How to spot a ponzi and pyramid scheme

Earlier this week I had a flashback to a time when I was new to the world of money and pretty much everything else.

I was hungry for knowledge, new opportunities, and dog on optimism. A little too optimistic if you ask me.

During this time a very good friend of mine came to me with an investment opportunity. What I didn’t know then was that this was merely a Pyramid scheme. Did I invest? You bet I did. Did I get my money back? A resounding NO.

There is a thin line between a Ponzi scheme and a Pyramid scheme.

A Ponzi scheme is an investment fraud that pays existing investors using new investors’ money. This type of fraud uses the already existing social network to scam you out of your money in the name of investment.

whereas,a pyramid scheme  is a business structure where you earn by recruiting others.

structure of a pyramid scheme

These types of businesses do not always present themselves as money launderers. Rather some come in the form of property developers, cryptocurrency investments, forex investments, and the

Reasons why Kenyans continue to fall for Ponzi and pyramid schemes.

1.Lack of knowledge on pyramid and Ponzi schemes.

 

2. The greed to get rich quick.

 

3.Desperation.
Many people, especially youths, are unemployed. This makes them easy targets for the sweet-talking scammers. Defrauding them of the little that they have.

4.The need to supplement one’s income.
Most blue-collar and white-collar workers are underpaid. This, together with the ever-worsening state of the economy creates the need to increase one’s sources of income.

5.Lies and manipulation by the scammers.
Yes, these recruiters will not blatantly tell you that they want to swindle you.

Rather they will hide behind multilevel and network marketing. A multilevel market is a legitimate business.

yes, in both businesses there can be sale of products. However:

a) In a multilevel marketing business (MLM) the focus is on the sale of products and services. whereas in a pyramid or ponzi scheme, the focus is on recruiting members to the sales network.

b) In an MLM, commission is earned on sale of goods and products unlike a pyramid scheme where commission is earned from the new recruits.

c) an MLM can survive on the sale of products or services while a pyramid scheme collapses upon failure to recruit more people.

 

Financial literacy

 

Here are other telltale signs of a Ponzi or pyramid scheme.

a) Extremely high rates of return of more than 10% per month

b) Complex or unbelievable strategies
In my case, we were told to bring only 5 people who would bring five other people

pyramid recruitment srtucture

c) Too good to be true promises.
I was told that I would earn a lifetime commission from the network I formed without investing in any assets

d) Last but not least, time pressure
These scammers will always pressure you to invest quickly, claiming that it was a “once in a lifetime opportunity.”
Don’t fall for these scams.

Do thorough research before investing in anything.

What to look for when researching for an investment

1. Background check on the business
For example, who the founders are and their qualifications, what other employees say about the business, etc

2. Are there any court cases pending or already filed?

3. Are they registered by any legitimate body?
For example, if it is a depository business that is a savings society, check to see if it is registered by the central bank of Kenya on its website or if it is registered by SASRA.

4. Look at the returns of the business. Are they abnormal returns over a short period of time?

5. Ask for financial reports of the venture.

If the business does not provide regular reports, make your exit. These reports should show whether assets have made a profit or a loss.

Finally, listen to your instinct. Trust your gut.
I remember that I talked myself out of that feeling that things were simply too good to be true. Do not commit the same mistake.

Begginers ultimate guide to investing the right SACCO

I know that you are wondering how my ordeal with the scammers went. So here you go.

After my friend introduced me to the venture, I was invited to a seminar. This seminar was to “help me” understand how the business works.

And just like any other seminar, I had to pay an entrance fee. To keep idlers away, they said, which I unwillingly paid.

During the seminar, we were pumped up to make money by recruiting. But before we could start earning we were told to buy an account. By purchasing the account you could become an agent.

At the time I didn’t have the amount to purchase an account. These recruiters could not let me forget about the “opportunity”. They kept calling me even when I was at school.

Showing me that this was a stumbling block in my road to making hundreds of thousands a week.

I was convinced that if only I could get that amount, I’d be set for a better life.
Guess what I did? I used my tuition fee to invest. As soon as I bought the account the calls stopped coming. Months went by but nothing was forthcoming. Seeing that my efforts were bearing no fruits, I gave up. Having lost not only the amount but my tuition fee as well.

Begginers guide to investing in shares in Kenya

As I pen off I’d like to say that before venturing into any new investment do thorough research. Hire a financial advisor if you can. And as always invest in knowledge because the higher your financial IQ, the easier it will be to spot a scam.

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