The term Ponzi scheme, sometimes called Get Rich Quick, emerged in the 1920’s where Carlo Charles Ponzi operated an investment scheme and conned investors about $15 million. He promised an unsustainable rate of return of 50% on the investment in 45 days or double the investment amount in 90 days. Since then his name “Ponzi” remains attached to the notorious scheme he operated. Ponzi scheme is a form of fraud where the schemer lures investors and uses new investors’ monies to pay enticing profit to the old investors. This scheme eventually collapses if it is unable to attract new investors to pay existing ones their principal amounts and the unrealistic returns.
Recently, most of such schemes are operating as online investment whiles others are operating in physical structures like offices. It is worthy to note that virtual currencies (cryptocurrencies) are not regulated by any institutions and that makes it more prone to Ponzi schemes. Example of fraudulent cryptocurrency are: Confido which disappeared with $375,000 in 2017; Benebit defrauded $2.7 million in 2018; Centra conned $32 million in 2018 saying it planned to create a cryptocurrency debit card backed by Visa and Mastercard that could be used at stores just like a credit card; Onecoin defrauded $4 billion in 2018; etc.
Bernard Lawrence Madoff ran the largest reported Ponzi scheme in History since 2008. He operated a fraudulent investment scheme of $65 billion in the United State of America for a period of thirty years. It was revealed that most of Madoff’s investors were well educated and financially savvy – FBI, Lawyers, Bankers, etc. How was it possible? This is testament to the fact that anyone can fall victim of Ponzi scheme.
PONZI SCHEMES IN GHANA
A lot of Ponzi schemes happened in Ghana within the last two to three decades and caused substantial financial losses to the economy. In recent times, the financial sector of Ghana continues to be marred with fraudulent investments and scams. Some people blame the greedy investors while others attribute it to the lax financial regulators. It is clear that most Ghanaians do not understand why such schemes happen and who is really responsible for its happenings as a lot of accusations are flooding the media. Let us look at some popular Ponzi schemes that have occurred in Ghana.
1. R5 AND PYRAM GHANA
Around 1993, two non-bank financial institutions – R5 and Pyram – operated a savings and loan scheme without license from the Bank of Ghana. They lured a lot of educated people including top government official and received billions of Cedis from them in return for a higher return on their investments. The investors accounts were frozen in 1995.
2. UNIQUE SHEPHERD (US) GROUP OF COMPANIES (US TILAPIA)
In 2014, US Group of Companies Limited, owned by Ghanaians, called for investment into the breeding of tilapia with a promised higher rate of return but failed to pay its investors the agreed profit.
3. DKM AND GOD IS LOVE FUN CLUB
In 2015, the Bank of Ghana froze the finance and other assets of these two financial institutions for flouting the Banking Act and maintaining unsustainable interest rates. At various times, DKM offered as high as 150%, 80% and 50% interest rates per quarter, rates that financial analysts describe as unrealistic. DKM Diamond Microfinance Limited had its license revoked in February 2016.
4. SAVANA BROKERAGE INVESTMENT (SBI)
SBI operated an online investment scheme in Ghana in 2014. The company’s website collapsed in 2018 and an estimated investment of over GHC2 million was lost by Ghanaians. The company promised a rate of return of 40%, 60% and 100% per month for Knights, Queens and Kings Package respectively.
In 2014, it was discovered that Menzbank was taking deposits without license from Bank of Ghana and was published among unlicensed entities operating illegality in 2015. In 2016, BOG issued a notice to warn the general public against the deposit-taking operations of Menzbanc (then Menzbank). Menzbanc was renamed Menzgold in 2017.
Further investigations by BOG in 2018 revealed that Menzgold was taking deposits from the general public with interest rate between 7% -10% per month based on the quantity of gold purchased and issued another warning to the general public. Finally, in 2019, Accra Circuit Court issued the warrant for the arrest of the Menzgold Directors for defrauding by false pretense and money laundering.
6. GLOBAL COIN COMMUNITY HELP (GCCH)
GCCH operated a virtual currency scheme and collected deposits from customers promising to pay them an interest of 27% per month for 12 months, after which the principal and interests expire, with no further obligation to the company. In 2018, amidst Menzgold saga, over 110,000 depositors amounting to GHC135 million were reported to be have been duped by this virtual currency (cryptocurrency) trader.
IDENTIFYING PONZI SCHEME INVESTMENTS: THE RED FLAGS
Walsh in 1999 said “What’s remarkable about Ponzi’s legacy is that, no matter how many times investors lose money, new schemes keep coming forward. And greedy, naïve people of all sorts line up to throw good money after bad”. It is incumbent on individual investors to do proper due diligence before investing in any financial or non-financial institutions. The following are some common modus operandi of Ponzi Schemers:
1. Higher Interest Rate: The general relationship between risk and return on investment is positive, thus higher risk merits higher interest rate of return. All Ponzi schemes violate this basic principle by promising higher returns with low risk or no risk in order to lure gullible investors. The Bank of Ghana interest rate as at April, 2019 is 1.333% per month (16% per annum) while the average bank loan interest is 27.8% per annum. Any investment scheme that promises an interest substantially higher than any of the above rates is a likely Ponzi scheme. Investors must also compare their promised rate of return with the current 91-Day Treasury Bill rate (quarterly rate), anything higher than the latter is susceptible to fraud.
2. Virtual Offices: Any investment scheme must have a traceable office and team members. Extra caution must be taken, especially with online investment, if investment office and members cannot be traced. This happened in the case of Mavrodi Mondial Movement (MMM Ghana) in 2017 where the Bank of Ghana issued a warning that MMM Ghana is “operating a Ponzi scheme” through a virtual office. Also, in Confido cryptocurrency fraud and SBI online investment, the website closed down and their founders disappeared.
3. License and Documentation: In Ghana, the case of R5, Pyram, SBI, Menzgold, etc revealed that they operated without license from Bank of Ghana (though some had license from different institution). Some were licensed for a specific object but operated beyond their stated objectives. This shows that a detailed explanation and documentation about the stated objects of businesses must be sorted for before investment made. Always request for investment prospectus, read and understand before investing. Check for updates from BOG on the list of trusted businesses and unlicensed businesses.
4. Secrecy: Legitimate investments give a full disclosure of their risk and operations. Beware of schemes that disclose only profits without revealing the risks involved. Most Ponzi schemes lure investors by disclosing their profits and hide relevant details on how they make their profit, who their auditors are, charges and maintenance fees, taxes, etc. Avoid investments you do not have/get adequate information on.
5. Feedback: Most Ponzi schemes ignore hard questions. Check for feedbacks and customers review, fish out bad reviewers and consider their reasons for such reviews. In the case of Madoff, the muti-million company had only three customer reviews. Also check whether they have a customer support lines, if it really works and how quick they respond to questions. For online investment, you can check for its legitimacy and its online rating on google or you can use scam detector to test the vulnerability of the website.
6. Irrational Poaching: Ponzi schemes feed on new investors and uses mouth-watering returns to poach customers. As soon as a lot of people, within a short period, become irrationally excited in a particular investment due the returns, it raises a red flag. These people start transferring funds from similar ventures into the Ponzi schemes because the scheme promises unfairly higher returns than the average industry return rate.
7. Delayed Payout: Caution must be taken immediately payout delays. When it happens, schemers try to convince customers to reinvest their payouts or pay extra hidden charges to get their promised returns. They may also increase their mouth-watering returns and pressurize existing investors with referral bonuses to bring in more investors.
8. Endorsements and Shared Affinity: Many fraudsters get celebrities and reputable people to invest in order to get public trust. They also use the media and engage in charitable activities to enhance their reputation and legitimacy. Their investors also have an ethnic or religious affinity which a lot of people believe and trust. All these influences friends, celebrity followers and family members to invest blindly without asking questions.
The general public and some financial experts fall victim of Ponzi schemes due to greediness, gullibility, influence, shared affinity and lax financial regulations. The two main modus operandi of Ponzi scheme in Ghana are; a promised mouth-watering rate of returns and unlicensed operations. Individual investors must consider the prevailing market rate of return before taking any investment decisions.
The operations of cryptocurrencies are highly prone to Ponzi schemes because it is virtual and difficult to be regulated. The Bank of Ghana had issued a notice to warn the public and had isolated itself from any scam thereof. Online Ponzi schemes operate virtual office and offers unrealistic returns. With the current information overload, the solution to these frauds remains the same: Do your own research, do not be greedy, and do not follow others lead. There are no free meals.
KNUST- BBA 3(Accounting)