Wednesday, September 19, 2007

BEWARE OF PYRAMID SCHEME

They come in diverse guises, systems and names. They entice the unwary with mouth-watering promises and evoke tantalising images of instant wealth and affluence. Call them savings schemes, investment programmes or marketing operations: they offer the same goal of small investments and ensuing bumper returns on investments that no legitimate business or financial institution can offer.
And they have become ubiquitous in Nigeria. From the ‘multi-level marketing’ operations to ‘oil traders’ and outright ‘wonder banks’, the pyramids are all over the place ensnaring men and women who want riches with little effort, and making claims that skirt the twilight zone between legitimacy and outright fraud. Whether you are an executive, blue-collar worker, investor or business operator living in Lagos, Abuja or other major cities in the country, you may have been approached or heard of someone you know being contacted to partake in one lucrative ‘investment scheme’ or the other.
Sometimes, they claim to be big time investors in oil and gas operations. Or they pose as financial managers after the order of Midas, the legendary ruler at whose touch everything turned to gold. Or they label them ‘investment clubs’. The generic name for the miracle investment schemes is pyramid scheme. The online Wikipedia defines a pyramid scheme as “a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered”. On account of the success and notoriety such scams have had in the United States and Europe, laws and ‘experts’ on pyramid schemes abound.
According to such authorities, the genre is called a pyramid scheme because it involves an initial ‘investment’ by one person who then recruits a given number of other persons, each of whom in turn, recruits the same number of persons till infinity. As long as each new recruit is able to sign on the specified number of persons, he or she makes a profit, sometimes, as much as 500 per cent of his ‘investment’.
The system is therefore like a pyramid, whose base keeps on widening as long as fresh persons join and ‘invest’. The fatal flaw in the scheme is that for it to remain profitable to all subscribers, virtually the entire population of the earth must join and even then, the number of persons is finite. The result is that every classic pyramid scheme must inevitably collapse and the majority of subscribers will lose their money.
For the get-rich-quick, there is a variant called the Ponzi scheme. A classic Ponzi operation is a bogus investment scheme that offers abnormally high ‘profits’ on investment. The excessive profits come from the deposits paid by subsequent investors, meaning that the scheme can only survive as long as there is an endless stream of new investors also lured by the promise of super-normal profits.
It is named after Charles Ponzi, who immigrated to the USA from Italy in the 1900s and fleeced the citizens of his newly-adopted country of millions of dollars before he was caught. The difference between a Ponzi scheme and a pyramid scam is that the schemer is the fulcrum, the man accepting and dishing out returns to investors (read victims) while in a typical pyramid operation, the recruit, who successfully recruits his additional recruits, earns his promised super profit. The experts also say that a Ponzi scheme attracts the well to do and can run for as long as those who invest in it can be persuaded to ‘re-invest’.
But a Ponzi scheme collapses much faster on account of the exponential increases in the number of participants that is essential for its sustenance. At any point that a new recruit fails to recruit the required number of new sign-ons, the pyramid begins to unravel.Nigerians are in trouble because the laws are lax and there is so little information available to help people identify legitimate investment opportunities and bubbles that will ruin or impoverish them. The new type of investment that is also gaining inroads in the cities is the Multilevel Marketing Plan.
This will typically seek to recruit you as a distributor of some goods or services with a promise of large commissions. The catch is that like pyramid schemes, you are required to recruit other distributors and your sales are to these new recruits, not to the general public. Your ability to prosper under the scheme is based on the number of people you sign on and on their own success in bringing new sign-ons. Recently too, the scammers have gone online operating pyramid schemes and their variations through the Internet. To beguile the victim, they claim to be American, Canadian or European firms but rely on the well-established format: super normal profits will come your way as long as you can sign on others to invest money to earn kalokalo interests or to buy products or reports.
Some of the Internet-based firms claim to be energy traders or dealers in gold or other precious metals and offer you a chance to join the gravy train. The schemes are ensnaring many because they play on a basic human nature: greed. Researchers in the US say that of all participants in a typical pyramid or Ponzi operation, over 90 per cent will never recoup their money. The less than 10 per cent who do make money are the early birds who serve as a powerful marketing tool for the organisers. In 1997, the unravelling of a number of pyramid schemes in Albaria, in which investors lost $1.2bn, provoked a revolt that toppled the government.In the US and Europe, there are elaborate laws to deal with these schemes. But new ones keep coming in various guises such as ‘investment clubs’.
One variation noticed in Nigeria is that the operators go through pastors and other opinion leaders to snag new participants. They target pastors as the early recruits who are thus guaranteed to reap some returns. These ‘men of God’ then go on to recruit church members and others who rely on their favourable testimonies to sign on. It is said that the Central Bank of Nigeria is unsure of how to move against these firms, which, not being registered finance houses, still solicit for and take deposits from the public.
It is also clear that some bank workers are actively engaged in the schemes and are known to direct their customers to these miracle banks and marketers. It is said that the Economic and Financial Crimes Commission is on the trail of some operators. Religious leaders and bankers should stop allowing themselves to be used and concentrate on their core mandates.But if you do fall victim to the lure of the pyramid, know that you are primarily a victim of your own greed. Better to stick with your neighbourhood bank, the stock market or the ubiquitous esusu.
written by....Biodun Sonowo and extracted from The Punch Newspaper

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