life savings into the hand of a stranger. It has to be someone one can easily trust(it could be a relative or someone that has gained the trust of people close to us. It could also be someone who practices the same faith like you). Also, perpetrators gain the trust of their victims by trying to look successful. They wear nice clothes, live in expensive apartments, and drive luxury cars.

5. Poor economy: it's also noticed that Ponzi Schemes thrive more during economic crises in a country. This is the moment people can follow anyone that promise to deliver them from their hardship.

The Common Characteristic of a Ponzi scheme

But what are the symptoms or red flags to watch out for in schemes like these:

1. They promise a high interest, which is not feasible in the financial market, within a short span.

2. They fail to be registered with the Securities and exchange commission (SEC)

3. They have no physical location.

4. What is being invested in is made a secret to investors.

5. Difficulty in withdrawal.

6. Investors are urged to reinvest their earnings.

What to invest in rather than a Ponzi scheme.

1. Self-investment: this is one of the best things a person can do for himself. This means using your money to learn a skill that will generate more money or that which will enrich your life and make you better.

2. Learn how to trade the financial market: rather than gamble with your cash with those who promise to trade the market on your behalf, you can learn the skill yourself and take the risk you can afford.

3. Make a long-term purchase of companies' stocks: this is a less risky step. The purchase of companies' stocks has been made easier by different Fintech apps for this purpose. eg.  Chaka, Bamboo, and Trove.

4. Make a fixed deposit account with Bank: this has the lowest risk since banks are being covered with insurance, so your money is in safe hands. Though the banking sector has discouraged people from investing by giving a very low interest that can't stand the test of inflation, some banks stood out in the interest they roll out: eg. GTCO(0.25% per month), UBA(3% per annum for a target savings account).

 (Kindly note that the minimum amount you can deposit for this type of account is between #50,000-100,000).

Disclaimer: Be diligent enough to do your own research and don't take this as financial advice.

If I was asked if there will be an end to the Ponzi scheme, my answer will be 'No'. As far as human nature and desires never change, Ponzi schemes will keep coming in different forms and names. The best thing that can be done is for everyone to take the necessary preventative measures against these schemes. 

Save a Life Today 

You can help a fellow Nigerian by sharing this post on your social media handles. You don't need to experience this before you wise up. Stay alert and stay safe.

References

1.  Marie Springer, Marie(2021), The politics of Ponzi Schemes: History, Theory, and Policy. New York, NY, Routledge.

2. Cross, Collen(2013).Anatomy of a Ponzi: scams Past and present. Slice Publishing.