A Ponzi scheme is a scheme where a participant attempts to make money solely by recruiting new participants into a programme with a promise of returning a high return within a short period of time for doing nothing other than handing over one’s money and getting others to do the same.
This is the definition of a Ponzi scheme given by Mrs Anastasia Braimoh, Principal Partner, Laurel Francis & Associates, one of the panellists at the 16th Annual Business Law Conference of the Nigerian Bar Association’s Section on Business Law (NBA-SBL) held in Abuja.
The conference themed: “Recent Developments in the Business Law Environment,” brought together decision-makers in both the public and private sectors, policy formulators, regulators and industry practitioners with a total of 11 plenary’s sessions which addressed the issues that affect the business environment.
How to identify and tackle Ponzi scheme in Nigeria
Speaking on tackling Ponzi schemes in Nigeria, Mrs Braimoh said everyone knows what a Ponzi scheme is but the problem is identifying it.
She said, “Basically a Ponzi scheme is a scam, it’s just robbing Peter to pay Paul. We all know what a Ponzi scheme is but identifying it is the problem. Even Professors have been duped, literate people too have been duped.”
Speaking on the characteristics of a Ponzi scheme she said, “First of all, it is an unregistered scheme that is not regulated, it’s illegal but the only legality it has is that it has registered as a company with CAC. Apart from that it’s not regulated by any regulator and that should be a red flag.“
“The company will give a very mouth-watering return on investment. When a company is giving you an unrealistic return which does not tally with conventional investment then it’s a red flag.
“The structure might be complex and they use high-sounding words. They also lure investors by making the entry amount very low.”
She said it is important to note that a company can start a business legitimately and transit into illegality.
“They can register with the regulators and at some point in the operations it becomes a Ponzi scheme and as an investor, you have to be very vigilant and aware because that is the responsibility that you have to protect your own investment,” she said.
Speaking on what has been the Nigerian experience with Ponzi schemes she said, “There seems to be an increase in Ponzi schemes in Nigeria which means there is money in the system that people actually want to invest.
“I worked with SEC until December last year and before I left, I was head of enforcement and we get complaints about Ponzi schemes everyday.”
Speaking further, Mrs Braimoh revealed that there are provisions in the law that actually describe what these people try to do legitimately when they don’t have the licence to do so.
She said, “Section 153 of the ISA which explains what a collective investment scheme is. If you look at the activities of a Ponzi scheme, what they are trying to do is to mirror that section. These companies that are not registered to offer or collect money from the public do so in a portfolio and the participants share the profit and the risk.
“There are other sections in the law that prohibits individuals except for public companies ( Sec 67) or statutory bodies that have been established by an act to invite the public to invest in their companies.”
She noted that those that perpetuate Ponzi schemes are violating the provisions of the Investments and Securities Act (ISA)
“We have the regulatory framework but there are a few lapses that we think need to be amended in the ISA to be able to equip the regulator to fight the menace of Ponzi schemes.“
Another panelist, Okorie Kalu of PUNUKA Attorneys and Solicitors said Ponzi schemes have been on the increase in Nigeria because it is perceived as a poverty alleviation strategy by many Nigerians who are looking for a way to have a better return on their labour.
When asked what steps to take when an investor finds themselves in a scheme that is a Ponzi, Mr Kalu said “When Investors or clients come to you as victims of Ponzi schemes, the question becomes how do you assist them and what are the solutions and the tools that are available in the system that speaks to the situation.”
He noted that there are different baskets of remedies that are supposedly available to address the issue but they were never designed to address the Ponzi scheme.
He said, “The most common one is the extrajudicial measure of running to the police by using the judicial system or an administrative recourse to the regulator (SEC) particularly if the business started as a legit business.
“Even for some of the schemes that have been busted and SEC has been able to seize some assets, The regulator is sitting on the asset and this has led to some interesting jurisprudence with investors filing suit against SEC seeking to obtain garnishee orders on seized assets.”
Speaking on tools available for practitioners who want to help their clients recover their funds, he said, “The traditional approach that we have is reliance on common law tools that are available which are Seeking restitution for unjust enrichment, Basic debt recovery actions and the Mareva injunction of freezing the account of the promoters to get some level of leverages against the Ponzi schemers.
When asked what percentage of seized money has been returned to investors over the years, Mrs Braimoh said “None, for now, have been returned to victims because when a complaint is made, traditionally, the Regulator does not know until most of the funds are gone.
“To recover the fraction left, SEC needs to investigate and the matter is referred to the police unit under SEC of which the investigation takes time.
“SEC will go to court and freeze the assets wherever they are before SEC will start chasing after the promoters. It takes time. The only time restitution can be made is only when the promoters have been prosecuted and the court has given judgements.”
“Most times when these funds are frozen, if need be, a trustee is opened where this money is fixed. SEC does not want to get involved with the disbursement of these funds because they do not want to be accused by any party that they were implicit or complicit on any of the issues.
“The trustee will manage those funds and will now take care of compiling the names of people that were defrauded and at the end of the day, disburse the funds and it takes time for now, none have been paid.
“For the freezing orders that have been made in conjunction with or regulated entities for instance, the financial services regulatory coordinating committee.
“The monies that have been frozen are still there, they have not been distributed until these cases in court are actually concluded.”
She cited an example of a particular case where the court found the promoters guilty and they were imprisoned but the relief sought by SEC was not granted by the court which was restitution to those that were defrauded.
“That money is still there. So what SEC is trying to do now is to get an order from the court to be able to distribute this money that is still frozen in the account,” she added.
What you should know
- The Investments and Securities Act (ISA) Section 153 defines Collective Investment Scheme as “A scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which:
- “Two or more investors contribute money or other assets to and hold a participatory interest;
- The investors share the risk and benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed, but not a collective investment scheme authorised by any other Act.”
- Section 67 of the ISA 2007 permits only authorised public companies, statutory bodies, or banks (in Nigeria), to offer corporate securities to the public, or deposit money with any Nigerian company for such purposes.