Ponzi schemes: Nigerians shun red flags for big bucks

Many investors patronising Ponzi schemes in Nigeria seem to be ignoring the obvious “red flags” raised by the promoters, in their quest for the promised above-average returns, which ordinarily defy market trends and signal potential fraud.

Ponzi schemes are ‘investment’ schemes that promise unrealistic returns, which ordinarily should be treated with caution.

The merchants target greedy investors in their push to grow their pyramid schemes which pay returns to their investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.

“It is important to checkmate the trend to protect innocent Nigerians from losing their hard-earned savings to these rising portfolio investment platforms, whose mission is to defraud innocent people through all sorts of attractive and, many a time, unrealistic promise of high returns, even as they deceive people with some initial commitment that can never be sustained”, Abiola Rasaq, a financial analyst, told BusinessDay.

As at third-quarter (Q3) of 2021, Nigerian investors lost over N300 billion to Ponzi schemes across various platforms in the country, operated by fake capital and financial market operators, Akin Adeniyi, president of Association of Corporate and Individual Investment Advisers president, said during a recent webinar.

As victims and regulators still digest the shock of the recently sealed premises of Oxford International Group/Oxford Commercial Services, Farmforte Agro Allied Solutions Limited/Agro Partnerships and Vektr Capital Investment/Vektr Enterprise, the latest additions to numerous illegal firms engaging in capital market activities, experts are probing the psychological and financial components of Ponzi schemes.

Nigeria’s Securities and Exchange Commission (SEC) said the offices of these companies in Lagos, Port Harcourt and Abuja were shut down for carrying out investment operations that fall within ambit of fund management without registration with the apex regulator, contrary to the provisions of the Investments and Securities Act 2007.

Maymunah Yusuf, MD/CEO of Pinnacle Medical Services, identified greed and get-rich-quick syndrome as the major drivers of the now-rampant fraudulent investing scam.

According to him, other psychological biases other than greed that makes investors vulnerable to scams are financial pressure, unemployment, gullibility, and ignorance.

Speaking on how investors who are victims can recover from the consequences of their vulnerability, she urged them to contact an experienced investment loss company, join an accountability community, avoid putting pressure on themselves and seek the services of a mental health professional.

The Ponzi scheme is named after Italian immigrant Charles Ponzi whose 1919-1920 fraud was a cause celebre in Boston.

Nigeria’s worsening unemployment problem and widespread poverty have also been blamed for making Ponzi schemes fashionable. Successful Ponzi schemes prey on close-knit communities of victims, so-called “affinity groups,” which the perpetrators of the frauds are either already linked to or can tap into.

Rasaq said, “I think everyone is on the fast lane and wants to make high returns on their investment to catch up with the erosion in purchasing power of the naira savings and also as a hedge against financial insecurity, which seems to have enveloped a large proportion of the population.

“Again, we cannot rule out the increasing greed of an average Nigerian which is partly fuelled by the ostentatious and oppressive lifestyle of political elites and rent-seekers, who really became rich overnight mostly on the back of underground activities.”

According to him, sometimes, people invest with/in many of the Ponzi schemes with limited consideration for the risk but often time out of ignorance of the inherent risks of the ventures they sink their money into.

Rasaq said, “Again, greed tends to obscure people’s rationality in making these investment decisions, as the urge to double their capital/principal investment in no time keeps fuelling their urge to invest in the Ponzi schemes without relevant due diligence.”

“Though not necessarily the main cause, it is also important to recognise the impact of weak governance of supposedly credible investment outlets, as the low investor confidence in the conventional and supposedly credible investment vehicles or asset classes have also pushed many investors to the edge, and many investors now believe it is worth taking the risk on Ponzi schemes as they think the supposedly credible investment outlets are not so different, because of a few unfortunate incidences of bad governance and mismanagement of trust in overseeing investors’ fund.”

He believes that the regulators are making efforts to nip the Ponzi schemes in the bud, but unfortunately with limited resources to track and prosecute the increasing number of these fragmented and polarised Ponzi schemes.

Read also: Ponzi schemes: Investors’ greed or dearth of investible products?

According to him, the framework for prosecution of such schemes is inadvertently rigorous and regulators have limited powers in prosecuting the schemes even when they identify them, due to numerous loopholes, including prolonged judicial process that can be tiring for the regulators and sometimes political interference.

Rasaq said regulators might need further empowerment to curb the rising trend of the Ponzi schemes in a way that optimises their resource utilization.

“Also, there is increasing need for public trust in the regulatory frameworks and agents, as sometimes, the public, including media, tend to undermine the ability of regulators to checkmate Ponzi schemes, especially when they are still at nascent stage and their dangers are not readily obvious to the public but when regulators by their training and inclinations may have observed the inherent risks,” Rasaq added.

According to him, regulators may need to step up their oversight especially to ensure that innovative investment channels are not undermined in the interest of market development.

He also stressed the need for collaboration of all stakeholders in protecting unsuspecting innocent investors from the rising trend of Ponzi schemes in the country, including the need for the media and the public to report suspicious agents and platforms of these ponzi networks and vehicles.

During a meeting with SEC in February, Ben Llewellyn-Jones, British Deputy High Commissioner to Nigeria, highlighted the need for the regulator to create more alternative options for investments for all classes of people as one of the ways of pulling people away from unregulated space.

“The more you can create alternative options, the easier it is to pull people away from unregulated space, and that is why the Sandbox is so attractive to us and why we encourage it. We come across these fintech players and they are formidably driven in their vision,” Llewellyn-Jones had said.

Lamido Yuguda, director-general of SEC, at a national fact-checking course organised recently by the National Orientation Agency, noted that Ponzi schemes, with all the illegality and promises of unrealistic returns, had “burnt the fortunes of many ambitious investors, from Yuan Dong Ponzi to Galaxy Transport, Famzhi Interbiz Limited, Cowlane and Durell, and the infamous Mavrodi Mundial Movement.”

“The upsurge of these schemes has undermined the reputation of the capital market and dampened investors’ confidence, among other things. This has created a considerable challenge to the growth of our market, and the Commission is striving to change the narrative by instilling a fair, transparent, and orderly market,” he added.

“Investments enable growth in wealth, thus while encouraging more retail investments, we urge you to invest in investment classes and products approved by the SEC, which can be confirmed through the channels provided above,” SEC said.