Ponzi schemes named after the infamous Charles Ponzi, are investment schemes in which earlier investors are paid promised dividends from the funds on new investors, it’s basically a robbing Peter to pay Paul kind of set up. While the sordid history of Ponzi Schemes in Nigeria can be traced back to the 1980s, it took a turn for the worse in 2016 with the economic recession as over 160 different Ponzi schemes were in operation at that time. Fast forward to present times, the menace of Ponzi schemes shows no signs of abating, rather perpetrators have gotten more daring and inventive. Consequently, it is important to be able to spot the warning signs associated with Ponzi schemes and know how they work, as this is a sure way of not becoming a victim.
HOW TO RECOGNIZE PONZI SCHEMES
- HIGH RETURNS AT NO RISK
Every investment carries some degree of risk, ranging from low to medium and high risk and typically, investments yielding higher returns involves more risk and this is because investment schemes often invest their money in businesses or financial products which are often prone to the risks of an economic downturn, exchange rate fluctuation, inflation, etc.
Any investment that regularly returns high returns at no risk regardless of overall market conditions is a Ponzi scheme.
THE PROMISE OF GUARANTEED RETURNS
Ponzi schemes often lure victims via a promise of “guaranteed results” effectively tapping into their desire of not wanting to lose money, but as already stated above, doing any sort of business involves risk. As such any investment proposal that guarantees you a return on investment should set your alarm bells off. Only financial instruments/investments owned by the government present little or no risks because governments have considerable resources at their disposal, but such never have high returns.
- VAGUE BUSINESS MODEL
Ponzi scammers often backup their enticing offers with investment stories that seem credible. They might claim to deal in forex or cryptocurrency mining, or some other business, the list is endless, limited by only the scammer’s imagination. The crucial question is do you understand how the business model actually works to generate the promised dividends? Is the business model sustainable to pay such high profits after taking out expenses and other costs? If what you’re being told seems too far-fetched or difficult to understand you might be dealing with a Ponzi scheme.
- THEY ARE NOT RECOGNIZED BY REGULATORS
Unlike other investment schemes and plans such as mutual funds, pension funds, treasury bills, which are all recognized and regulated by the Security and Exchange Commission (SEC), Ponzi schemes are not recognized, and as such, investors do not have any form of recourse, exposing them to the risk of losing their entire investment when the Ponzi collapse.
- PRESSURE TO REINVEST OR RECRUIT NEW INVESTORS
Ponzi schemes typically put pressure on investors to reinvest their gains in a bid to keep the money in the system to avert a collapse. Also, if there is an emphasis on recruiting new investors via the promise of higher returns for every new investor brought in you might be dealing with a Ponzi.
HOW PONZI SCHEMES GAIN TRUST AND CONCEAL THE TRUTH
Here are a few of the ways Ponzi scammers gain the trust of their victims.
- USING WORDS THAT DENOTE TRUSTWORTHINESS
Ponzi scammers love to use words that signify trust and professionalism on their documents and forms, often these words are the usual lingo of banks and other financial institutions. Another arrow in their quiver is the use of false claims such as being registered by the Corporate Affairs Commission (CAC) or undergoing registrations by the Securities and Exchange Commission (SEC), presenting fake documentation on their websites, and the use of false testimonials all in bid to gain trust.
- PAYING PROMISED PROFITS WITH FUNDS FROM NEW INVESTORS
Ponzi schemes always try to pay off previous investors as much as possible so they can serve as positive referral and word-of-mouth advertising. By paying previous investors with funds of new investors, the Ponzi scheme maintains an air of legitimacy and diverts attention from its vague business model.
- SECRECY
Con artists entice investors and instill trust by telling half-truths, knowing the full details cannot be verified. They then convince their victims by stating that there are details they cannot divulge as these are part of ‘business secrets.’ For most investors, such explanation suffices, as they carry on without a thorough investigation and agree to whatever terms they are told.
WHAT MAKES PEOPLE VULNERABLE TO PONZI SCHEMES
For almost every Ponzi scheme, the red flags are always hidden in plain sight, which begs the question; “What draws people to these schemes? and ultimately, What makes them vulnerable to it?”
- GREED: Naturally, greed is the predominant vice. This dark desire to get much more than is possible or needed is the bane of almost every Ponzi victim. Otherwise known as ‘avarice’, greed provides the participants in a Ponzi with soothing reasons to hold onto such scheme even though it is illegal, illogical and malevolent. This desire devoid the victim of reason until it is very late.
- GULLIBILITY: These are the victims of ignorance. They rely on the advice or recommendations of people who they assume, have better education or experience. Nothing said here should be misconstrued for illiteracy. An illiterate may be less gullible than a literate. It all boils down to an inability to think for one’s self and their propensity to believe anything as a result.
- PEOPLE WHO SENSE A PONZI SCHEME BUT HOPE TO GAIN FROM OTHER PEOPLE’S INVESTMENTS: Now, here exists a special category among which you’ll find some rationalists. This group is driven by a speculative anxiety. They sense that a scheme is Ponzi and may even find all the evidences glaring but they are overpowered by the anxiousness of making some free quick bucks. They hear that such and such persons “cashed-out”, and they don’t want to regret not staking their money by the time others start raking profit too. This is also called the “Fear of Missing out (FOMO)“. This curiosity fueled by greed becomes the recipe for their ultimate loss.
In conclusion, always remember and apply the golden rule – pause and ask yourself “Does it sound too good to be true?” If it does, chances are that it really is.
Contributors
- Offor Chubuike Gabriel
- Wale Osoba
- Teslimat Adedamola Okanlawon
- Divine Omozokpia