Recognized as one of the founding fathers of swindling and scamming, Charles Ponzi’s unique and almost flawless approach in defrauding the masses of money led to what is now popularly known as a ‘Ponzi Scheme’.
A Ponzi scheme is a false investment that promises outrageously higher returns as compared to traditional investments (Treasury bills, Fixed Deposits, Mutual Funds, Stocks, etc.). Due to the unrealistic nature of guaranteed returns, Ponzi schemes are only able to pay interest to initial investors by using funds of subsequent investors.
The false nature of this type of investment is more pronounced due to its overdependence on constant flow of cash from new investors, without which the scheme would collapse.
Ponzi Schemes
The concept of Ponzi schemes dates as far back as the 1830s, though this type of investment scam was not widely known till the early 1900’s. History not only confirms the recurrence of Ponzi schemes, but also the geographical footprints that cut across continents and national borders.
Table 1.0 gives a random sample from countless Ponzi schemes across the globe.
| Year | Country | Con Artist | Defrauded Amount | Purported Strategy |
| 1899 | United States | William Miller | $1 million | 520% Interest in 1- Year |
| 1919 | United States | Charles Ponzi | $ 20 million | 200% Interest in 1-Year |
| 1970 | Portugal | Dona Branca | $120 million | 120% Interest in 1-Year |
| 1990 | Russian | Sergei Mavrodi | $10 billion | 1000% Interest in 1-Year |
| 2016 | Philippines | Joel Apolinario | $1.9million | 360% Interest in 1- Year |
| Table1.0 Source: www.wikipedia.org & www.Investopedia.com |
Similar to table 1.0, Ghana has not been spared the impact of similar fraudulent investment schemes over the years: notable Ponzi schemes that have taken place in Ghana include the Pyram and R 5 schemes-1995; CB Net Marketing Concept-2013; Diamond Investment Limited- 2013; Safeway Tilapia Investments-2016; Loom Money Ghana- 2019; and the currently contested Menzgold dealership-2019.
It is needful to mention that knowledge of historic Ponzi schemes alone is not enough to protect against falling for such scams. Much more relevant is the ability to assess how exposed an investor may be to Ponzi schemes.
‘Ponzi-Prone’ indicators
Demand for Unrealistically High Interest Rate: Investors who patronise Ponzi schemes are majorly fixated on getting rich quick and in the easiest of ways. These kinds of investors are more likely to accept and even demand unrealistically high interest rates.
This craving for immediate and quick returns tends to taint the investor’s objectivity/ability to see through unrealistically high interest rates. The disposition of such investors fundamentally violates the ‘Law of Compounding’ in finance (investing money carefully and allowing it to grow at steady compound interest rate will eventually make an individual rich).
Very Little to No Understanding of the Investment product: It is not advisable to put money in an investment product while having very little or no understanding of the basic working of that investment. Smart investors are those who make the effort to get valuable information that allows them to make more educated investment decisions. An investor who is quick to invest based on very little or no understanding of the basic operations of the investment is more susceptible to Ponzi schemes.
Relaxed Attitude to seeking independent expert opinion: Investors who are quick to take decisions to invest solely based on social media campaigns, customer referrals or recommendations of marketing representatives are more susceptible to fall into Ponzi schemes.
It is advisable to seek an independent expert opinion on an investment type before taking the bold step to invest all or a substantial amount of one’s income in the product. This helps correct the possible conflict of interest that accompanies social media campaigns, customer referrals and marketing representatives.
Willingness to invest in unregistered/unregulated companies: A key consideration to make, before investing in a much-publicised investment instrument or company, is to find out if the company is registered and regulated by the recognised regulator for such investments. A registered scheme, although not entirely insulated from fraudulent investment deals, is comparatively more accountable for the investment decisions taken.
Periods of Recession: The impacts of COVID-induced lockdowns around the globe have evidently driven many economies into recession. A recession is generally a downturn in the economic activities of a country, leading to a decline economic growth for two or more quarters in a year.
In these periods, companies tend to cut cost – which includes laying-off workers. In times of increased unemployment and heightened economic difficulty, an individual will turn to the slightest form of relief even if it is as extreme as signing up to unrealistic investment schemes. In times of recession. therefore, investors need to be extra vigilant on the types of investment schemes they subscribe to.
Conclusion
The world of finance largely identifies two groups of investors – Smart money investors and Dump money investors. Smart money investors make the effort to get valuable information that allows them to make more educated investment decisions. Dumb money investors on the other hand generally do not have the time, experience, or patience to get valuable information that enables them to make educated investment decisions. An investor will always have a choice… and this choice is best made based on the right information.
The writer is a Project Strategy Analyst with LMI Holdings, with top-notch experience in Financial Analysis, Investment Banking, Financial Advisory and Business Valuation. He holds a BSc in Banking and Finance, an MPhil in Finance, a Financial Modelling and Valuation Analyst Certification and is currently a CFA level 2 Candidate. For any comments to this article, kindly email [email protected].
