The Dangers of Ponzi Schemes and How to Identify One

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Tuesday, May 25, 2021 / 6:30 PM / Bukunmi Adejobi, Proshare Research / Header Image Credit: dreamstime


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Around the world, Ponzi schemes continue to be among the most popular ways to defraud people out of their hard-earned money, while there is increased awareness about the schemes, they are still prevalent in Nigeria.

 

A Ponzi scheme is a fraudulent system of making money based on recruiting an ever-increasing number of "investors". The initial promoters recruit investors, who in turn recruit more investors and at each level, the number of investors increases.

 

In a typical investment Ponzi scheme, fraudsters disguise their true purpose by promising to invest the money, generate high returns with little or no risk but they are not investing in anything, and they deliver - for a while. Instead, the money received from new investors are used to pay their obligations to the old, including the exaggerated returns. Eventually, when the operation cannot bring in enough fresh funds to sustain itself or when large numbers of existing investors withdraw their funds, the system collapses.

 

The participation in these 'get-rich-quick' schemes is often encouraged by friends, family, or neighbors. Usually, Ponzi schemes recruit members at seminars, meetings, over the phone, by email including social media. Some examples include the promotion of Ponzi schemes using virtual currencies, such as Bitcoins, forex trading even agro-tech schemes.


In a country like Nigeria with poverty levels on the rise, these schemes are common, and it is quite easy to swindle people who are ignorant and hungry for unrealistic returns.

 

Recently, the EFCC Special Fraud Unit (SFU) arraigned Mr. Dominic Joshua of Brisk Capital Limited for allegedly defrauding investors of over N2bn by promising them a 60% return on their investment. Validity to the scheme was given by a number of media houses that did not restrain themselves from exercising poor judgment in promoting an 'investment expert' who was 21 years of age with ten (10) years investment experience. While the phenomenon of a precocious investment expert is not impossible but an investment superstar that started at the age of eleven (11) years was improbable.

 

The sequence of events that has exposed the alleged fraud concerning Joshua's advertised investment scheme raises the issue of media introspection. Media houses may need to exert greater effort at verifying the legitimacy of schemes that solicit money from the public.   

 

Identifying Red Flags

 

Many Ponzi schemes share similar features. Here are some warning signs to help avoid being a victim:

 

  1. Unregistered investment platform

Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company's management, products, services, and finances.

 

  1. High returns with little or no risk

Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity and offers that sound too good to be true.

 

  1. Unlicensed investment professional brokers

Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

 

  1. Unsolicited Offers that request for personal information

Someone contacting you unexpectedly via email, text message inviting you to an investment seminar, is often a red flag.


  1. Unclear, Complex Strategies

Avoid investments that don't provide complete information about them. There are many online resources to access information about investments and how to evaluate opportunities for risk and potential gain.

 

  1. Default in Receiving Payments

Often these schemes default on promised payments, the promoters offer investors even higher returns to discourage them from departing the schemes. Also be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.

 

Investors can verify the status of any Capital Market Operators (CMOs) via the search section on the SEC's website before engaging them to carry out investment-related activities. This action is expected to help achieve investors protection in the market space.


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