There are many schemes available if you want to lose money
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
08 October 2006
Last week’s article on Pyramid financial scams drew
different reactions from many readers. One question asked by most people
is this: How do you distinguish a scam from a genuine investment scheme?
The answer is simple. In a scam, the deal is always too good. Another
standard feature of these scams is that there is nothing tangible being
bought and sold. It is usually just a certificate. Not a share
certificate saying that you own something, but pieces of paper that you
pass on to your friends.
Apart from Pyramid schemes, another common form of
fraud is the so-called “Ponzi” schemes (also known as “avalanche”
schemes). These scams promise to pay astronomical interest rates on
deposits – usually higher than 10 percent per month! I have heard of
three currently in operation in
A Ponzi scheme essentially borrows from Peter to pay
Paul. The promoter will promise the high return and some people will put
in their money. At the end of the agreed period, the investors will be
paid their dues in full, plus the interest. They will then be told that
they can re-invest the capital for similar gain. Most will agree thereby
sustaining the scam. Here is how that works:
If the rate is, say, ten percent per month and
you put in sh10,000 and every
month you will be paid Sh1,000. At the end of six months you can collect
you Sh10,000 plus Sh1,000 for the last month. Then you will be invited
to put back the capital into the scheme. If you agree, the numbers work
in favour of the promoter in a simple way: You gave him Sh10,000 and in
six months he has paid you a total of Sh6,000. He still has your
Sh4,000.
Now suppose there were ten initial investors putting
in a total of sh100,000. At the end of six months, the promoter has paid
out Sh60,000 (Sh6,000 to each) and he has Sh40,000 in his hands. With
this balance, he can only pay four people their capital. However, if
they are all invited to re-invest their money, chances are that eight
will agree and only two cash out.
In that case the promoter pays out another Sh20,000
and he is left with Sh20,000. This money can pay interest to the eight
remaining investors for only two months. But the promoter’s credibility
is now well established and word starts to go round that there is a
lucrative investment scheme where people are making 60 percent in six
months.
This creates an avalanche of investors all fighting
to get a piece of the pie. They all get the same terms and, in all
probability, eight out of every ten will re-invest their money after the
initial six months. This sustains the scam even longer. Unfortunately,
it is clear that this cannot continue forever. Ultimately it will reach
saturation and at that point the promoter will vanish with all the money
in his hands.
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