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How can I spot a Ponzi or Pyramid scheme?
Uganda Shilling and United States of America dollar notes collected in a jar. Bank of Uganda cautions the public against investing in Ponzi schemes. PHOTO BY RACHEL MABALA
Recently, Bank of Uganda (BoU) asked Equity Bank to freeze all accounts associated with D9 Club according to Section 118 of the Financial Institution Act 2004. Some Ugandans have been fleeced of their hard earned money through ponzi and Pyramid schemes. The unsuspecting victims are often wooed to put in a certain amount of money with a promise to multiply that money within the course of a certain period, say a year. This has propelled BoU to caution the public on the rise of ‘unlicensed deposit-taking firms and Ponzi schemes’.
Dear reader: A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. Money invested by clients is not invested in any legitimate business but used to pay the people operating the scheme and those who invested earlier on. This is why Ponzi schemes can sometimes appear to be genuine and profitable investments; because the people who invested first seem to be benefitting.
A Pyramid scheme is similar to a Ponzi scheme but, like the name “pyramid” suggests, it is based on a hierarchy whereby new investors are the bottom of the pyramid. The income they provide by paying membership fees or an initial investment is used to pay original investors. These new investments are marked as a profit from a legitimate transaction.
However, pyramid schemes, like Ponzi schemes, do not sell products or make real investments – they rely on money from new investors which is channeled to those at the top of the pyramid. They only generate income by promising extraordinary returns to new recruits to convince them to invest; and may require recruits to bring in additional investors before receiving payment.
Both Ponzi and pyramid schemes always collapse though, as it becomes unsustainable for those running it to deliver on the promises they have made to investors. Once they collapse, there is often no way for those who invested to recover their money.
Signs to watch
Here are some signs that an investment may be a ponzi or pyramid scheme:
Too good to be true. It guarantees you high returns with little risk of losing your investment. A good general rule to follow is; if it sounds too good to be true, then it is false.
Consistent returns. It promises you consistent returns regardless of the market conditions.
Legitimate businesses usually experience times of profit and times of loss.
Activities are complex. The investment strategy or business activities are described as too complex for investors to understand, or top secret.
If a business idea cannot be explained, it is suspicious
Focus on attracting new clients. The company or proprietor running the scheme focuses all their energy into attracting new clients to make investments. Without a constant flow of new investments to continue to provide returns to the scheme owners and older investors, the scheme falls apart.
Difficulty in accessing money. Both old and new clients face difficulty trying to remove their money from the scheme. Many times, it has already been spent on paying the proprietors or other investors.
Answered by Bank of Uganda.
