By Clara Nwachukwu
The Nigeria Deposit Insurance Corporation (NDIC), has attributed the rising incidence of Ponzi schemes to harsh economic conditions associated with financial hardship, inadequate financial education, and economic cycle (expansion, peak, contraction, and trough).
Other enablers are greed and/desperation, ignorance, financial illiteracy, bullish risk appetite, affinity, regulation arbitrage and information failure.
The Corporation also said inadequate law enforcement and consequences, plus the refusal to of subscribers to heed warnings, added with celebrity endorsements further bolster the trend.
The Director, Bank Examination Department, NDIC, Micheal Oladele, said this in a lecture, titled: “Rising Ponzi Scheme and Investment Scam in Nigeria: What we need to know,” at the 2022 workshop for financial journalists in Port Harcourt, River State, on Monday.
Despite the increases, he assured that the Deposit Insurer is building human and regulatory capacities to meet evolving challenges from the activities of Ponzi schemes.
Oladele traced the history of the scam to the 1920, when Charles Ponzi, used his company, Securities Exchange Company, and promised returns of 50% in 45 days or 100% in 90 days.
“Instead of actually investing the money, Ponzi just redistributed it and told the investors they made a profit,” he recalled.
Thereafter, he said the structure has grown in various dimensions to both financial and material schemes, including digital and cryptocurrency.
The latest being earlier this month following the collapse of FTX, leaving many crypto investors in despair. “FTX owned by Sam Bankman-Fried, was the third largest Crypto Exchange in the world, and was valued at $32 billion. He diverted investors’ funds to Alameda Research (another company owned by him),” he said.
The House of Representatives passed for second reading, a bill to repeal and re-enact the Nigerian Capital market, Investments, and Securities Act. The bill seeks, among other things, to prohibit Ponzi schemes and other pyramid investments.
Ponzi in Nigeria
Oladele said Ponzi schemes, locally known as “wonder banks” in Nigeria, “date back to the 1980s and early 1990s with the famous ‘Umana-Umana’ investment platform that held sway in Port Harcourt and Calabar, the ‘Planwell Water-Shed’ & Money Tree schemes in Edo State as well as ‘Nospecto’ in Lagos.”
He added that there is paucity of data on such frauds possibly due to under-reporting or even wrong classification, and advised the public to only patronise regulated entities and always conduct due diligence before investing.
He cautioned unsuspecting investors to be wary when they are offered abnormal higher returns on investment, and encouraged the public to report such schemes to the NDIC via its website.
Aside from higher return, he also listed various ways the schemes operate, which should warn investors of the risk of fraud. They include:
- Desperate search for new investors that will sustain the scheme.
- Pay ‘investment returns’ out of the new investments made by newer entrants and not out of profits of a legitimate business venture (i.e. collecting from Mr. C to pay Mr. A).
- Continuously update investors on their accumulating interest or capital gains update to keep them relaxed.
- Spread of testimonies of people that have benefited through social media or those around someone.
- Advocate for continuous reinvestment to sustain the live-wire of the scheme.
- Message of helping people or empowerment without traceable source of income.
- More investors introduced others, typically through word of mouth i.e. friends, family and social media
Oladele said as a member of the Inter-agency Committee on Illegal Fund Managers, NDIC thus far, has used regulatory approaches to tackle the menace.
Other members of the Committee include the Central Bank of Nigeria (CBN), and the Securities and Exchange Commission (SEC), the Economic and Financial Crime Commission (EFCC), Corporate Affairs Commission (CAC), and the Police.
“Against the backdrop of the thriving illegal financial schemes, the Federal Government, in collaboration with SEC and CBN, has implemented strategies to prohibit these activities.
“The House of Representatives passed for second reading, a bill to repeal and re-enact the Nigerian Capital market, Investments, and Securities Act. The bill seeks, among other things, to prohibit Ponzi schemes and other pyramid investments.
“The CBN, NDIC and the SEC have championed campaigns against Ponzi schemes and collaborated with the EFCC to tackle perpetrators,” he said.
He added that the SEC has an Investment Tribunal to prosecute perpetrators while the EFCC also prosecutes culprits.
