Time to penalise Ponzi scheme investors to raise revenue

Sometime last week, I woke up to a message from one of my social media contact in South America drawing my attention to a recent fraud case in Nigeria that involved a couple’s disappearance with depositors’/investors’ huge sums of money and querying why the incidence of fraud was so rampant in Africa and how genuine investors were concerned abroad. While his disposition is common, especially outside Africa, the thought of it gave me enough time to think of how the Nigerian government can adopt a strategy that does not only dissuade perpetrators but also be of benefit, especially at a time of revenue paucity.

My response to his enquiry was spontaneous and it came out effusively and effortlessly. “Good to hear from you, my friend. I don’t think there is a need to worry. As bad as it may seem, there is no rationale for people to patronize scammers if they are not greedy. I cannot wrap it around my head that people abandon licensed financial houses to patronize scammers for want of crazy returns. I believe they have analysed their risk and are ready for the outcome. To also add, this is not just an African thing, Charles Ponzi an Italian, made it popular and, of recent, the Mavrodis of MMM from Russia. They have cleaned out a lot! These are Europeans holding the world record for fraud. I don’t think it is an African thing but a human trait that exhibits greed.” And he agreed with me.

Back to the incident that gave rise to the discussion. A couple ran an unlicensed and unregulated financial outfit for the past few years accepting deposits from the public with a promise to pay exorbitant interest rates. The company grew the deposit to over twenty billion naira (over fifty million dollars) and disappeared, leaving the depositors stranded. It was reported that the high returns at about 120% per annum payable monthly attracted several high ranking individuals and notable institutions irrespective of the status of the company. This is not the first time this would happen in Nigeria. This type of disappearing investment has become a regular occurrence in Nigeria. It is called a Ponzi or Pyramid scheme.

Cambridge.org described a Ponzi scheme as “a way of deceiving investors (people who give money to a company, hoping to get more back) by using the money they give to pay interest to an existing customer rather than investing it.” According to Investopedia “The term ‘Ponzi Scheme’ was coined after a swindler named Charles Ponzi in 1920. However, the first recorded instances of this sort of investment scam can be traced back to the mid-to-late 1800s, and were orchestrated by Adele Spitzeder in Germany and Sarah Howe in the United States.”

In 1919, Charles Ponzi devised a scheme of trading international prepaid postal reply coupons. He offered his depositors 50% and in the end, it was discovered that he had defrauded about 10,000 investors out of $10,000,000. Ponzi pleaded guilty to mail fraud charges and spent three years in Federal Prison and nine years in State Prison after that.

Another notable scheme in history is the one by the Mavrodis, otherwise called MMM. “MMM was Russia based and established in 1989 by Seigei Mavrodi, his brother Vyacheslav Mavrodi, and Olga Melnikova. The name of the company was taken from the first letters of the three founders’ surnames. It was launched in February 1994 with annual returns of up to 3000% and led to the creation of other similar companies, all of which were characterized by extremely high rates of return to the extent that one company promised annual returns of 30000%.

Nigerians can relate to MMM as they lost about fifty million dollars to this scheme that operated digitally for a few years. There was another instance where, from over a total of 125,000 investors, a certain forex trading company with branches throughout Nigeria went down with over N171 billion ($450 million) of investors’ money. Also, in the early 1980s in Benin City, a famous investment house called Plan Well Watershed Limited reigned supreme. The promise of a good return lured many to sell their houses and landed properties to invest in it. While others like Plan well, Gold land, Arise and Shine reigned in Benin, Umana-Umana reigned in the South-South. They were all pyramid schemes that fed on the greed of a collective few who by their action continues to create imbalance, unnecessary distrust and anxiety in the financial industry.

The banks and other financial institutions Act 1991 provides that; no person shall carry on any banking business in Nigeria except it is a company duly incorporated in Nigeria and holds a valid banking license and that any person who transacts banking business without a valid license is guilty of an offence and liable on conviction to imprisonment for a term not exceeding 10 years or to a fine of N2,000,000 or both. The CBN is the only institution that can license any entity to carry on the business of banking and to accept savings/deposits from the public.

Complicity is a doctrine that attributes criminal responsibility to those who are involved with but do not physically perpetrate a crime. Its function is to construct a link between the accomplice and the criminal act of another person. The principle of complicity makes a person liable for an offence which he or she has intentionally assisted another to commit.

The issue of Ponzi schemes has become perennial judging by the spate of occurrence and investors’ outcry. The Economic Financial Crimes Commission recently claimed to receive an average of one thousand petitions monthly from the public concerning the activities of Ponzi schemes. This means, it has come to stay and more and more people are getting involved. Both the investors and the organisers need to be dissuaded

The law has largely focused on the organisers leaving the investors whose greed allows the scheme to fester. A law whose punishment focuses on positively reinforcing both parties is likely to produce a result more than the existing legal strategy.

The Nigerian government has over time struggled with a decline in revenue and has taken several innovative steps, such as the introduction of stamp duties on bank accounts, now called electronic transfer charges; and is considering taking custody of dormant account balances in banks and unclaimed dividends. The 2022 budget of N16.39 trillion has a deficit of N6.258 trillion which the government plans to borrow to finance. To generate additional revenue, the government should; 1) Declare investors in Ponzi schemes complicit, 2) Slam them with a 75% tax liability, 3) Subject them to compulsory psychiatric evaluation, 4) Deploy the additional revenue to fund the gaps in the education and transportation budgets.

Many argue that already jeopardised participants seeking prosperity need not be further impoverished as nothing differentiates them from failed commercial banks. Government has ensured the sustainability of commercial banks through the instrumentality of nationalisation and deposit insurance by the NDIC as a response to this argument.

Ponzi scheme investors contribute to distortions in the economy by encouraging people of dubious characters to operate. The public place is replete with pleas from several regulatory agencies like CBN, SEC, NDIC and concerned individuals. In most cases the public is driven into a frenzy by the greed of a few each time there is a collapse, not to mention the negative vibes it gives to potential foreign investors. This has to stop!

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