By: Alinda Ronnie Kyamureku

Introduction

In recent years, unregulated investment schemes have become increasingly prevalent, posing significant risks to investors’ financial security. Understanding the dangers of these schemes and how to avoid them is crucial for safeguarding your hard-earned money. In this article, we will explain what Ponzi schemes are, how to identify them, and the steps you can take to protect yourself from falling victim to these fraudulent schemes.

What are Ponzi Schemes and How Do They Work?

Ponzi schemes are usually marketed as financial investments that promise high dividends with little to no risk. They operate by using funds from new investors to pay high returns to earlier investors.

Since the Ponzi scheme model depends on high returns for early investors to attract new investors, the early members appear to benefit in the initial stages. With this illusion of profitability, members are attracted to join, which enables the Ponzi scheme to expand and operate for some time. However, as the number of members grows, newer members are usually not able to earn anything after their investment, as many may enroll at a point when so many members are expecting returns, which the outstanding investment pool may not be able to produce. Therefore, Ponzi schemes are unsustainable and will inevitably collapse when there are not enough new investors to support the promised returns. The result is that both new and older individuals who fall for Ponzi schemes often lose their entire investment.

Some of the most notable Ponzi schemes in the world have been formed around new innovative financial investments like cryptocurrencies and foreign exchange (forex) trading, about which few people have expert knowledge, and which have little regulation around them. In Uganda, the significant Ponzi schemes that have surfaced in the past few years include Capital Chicken, Veta plan, Mall Fund, Great Wealth Youth Platform Africa, Pio Crypto, Premium Clusters, and Pacs Capital Limited.

How do you Spot Ponzi Schemes?

• The first sign of a Ponzi scheme is usually the minimal risk involved in the investment story offered. Ponzi schemes also promise extraordinary returns in a very short period, usually above market returns, with high payout frequency, for example monthly or quarterly payments.
• Secondly, Ponzi schemes provide limited information on the type of underlying investment in terms of the source of financial flows and any associated risks that could cause financial loss. Instead, they often magnify the convenience of transacting, usually outside of regulatory boundaries, and the extraordinary returns on investment.
• Third, the financial sector is a tightly regulated industry to protect investors. Beware of investment opportunities that lack a reputable track record or a license by relevant regulatory authorities. This indicates that in case of any complaints, it will be difficult to get the authorities to intervene.

Why do People Fall for Ponzi Schemes?

People may subscribe to Ponzi schemes due to the attraction of quick and easy profits, especially when the readily available traditional investment options offer lower returns. Additionally, the fast advances in financial technology are not very easily understood by the vast majority of people, which has led unscrupulous promoters to take advantage by promising exclusive investment opportunities to recruit ambitious investors.

How Can You Protect Yourself from Ponzi schemes?

The best protection from Ponzi schemes is to educate oneself about the financial investment landscape. Learn about the different types of investments, the markets in which instruments are traded, the way the financial markets operate, and the risks involved.

As with all financial decisions, due diligence is very important. Due diligence in this context involves conducting deep research into a financial investment, to understand the market it is traded on and the real activity that provides the basis for the financial flows. Before investing, gather important information on the investment fund or company, such as whether they have the required licenses, skills and qualifications, and custodian banks.

How Do I Get Out of a Ponzi Scheme in Case I Fall for One?

If you suspect that you have become involved in a Ponzi scheme, it is essential to cease further investment, withdraw all the funds you have invested so far and if unable to do so, seek assistance from the relevant authorities immediately. Some of the authorities you may approach include the Uganda Police – Financial Crimes Division, the Financial Intelligence Authority of Uganda, and the Capital Markets Authority of Uganda. Reporting the scheme to the authorities will also help to prevent others from falling victim. Note that recovering invested funds from Ponzi schemes can be challenging, as their perpetrators often disappear or are unable to repay investors.

Conclusion

In conclusion, safeguarding your finances from Ponzi schemes requires vigilance, education, and due diligence. Always be wary of investment opportunities that promise high returns with little to no risk and conduct thorough research before committing your money. Consult with trusted financial advisors and ensure that any investment is regulated by the appropriate authorities. Visit the CMA website to see the list of licensed investment advisors and schemes.

By staying informed and cautious, you can protect yourself from falling victim to these fraudulent schemes and secure your financial future. Remember, if an investment opportunity sounds too good to be true, it probably is. Stay informed, stay vigilant, and prioritize the safety of your money.

References

• Public Cautioned Against Ponzi or Ponzi Schemes, Uganda Police Force, https://www.upf.go.ug/public-cautioned-against-Ponzi-or-ponzi-schemes/
• Historical Returns by Asset Class (1985 – Oct 2020) (visualcapitalist.com)