THE REAL AND LEGAL TRUTH OF PONZI SCHEMES

Scams and fraud have traditionally been two of the deadliest diseases that are ravaging the world. It has ameliorated the level of trust people have in digital commerce due to the bad experiences Ponzi schemes have caused, which has turned a lot of persons bankrupt because they want to break the chain of poverty. In the eradication of this mischievous scheme, there have been in place strict laws which frowned against it and shall sanction anyone that violates its provisions.

History of Ponzi scheme

In 1919, Charles Ponzi known as the father of Ponzi scheme duped thousands of investors due to his success in the postage stamp scheme which a lot of investors want to invest in. He convinced them to invest in his company, promising 50% returns within 45 days and 100% within 90 days. Unfortunately, Ponzi never really invested the money, he just plowed it back into the scheme by paying off some of the investors. The scheme continued until 1920 when the Securities Exchange Company was investigated. After his death, penniless in 1946, a lot of fraudsters have followed the path of the father of Ponzi scheme.

Definition of Ponzi scheme

In American Cancer Society v. Cook, 2012 U.S. App. LEXIS 5769 (5th Cir. 2012), the United States Court of Appeals for the Fifth Circuit defines a Ponzi scheme as a “fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments.”

“Robbing Peter to pay Paul” which is the basic premise of Ponzi scheme typically runs at least a year, although some Ponzi schemes have flourished for a decade or more.

A Ponzi scheme is not a Ponzi scheme simply because it is called a Ponzi scheme

Before a scheme can be tagged as a Ponzi scheme,  it needs to be proven with actual facts by establishing certain red flags. The red flags of a Ponzi scheme include:

1. A guaranteed promise of high returns with little risk.
2. A consistent flow of returns regardless of market conditions.
3. Investments that have not been registered with the Securities and Exchange Commission (SEC).
4. Investment strategies that are secret or described as too complex to explain.
5. Clients not allowed to view official paperwork for their investment.
6. Clients facing difficulties removing their money.

Prons of Ponzi schemes

With the continuous campaign against Ponzi schemes by the Securities and Exchange Commission, people are still investing heavily due to some mouth-watering benefits these schemes offer, which includes:

1. Financial Succor: It offers people interest rates that are more than what government-owned financial institutions offer. This comes handy in view of the high cost of living in the country. A 30% interest on investment once in a month gives investors enough financial power to take care of their bills.
2. They offer people easy money: What you just have to do is to register and invest on their website and within a month you, will receive interest on your investment.
3. It increases investors’ investment skills: The basic principles of investment would have been beyond some people if there are no Ponzi schemes. Some schemes, like iCharity, Coolnaira, and Ultimate Cycler also teach marketing skills in addition to investment skills.

The Cons of Ponzi scheme

The cons of Ponzi scheme is greater than the benefits. The cons includes:

1. Ignorance: Most of the investors in Ponzi schemes are not abreast enough about the risks and rewards of these schemes. This may lead to poor investment decisions with severe negative consequences.
2. The tendency to crash: They have the propensity to crash. According to research, the lifespan of a Ponzi scheme is between 12 to 18 months. This is a huge disadvantage that requires serious consideration.

Illegality Of Ponzi Schemes In Nigeria

In order to safeguard the public from investing in illegal businesses and curb the spread of unlawful schemes, the SEC came into place. The Securities and Exchange Commission (SEC) is empowered to regulate investments business in Nigeria and; to promote investors’ education and the training of all categories of intermediaries in the securities industry by virtue of Section 13 subsections (a) and (s) of the Investment and Securities (ISA) 2007. This is in line with the International Organization of Securities Commissions (IOSCO) requirements and global best practice standards.

It’s unlawful for a person or organization to engage in capital market activities without registering with SEC by virtue of section 38 (1) of the Investments and Securities Act (ISA) 2007.

Furthermore, section 67(1) of the Investment and Securities Act (ISA), 2007  provides to the effect that no person shall invite the public to deposit money whether bearing or not bearing interest except a bank or body established by law for that purpose.

Also, sections 58(1) and 59 of Banks and other Final Institutions Act (BOFIA), 2004 provide that no person shall carry on financial business in Nigeria other than insurance and stockbroking except if it is a company duly incorporated in Nigeria and holds a valid license granted by the Central Bank of Nigeria.

Under BOFIA, a person or company is regarded as carrying on or conducting financial business other than insurance and stock broking, if it solicits and accepts money deposits from the public and pays interests thereon, as a business, by whatever name called. Section 1(5)(a) of BOFIA sees financial business as a situation where a “…Person accepts deposit from the general public as a feature of its business or if it issues an advertisement or solicits for such deposition.”

The combined effect of section 67(1) of ISA and sections 1(5)(a), 58, and 59 of BOFIA is that Ponzi scheme is not only prohibited by law, it is in fact a criminal offense. It is a financial business that is exclusively meant for banks or statutory bodies established for that purpose. Anyone who wishes to carry out such a business must seek and obtain a license from CBN before performing the business.

Under ISA, punishment for engaging in Ponzi scheme is a fine of N100, 000 and if it is a company that engages in the Ponzi scheme, the company shall be liable to pay N500, 000. But under BOFIA, the punishment is 5 years imprisonment or fine of N1 Million or both.

Recommendations

Ponzi scheme can be nailed to the ground through the following ways:

1. Establishment of whistleblowing program, which would abreast SEC on new and old Ponzi scheme, for them to be prosecuted.
2. Proliferating the punishment for engaging in Ponzi schemes.
3. Bringing forth the campaign against Ponzi schemes down to the grass root.
4. Collaborating with goggle and the likes in banning the advertisement of this scheme.
5. Upgrading the technology used by SEC in rummaging the sponsors of these schemes.

Truth be told, I believe the government can put a stop to Ponzi schemes if they want.

Conclusion

An attempt has been made in this paper to reveal the real and legal truth of Ponzi schemes. It has revealed the origin and the founder of this scheme. The point had further been made that a Ponzi scheme is not a Ponzi scheme until the elements of Ponzi schemes had been found.

Indeed, it has been established that the cons of Ponzi schemes are greater than the benefits and anyone found wanting of engaging in Ponzi schemes risk been imprisoned for 5 years or fine of 1 Million Naira or both.

In conclusion, solutions had been suggested in putting an end to Ponzi scheme if the government want to end it.

Author:

 OLASUPO JUBRIL ADEDIMEJI 

200 level Law Student, Lagos State University.