How Kenyans will lose Sh5 billion in phoney investment scheme

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

01 October 2006

With the good trading recorded at the Nairobi Stock Exchange, con-tricksters have come up with financial scams promising astronomical returns in a very short time. I have heard of one that is paying 10 percent per month (you treble your money in one year!). Another one is paying out 80 percent in five weeks. But the most stupendous of them promises a return of over Sh4.6 million from a paltry investment of only Sh2,500.

This last scam is a classic “Pyramid Scheme”. I suspect the other two are “Ponzi Schemes”. These two types of fraud work on the multiplier effect of numbers. They do not sell any tangible product or service.

In the Sh4.6-million Pyramid Scheme, the you buy a certificate containing five names for Sh500. The seller appears last on this list. You are then asked to send another Sh500 to the coordinator of the scheme and Sh1,500 to the person appearing at the top of the list. Your total investment comes to only Sh2,500.

When these moneys are paid, the you get another five certificates bearing your name at number five on the list. The other people have been moved up one slot each and the person who was at the top removed. Now you sell these papers to five new recruits at Sh500 each.  At that point, you recover your Sh2,500 and the numbers begin to multiply.

When the five certificates with your name at number five are sold, they generate 25 (5 x 5) more with you at position four. When these are sold, they produce another 125 (25 x 5) with your name at number three. The next level has 625 (125 x 5). Finally, when you reach the top slot, there will be 3,125 (625 x 5) certificates “out there”. These numbers form a pyramid shape, hence the name.

Now each of these 3,125 new members will pay you Sh1,500 making a total of Sh4,687,500! This can be achieved in a very short time because everybody in the pyramid only has to look for five people. Furthermore, the investment required is quite small – only Sh2,500 – and it returns very quickly when the five certificates are sold.

So, what is wrong with the scheme? Why is it a scam? The answer lies in the source of these super profits. The money comes from the members buying the pieces of paper (“certificates”) from one another. The coordinator collects Sh500 from each person – all for the purpose of helping them con each other.

Unfortunately, Pyramid Schemes reach saturation very quickly. At that point, everybody who can afford to join has been recruited and there is no one to sell the papers to. When this Sh4.6 million scam reaches the tenth level, it will have over nine million members (5 x 5 x 5 x 5 x 5 x 5 x 5 x 5 x 5 x 5) at the bottom of the chain and they have a hard time finding some one who is not already enlisted.

These 9 million people are the ones who will finance the whole scam. They will lose a combined total of almost Sh5 billion and they will never recover it. At that point, the coordinator will have collected a cool Sh1.2 billion! And the 9 million can’t sue him because the never gave him any money.