Ponzi scheme was a pyramid scheme started by Charles Ponzi, who was imprisoned in 1920 as a result of a $15 million fraud. “Ponzi Schemes” derives its name from the person who started this type of scheme.

Managers of Ponzi schemes are always out soliciting for prospective new investors with the promise of investing their funds in supposedly high returns with little or no risk. The truth of such claims is that there are no such investments; very few, if any, and actual physical assets or financial investments do not exist.

More often than not, the Managers of Ponzi schemes do not engage in legitimate investment drives, rather their attention is on attracting new money to make promised payments to earlier investors as well as divert some of these so-called invested funds for their personal use. The fact about Ponzi schemes are that the bubble will definitely burst with time.

An example of a Ponzi scheme was the Bernard Lawrence Madoff multi-billion dollar fraudulent investment scheme in the United States of America, popularly called the “Madoff Fraud”; which was detected in 2008 and his subsequent arrest in December 2008.

Madoff set up a small Wall Street investment firm in 1960 called Bernard L. Madoff Investment Securities LLC, which was used to perpetrate the huge investment fraud. It is alleged that when Madoff’s fraud was unearthed and interrogated, the response was “don’t blame me…. blame your watchdog” (Regulators).

Another aspect of a Ponzi scheme people must look out for is the use of virtual currencies such as bitcoins other than conventional currencies. Such virtual currencies are often traded on online exchanges for conventional currencies like the US Dollar or used to purchase goods and services using online facilities.

The reason for the use of virtual currencies for fraudulent activities, hence Ponzi schemes are that in some jurisdictions transactions in virtual currencies tend to have greater privacy benefits and less regulated than conventional currencies.

The Case of Ghana

The Ghanaian financial sector has been hit in recent times with investment and fund management scams involving some fund management and micro-finance organizations. This trend is not the first of its kind in Ghana as there have been pockets of such scams previously. This situation raises questions on the average Ghanaian’s level of financial education and financial literacy. A lot of talking and accusations and counter accusations flooded the Ghanaian media both in print, and electronic, as to who is responsible for the alleged scam.

While a section of the Ghanaian population is pointing fingers at the Regulators (Watchdogs) of the financial sector, others are heaping the blame on the greed of investors who put their money in these organizations with the hope of earning higher returns. Looking for a place to place the blame is not what matters at the moment. Rather evolving practical solutions from both regulators and Ghanaians at large should be the main focus and pursuit.

It must be emphasized that an investment product sold to investors with the promise of outrageous returns in most cases is fraudulent as it violates fundamental returns and investment principles. Ponzi scheme is an investment scam which involves the payment of purported high returns to existing investors from funds contributed by subsequent investors.

Some common Red Flags to watch out for Ponzi Schemes when investing

1. Investors should watch out for investments with high returns with little or no risk. Investments generally carry some level of risk and, investments with higher returns typically have high risk. A promise of guaranteed returns or high returns for little risk should be approached with great caution.

2. Do not rely on reputation, word of mouth or shared affinity. In most fraudulent investments such as Ponzi schemes, investors fall victims through trusted friends and family members who encourage them to also invest. Sometimes prominent people in society may be enlisted at their behest or they may not be aware, and their names are used as an advertising tool to market the investment. Also, religious and ethnic affiliations are employed to perpetrate such fraudulent activities in order to increase the number of the investors.

3. Check for the Auditors of the organization. Auditors certify financial statements of their clients which investors rely on for their investment decisions. The fact is that a credible and legitimate organization engaged in fund management will make use of a well-known and reputable auditing firm. In the Madoff case, the Auditor was not known, difficult to locate and with only three employees reviewing the multi-billion dollar investments.

4. Watch out for overly consistent returns. Investments fluctuate up and down, particularly those with high returns due to the high risk attached to them. An investor should be skeptical with an investment that pays consistent returns irrespective of the overall market conditions.

5. Verification of the investment details and any paperwork. At least, investors should ask detailed questions about the investment and get convincing responses before investing. This calls for the use of investment advisors for adequate professional advice before putting money in an investment. Always request for an investment’s prospectus and understand the issues in it before investing. Also, note errors in accounts statements which may trigger any fraudulent activities. Avoid investments you cannot get adequate information.

6. Delay or difficulty in receiving payments. When payments are delaying or difficult to receive then an investor must be cautious. Managers of Ponzi schemes, in most cases, will convince investors to roll-over their investments by increasing the rate of returns when they foresee the imminent burst of the bubble. In the recent case in Ghana that is being grappled with now, there were some promotional activities carried out regarding increasing the rate of returns to encourage more investments.

Financial Literacy -The Way Forward

It is obvious that the level of financial literacy in Ghana needs to be improved to prevent the people from falling prey to some of these scams that can cause the untimely death of people through shock and loss of livelihood. Effective financial literacy will empower the people on basic financial decisions in areas such as investment, savings and insurance.

The absence of financial literacy can result in making poor financial decisions that can have implications on the financial health of an individual. The investors of the alleged fraudulent organizations in Ghana today are in this mess because of the absence of financial literacy. A large section of the Ghanaian population and most of those bearing the brunt of the alleged scam are financial illiterates. It is, therefore, imperative for financial literacy to be given prominence in Ghana.

Besides, the Ghanaian Regulators (Watchdogs) in the financial sector should keep a close check on the operations of all organizations under their ambit to ensure full disclosure and fraudulent-free reporting. The Bank of Ghana and the Securities and Exchange Commission have very critical roles to play in preventing such occurrences other than coming out with possible solutions after the harm has occurred. Individual Ghanaians should also open up and get involved in financial discussions and report any of such alleged frauds upon the least suspicions.