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The problem with Ponzis and pyramids

Aug 23 2015 15:00
Everyone wants to get rich, and some want it to happen as fast as possible. This is often the reason so many people are suckered into get-rich-quick schemes or pyramid schemes, which are illegal and inevitably end in tears. Neesa Moodley reports

One of the major problems in South Africa revolves around the regulation – or lack thereof – of pyramid schemes. The Consumer Protection Act (CPA), which came into effect in 2010, placed a ban on pyramid schemes, multiplication schemes and chain letters that involve the payment of money.

However, these schemes continue to exist and, contrary to popular belief, they do not fall under the jurisdiction of the Financial Services Board (FSB), but that of the Reserve Bank.

Caroline da Silva, deputy executive officer for financial advisory and intermediary services at the FSB, explains that the board investigates allegations of unregistered financial services businesses, which sometimes turn out to be pyramid schemes.

“Such matters are then referred to the relevant regulators with [the proper] jurisdiction. That includes cases where the schemes are conducted by authorised financial services providers.

“In the latter case, the FSB will take the necessary action in the form of a withdrawal of the licences and issue a media release,” she says.

In many instances, the FSB’s investigations are prompted by allegations that the clients’ investments are traded in forex or in listed securities and, more recently, Ponzi schemes purporting to be stokvels.

In the most recent case, the FSB issued a public warning regarding Ntinga Health and Financial Services, trading as AQNO Trading and Investments.

According to the FSB, the company operating from St George’s Mall in Cape Town appeared to be running a Ponzi scheme. As part of an inspection, FSB inspectors executed a search and seizure warrant at the company’s head office on July 22 .

“The preliminary view of the FSB, based on the investigation to date and the evidence recovered during the search and seizure operation, is that Ntinga is operating a Ponzi scheme,” says Tembisa Marele, communications specialist at the FSB.

Among other things, the inspectors could not find any evidence that investors’ funds had been placed in investment products. Ntinga promised guaranteed investment returns of 96% per annum, which should have been a red flag for potential investors.

The FSB has provisionally withdrawn Ntinga’s Category I financial services provider licence (licence number 32188) that entitled it to advise clients on such products as long- and short-term insurance, pension fund benefits and participatory interests in collective investment schemes.

According to the FSB, the key individual at Ntinga is Armstrong Luthando Mazizi. He is also a signatory to the Ntinga bank accounts with Gcinisiko Mantshe.

Marele says the FSB has handed over the matter to the SA Reserve Bank and other relevant authorities. The FSB and other law enforcement agencies are working together to ensure that the people responsible for the possible unlawful conduct are brought to book.

However, this is just one of many pyramid or Ponzi schemes operating in South Africa and more people are persuaded to part with their money daily in the hopes of doubling or tripling their funds.

This is what you need to watch out for to avoid being caught by any of these schemes.

Ponzi schemes

These schemes are named after Charles Ponzi, who first made them infamous as far back as 1920.

Operated by smooth-talking con artists who appear to be legitimate and might even have a legitimate business to front their scheme, these businesses will typically invite you to invest in a scheme or business.

One of the more famous Ponzi schemes in recent history was that of Bernie Madoff, who was a legitimate stockbroker and investment adviser.

His clients, or “victims”, included Hollywood luminaries Steven Spielberg, Kevin Bacon and talk show host Larry King. While they might already be rich by most people’s standards, few have the power to resist the promise of easy money. One of the signs of a Ponzi scheme is that the operator promises you unrealistically large returns on your investment in a short period of time.

In a Ponzi scheme, the investor does not play an active part, but merely contributes seed capital or money. For example, in South Africa, Barry Tannenbaum convinced many of South Africa’s elite to invest in Aids drugs.

The fact that he was the grandson of the founder of pharmaceutical company Adcock Ingram probably helped his credibility, but the scary truth is that no one bothered to check the validity of his claims or his “investment”.

The result was that wealthy South Africans invested more than R12.5 billion in his Ponzi scheme before it was uncovered.

Pyramid schemes

A pyramid scheme is one in which you are required to be an active participant. In this case, you receive money or compensation after you recruit new participants to the scheme.

Each new participant must make an upfront payment to participate in the scheme and the recruitment process has to continue for you to make money, with the people at the top of the pyramid reaping the most profit.

The warning signs of a pyramid scheme include:

1 Each new participant has to pay in a fee or lump sum to participate in the scheme.

You earn money primarily from recruiting new participants rather than selling goods.

3 The emphasis is on participant recruitment or building your “team”.

4 You enter the scheme at the lowest level, or the bottom of the pyramid, and only move higher up the scale as you recruit new participants.

5 The people at the top of the pyramid earn the highest “commissions”. Often, these schemes peter out and you will find that the key individuals or people running the scheme simply relaunch it under a different name.

The main difference between these two schemes is that in Ponzi schemes you do not play an active role, while in a pyramid scheme you have to actively recruit others to join the scheme.

A Ponzi scheme also relies on a continuous stream of new members since old members are paid their promised returns from new members’ contributions.

It is usually when the people managing the operation run out of new members that the scheme starts to fail as management can no longer meet
its promises.

Multilevel marketing schemes

These are schemes that operate on the borderline of the law.

In essence, they work in the same way as a pyramid scheme, but have a product, which means they are not defined legally as a pyramid scheme.

For example, you might be introduced to a scheme where you are “selling” a health drink, but are in effect paid a higher commission for introducing new participants.

So the product is available and you get paid to sell it, but the real incentive is to introduce more participants to the marketing scheme.

Multiplication schemes

A multiplication scheme is defined under the CPA as a scheme in which someone offers, promises or guarantees you an effective annual interest rate that is at least 20% above the repo rate.

The current repo rate is 6%, so you will be promised a return of about 26%.

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