Don't Get Caught in a Pyramid Scheme - Shine Your Eye

The economy is barely stable, the government is unable to employ all graduates, let alone school dropouts, and the country's inflation on goods and services is unending. To top it off, social media pressure to get rich and live "the life" is at an all-time high.?

It's, therefore, understandable when people flock to any venture that promises mind-blowing returns in the shortest possible time. These types of ventures are pyramid schemes that cannot deliver what they promise, but because of the desperation of people, they tend to cater to an audience that believes they can?

The Ponzi scheme is a business model in which a con artist promises high return rates to investors and then utilizes other investors to pay them back. It is another name for a pyramid scheme, in which new investors compensate older investors.?

The Ponzi scam was named after Charles Ponzi, a notorious conman, who was later caught and jailed in 1920 after he had defrauded people off over 15 million US dollars. There have been many ‘projects’ in Ghana that have eventually turned out to be pyramid schemes and caused great havoc in the financial positions of many Ghanaians.

1. The Menzgold era.

The most popular and more recent pyramid scheme was in 2016 when many people signed onto the Menzgold dream and ended up losing thousands of Ghana Cedis.

According to Edinburgh University Press, the Bank of Ghana warned the management of the then "Menzbank" in 2014 that their company name was problematic because it violated the laws governing institutions with the word "bank," and that the name was deemed illegal and misleading.?

The company changed its name to deflect this, but in 2016, the Bank of Ghana issued a warning notice to the general public about the institutions' illegal actions, thus citizens who invested in the company after that did so at their own risk.?

This business was labelled a pyramid scheme because it promised investors huge returns with no risk of losing money, and the story proved too good to be true.

2. The case of DKM Diamond Microfinance.

At its inception, DKM Diamond Micro-Finance LTD attracted sole businesses, groups, families, and students who were looking for ways to boost their hourly, daily, or monthly income. This dream was cut short when they realised that the company wasn’t what it seemed.?

Apart from the fact that DKM Diamond Microfinance guaranteed investors a proposed 60% investment return in two months – which was both absurd and unsustainable since the average interest rate for investment companies was 12-20% – managers of the company also mismanaged mobilized funds so badly that there was no way to recoup it.

The Bank of Ghana had to step in and stop DKM's operations for 90 days in May 2015, pending further investigation into charges of breaking the Ghanaian banking laws. The company had 9 million customers and over GH￠100? million in deposits at the time of the suspension.?

Customers were unable to access their funds because all assets had been frozen and many are still counting their losses to this day.

3. The Safeway Investments Company Limited saga

The company struggled to pay the interest that it promised because it had invested depositors' funds into other businesses which were unsuccessful.

The corporation owed over 14,000 consumers across the country GH￠27 million in 2016 which did not include the promised 80%? interest rate on deposits. Once again, investors are promised ludicrous interest rates in the shortest time feasible.

5 Things That Ponzi Schemes Have in Common.

• High investment returns with little or no risk: because risk and return are usually directly proportional (high returns, high risks and vice versa), programs that promise high returns with low risk should be viewed with caution.
• Returns that are excessively consistent: investment returns typically follow business and economic cycles. When the economy is thriving, returns are higher, and when the economy is in a slump, returns can be lower. Ponzi schemes sometimes include investments that promise to pay the same returns regardless of business cycles.
• Lack of investment information: Ponzi schemes typically do not reveal specific information about their investments because of their secrecy and/or complexity. They're known as "blind pools," because investors have no idea how their money is invested.
• Issues with paperwork: Ponzi schemes are more likely to provide inconsistent and error-prone communication when sending regular performance statements or reports on clients' investments.
• Receiving payments is difficult: Ponzi schemes frequently encourage investors to roll over their excellent profits and grow their investment holdings. Investors who wish to cash out their investments are told to do it gradually or not at all.

How can you protect yourself from falling prey to these schemes?

The next time someone comes to you offering you a sketchy business plan, with low risk and extremely high returns, and just everything that seems outrageous and possibly too good to be true, make sure you pay due diligence and get all your facts right so you are not found wanting. Don’t invest in what you don’t understand.

In Conclusion

There is a need for the greater financial education of the public about their rights and responsibilities as investors and to help them understand the concept of money. Ponzi schemes gain a great deal of attention and praise in the early stages with promises of unrealistic returns and we need our financial regulators to stop them in these early stages to prevent many people from investing and losing huge sums of money.

For further knowledge on any information referenced in this article, visit the following sites:

https://www.microcapital.org/microcapital-brief-bank-of-ghana-rejects-appeal-by-customers-of-dkm-diamond-micro-finance-limited-president-intervenes/

https://www.euppublishing.com/doi/full/10.3366/ajicl.2021.0377

https://www.researchgate.net/publication/353271633_Effect_of_Ponzi_schemes_on_a_country_the_case_of_Ghana?

Author

This article was written by Paula Sabin-Quarm for Bethniel Finance. Paula is?a research enthusiast, content writer

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