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January 20, 2019

Unmasking the strategies by Ponzi schemes

Karen Kandie.
Karen Kandie.

The Central Bank of Kenya last week warned the public again over putting money in pyramid schemes. The country has had its fair share of schemes that promise to double your money in a couple of weeks. The frauds follow predictable steps. The initial investment is doubled, or gives very high returns, say more than 50 per cent. This lures the investor to put in the total amount back to the scheme, and some more. Eventually, the scheme collapses and all the amount is lost. They are also called Ponzi schemes. They work by paying high returns to first investors from money paid by investors who join later. They continue operating so long as new members are growing. Often times, they use social connections of friends and family and display high life to recruit new members. Existing members may be paid commissions and bonuses for each member they recruit. If new members do not grow fast enough to pay old members, the schemes go bust. People lose lifetime savings, retirement money, and some are left paying loans taken to invest in the schemes. Livelihoods, families and even life is lost in the process.

In the past, the public has accused CBK and other financial market regulators of not protecting them from the scams. The truth is it takes time for the regulators to catch up with the frauds and by then, it is too late for some investors. The public has a first-line duty to protect themselves and their hard-earned cash. While the schemes come in many different forms, they have several similarities.

One, they guarantee to double the money or very high returns within a short period. The promise to turn people into quick millionaires is bait. No real businesses can guarantee to double the investment in three months, or provide a 50 per cent return. It is not just a cliché: if something is too good to be true, it usually is. Two, there is no clear business model on how the money is generated. Before parting with the money, ask questions on the investment model and ask yourself whether it makes sense. If you have lingering doubts, trust your instincts. Often times, schemes are headed by “important people” with some overseas connections that are not accessible.

Finally, the schemes claim they are exploiting loopholes in the wealth generating system. To create a sense of urgency they claim the window of opportunity is closing quickly and soon. Investors run to invest in what they believe is a lifetime opportunity without asking any questions. Stories of some wealthy people who have made their wealth from the scheme are used to attract more people. While the CBK and other regulators have a role to play to wind out these scams, the first line prevention is with individual investors. 



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