Fresh calls for tighter regulation as Ponzi schemes wreak havoc

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Regulators need to be at the top of their game to protect the public from Ponzi schemes, experts said this week, after another “get rich quick” platform recently collapsed leaving investors US$1m poorer.

The recent collapse of E-Creator has ignited debate on the need for tight regulation and awareness campaigns on the red flags of these fraudulent schemes that con people into investing their hard earned money in a business venture or investment that promises high returns in a short period of time.

Economist and financial markets regulation expert Henry Munashe Jaji said regulatory bodies should be on their

“A-game, sniffing out these schemes before they take off”.

“I am talking about the RBZ, the Securities and Exchange Commission and to some extent the Insurance and Pensions Commission. They should have the power, the funding, and the freedom to dig into anything that seems suspicious,” he said.

The Australian-based economist said there was a need for strict rules about how investment funds and businesses report their finances.

“It’s a lot harder to run a Ponzi scheme when the books are wide open for anyone to see. We also need stronger laws. If someone’s caught running a Ponzi scheme, the penalties should be so harsh that it’d make anyone think twice before trying it,” Jaji said.

“And speaking of justice, we’ve got to make sure it happens fast. We need courts or tribunals that can handle these cases quickly, so victims aren’t left waiting for years to get their due.”

Insurance and risk expert Kris Ratambwa believes the Reserve Bank of Zimbabwe should take the lead as these scams involve taking deposits from the public using one excuse or the other.

“Every deposit-taking institution should fall under a specific authority, eg RBZ or IPEC if it’s more in line with risk pooling (insurance). Authorities should not seem to be easily disarmed by cheap vocabulary (like the term ‘employee’ in respect with E-creator). If it looks and sounds like a duck, then it’s a duck. If you are offering banking or investment products then you are regulated by RBZ like all deposit-taking institutions,” he said, adding that there was a need for specific regulations to cover Ponzi and pyramid schemes.

“That way, it helps eliminate those grey areas,” Ratambwa said. Jaji said there should be protection on whistleblowers who should find it safe and even rewarding for them to speak up if one suspects a Ponzi scheme.

Countries need to collaborate to fight the scourge since Ponzi schemes often cross borders, he said.

Ratambwa said authorities should step in early to make sure the business is making the money it’s claiming to be.

“Like we all know E-Creator was not making money from product reviews. A quick look into their business would have protected a lot of people [show us your receipts from the said business partners],” he said.

Ponzi schemes thrive if the economy is facing hardship and people are often desperate for ways to make money.

Regular jobs won’t be enough, or they may even be hard to come by and Ponzi schemes swoop in, promising folks high returns with little risk, Jaji said.

“In Zimbabwe, we’ve seen the economy collapse face over the years, leading to job losses, hyperinflation, corruption, and more. These challenges make Ponzi schemes look very appealing, but it’s important to remember that they’re unsustainable and eventually collapse, leaving a lot of people in the lurch,” he said.

Before E-creator, MMM and Beaven Capital left floods of tears as the get rich quick schemes backfired.

All that glitter is not gold

Experts say investors should be wary if the returns are abnormally high and one is promised zero risk (no downside, guaranteed returns).

“Those are the usual red flags. In betting the returns are potentially high but the risks are also known and very high,” Ratambwa said.

The Ponzi scheme will show consistent, positive returns regardless of what’s happening in the market, which is another major alarm bell, Jaji said.

In a healthy economy, there’s usually a balance between risk and reward in investing. But Ponzi schemes upset that balance, promising big rewards with little to no risk, he said.

“They often aren’t registered with regulatory bodies, which makes them even riskier. Their strategies and operations, often shrouded in mystery or incredibly complex. It’s hard to see what’s actually going on. If you decide you want to pull your money out, it suddenly becomes a big issue, with lots of delays or excuses,” Jaji said.

“The biggest giveaway? They rely heavily on bringing in new investors – your returns are actually being paid out from the new guy’s investment, not real profit. And they’re really pushy about getting you to invest more and bring in more people.”

More than a century after con artist Charles Ponzi swindled “investors” of US$15m in eight months, the scheme is being perfected enough to entice people.

In some instances, greed and the get rich quickly mentality have left people in a hole, an analyst said.

“…Most people who joined e-Creator, were generally aware that it’s a Ponzi scheme…but wanted to beat the system, get early and come out early but this time the life cycle was unexpectedly and unfortunately too short,” an expert said.

It is not only in Zimbabwe that millions have been swindled.

Bernie Madoff has the official title as the king in conning people. He was estimated to have creamed off investors of US$60bn in 17 years.

A Chinese Ponzi scheme, Yilishen Tianxi Group, salted away US$2bn from investors in eight years.

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