An online financial platform, Investopedia, defines a Ponzi scheme as a fraudulent investment scam promising high rates of return with little risk to investors. It involves a generation of returns for earlier investors with money taken from later investors – a proverbial ‘robbing Peter to pay Paul’ format.
A Ponzi scheme operates similarly to a pyramid scheme in that they are based on using new investors’ funds to pay earlier backers. But these schemes become unsustainable when the backlog of old investors eligible for payments exceeds the investments coming into the system.
Such fraudulent schemes are not new to Nigeria as they were common in the 1980s and early 1990s. The earliest in the recall were the Umana-Umana investment platform in Port Harcourt, Rivers State, and Calabar, Cross River, the Planwell scheme in Edo, and the Nospecto in Lagos.
When a pyramid scheme, Mavrodi Mundial Movement, launched by the Russian politician, Sergius Mavrodi, made its way to Nigeria, many Nigerians embraced it as a safeguard for financial freedom amidst the economic recession which plagued the country in 2016.
According to a report by a British newspaper, The Independent, MMM swept across Africa with branches, promising returns of 30 per cent a month on investment in Nigeria, South Africa, Zimbabwe, and some East African countries. Within the first few months of the scheme’s launch, 2.4 million people had signed up to join it.
Following the collapse of MMM, the Nigeria Electronic Fraud Forum indicated that citizens lost N11.9bn to the scheme. The Central Bank of Nigeria also disclosed that investors lost N12bn.
The Nigerian Deposit Insurance Corporation also estimated that over three million Nigerians lost about N18bn to the scheme. This development led to cases of suicide and attempted suicide among many citizens, who invested in the fraudulent scheme.
A report by the Norrenberger Financial Investments Scheme estimated that as of 2022, Nigerians had lost over N300bn to Ponzi schemes in five years.
Ponzi scheme operators
Section 38(1) of the Investments and Security Act 2007 prohibits the operation of Ponzi schemes.
The section provides that “no person shall (a) operate in the Nigerian capital market as an expert or professional or in any other capacity as may be determined by the commission or (b) carry on investments and securities business unless the person is registered in accordance with this Act and the rules and regulations made there under.”
After the infamous crash of MMM, online investment schemes have sprung up such as Loom, Twinkas, Donation Hub, Get Help Worldwide, Smile2Charity, Ultimate Cycler, Givers Forum, I-Charity, Crowd Raising, Clarrita, and Help2Get.
Other schemes such as MyBonus2u, RackSterli, Quintessential Investment Company, Inks Nation, and Wales Kingdom Capital Limited preyed on Nigerians’ quest for financial freedom and their founders disappeared with the money invested by citizens.
In 2021, the Economic and Financial Crimes Commission disclosed that it arrested a couple, Emmanuel and Victoria Jaiyeoba, in Ibadan for defrauding investors in an N935m Ponzi scheme. The EFCC noted that the suspects defrauded their victims under the guise of forex trading.
A couple, Gloria Osei and Muyiwa Folorunsho, who operated Ponzi schemes are still large after they reportedly obtained Dominican passports to escape a manhunt by the Interpol desk of the Nigeria police to arrest and detain them for prosecution which includes defrauding investors N1bn.
A businesswoman, Chinyere Emeka-Atu, was arrested following an accusation of defrauding traders and market women of over N600m in Lagos State.
The woman used her company, Family Food Support Association, to gather unsuspecting members of the public, including petty traders, to part away with N9,000 every month to get a higher return on their investments.
The victims were said to have been promised a return of N200,000 cash and N90,000 worth of foodstuffs after nine months of investments in the association’s scheme.
But when Emeka-Atu started defaulting in the payment of the promised money and donation of food items to those who invested in the scheme, the aggrieved victims reported the matter to the police.
In a similar twist, a Federal High Court sitting in Lagos State ordered the arrest of a Ponzi scheme operator, Victoria Imase-Regal, over alleged N36.45m fraud.
Commenting on why many Nigerians fall victim to Ponzi schemes, a financial analyst, Dipo Adeniran, told Sunday PUNCH that greed and poverty were two major factors.
He said, “Greed is one reason for this. Many people want to make quick cash without having to work hard for it and when they come across a financial scheme that promises outrageous returns that no legitimate business would be able to provide in a short time, they fall for it.
“Secondly, poverty and general economic downturn condition people to be desperate to get out of their present situation and that makes them vulnerable to dubious financial schemes even when they see scams written boldly over them. They will tell you ‘Everything in life is about gambling, you win some, lose some.’ It’s an unhealthy mindset.”
Similarly, the co-founder of PennyTree, Adeleke Awotayo-Ayeni, in a Twitter space in April 2022 noted that financial illiteracy was a key reason many people were attracted to Ponzi schemes.
He said, “For a first-timer, I can say it is a mistake, maybe, due to misinformation, and lack of financial education but when one falls for a scheme a second time, it means the victim actually recognised the risk and decided to take it.
“People often forget that just like any skill, one needs to have the financial knowledge to make sound decisions. For example, a person with zero financial literacy would fall for any investment that would offer a huge return. Financial education will help people understand the modus operandi of the ponzi schemes and how they can prevent it.”
The Director-General, Delta State Innovation Hub, Chris Uwaje, explained that Ponzi schemes preyed on people’s gullibility, adding that if those who invested in them were more circumspect, they would not have fallen victim.
He said, “They put a hook because they know people are gullible. People look at the information without checking for the authenticity of the platforms.
“It is the gullible aspect of humanity that is being exploited. If there is one way to identify Ponzi schemes, it is that they have no official registration.
“For instance, a bank says it will give you 300 per cent interest, but people will take everything without verifying. What makes a bank authentic? A bank must be registered; it must have an address; it must have a licence from the Central Bank, and must have insurance.”
Regulatory bill
In March, the Investment and Securities Service Bill 2023 scaled through the final hurdle at the National Assembly.
The bill was passed by the House of Representatives in December 2022 and still awaits presidential assent.
One of the developments that the new bill will bring is the prohibition of Ponzi or pyramid schemes, which have siphoned billions of naira from many citizens. It also prescribes a jail term of not less than 10 years for promoters of such schemes.
The bill proposes more regulatory powers for the Securities and Exchange Commission as well as eases state and local governments’ access to securities and facilities.
On his part, the National Chairman of the Progressives Shareholders Association of Nigeria, Boniface Okezie, expressed doubts about the President’s assent to the bill.
“The Ponzi scheme has worked elsewhere; people have embraced it but the Nigerian market has not embraced it and the Securities and Exchange Commission said that it is not known to them and that it is a scam and so they cannot allow Nigerians to patronise it.
“I do not think the outgoing president will assent to that bill before he leaves office on May 29 because previous bills sent to him, it took him time to assent to them, not to talk of now that he is going for retirement,” he stated.
But in a statement released after the Senate passed the bill, the Director-General of the SEC, Lamido Yuguda, said a recommendation was made in the bill for the inclusion of the National Pension Commission on the SEC board for increased collaboration between the two agencies, particularly to encourage greater investment of pension funds and in capital market product or instruments.
A cyber security expert, Mr Uche Azubuike, told Sunday PUNCH that the bill would be a welcome development.
“The bill is aimed towards protecting investment, so I see it as a welcome development. Besides, there should be penalties for operators of Ponzi schemes because they inflict pain and misery on the populace and their action or lack of it, contributes to losses and even deaths,” he said.
Azubuike also highlighted some common characteristics people should be on the lookout for to detect Ponzi schemes.
He added, “These schemes come in different forms, but there are some red flags you can be on the lookout for. For instance, any investment scheme with high returns with little or no risk, it’s fraudulent. There is no investment without a degree of risk.
“People should also be skeptical about an investment that regularly generates positive returns regardless of overall market conditions. That’s not the way it really works in reality.
“Most of these investment schemes are not registered with the SEC or with any sort of regulators. This prevents investors from gaining access to information about the company’s management, products, services, and finances. This is another red flag.
“If you are into an online investment without any paperwork and you have difficulty receiving payments, be alert to a red flag. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put. Once you start noticing all these patterns, it’s a fraudulent scheme.”.
