Ponzi bill: Attempt at sanitizing Nigeria’s financial markets?

By Marcel Okeke

In the latest of efforts at strengthening the functioning of Nigeria’s capital market and protect investors, the National Assembly on 29 March 2023 passed the Investment and Securities Bill (ISB 2023). The Bill has provisions for more stringent punishment for operators of Ponzi/pyramid schemes and illegal investment schemes that have led to the loss of billions of naira by Nigerians. The existence and operations of such illicit schemes over the years have negatively affected confidence in the investment climate of the country. Though awaiting Presidential assent to become an Act, one of the significant developments that the new Bill brings about is the outright prohibition of the Ponzi/Pyramid schemes in the country.

Expatiating on the Bill, the Senate President, Ahmad Lawan, said it is expected to protect investors, adequately regulate the market, reduce systemic risks, and provide for more stringent punishment for promoters and operators of Ponzi schemes. He said, “The bill for an act to repeal the Investments and Securities Act 2007 Act No. 29 2007 and enact the Investments and Securities Bill 2023 to service the SEC as the apex regulatory authority for the Nigerian capital market as well as regulation of the market to ensure capital formation, to protect investors, maintain fair, efficient and transparent market and reduction of systemic risk and for related matters is hereby passed.”

Specifically, under the Bill, promoters of Ponzi schemes would now face a jail term of not less than 10 years; the Bill also prescribes asset forfeiture and a fine of 10-20 per cent of the amount of money collected from victims. On his part, Chairman of the House of Representatives Committee on Capital Markets and Institutions, Babangida Ibrahim, said the ISB 2023 was capable of transforming the capital market, attracting foreign investors, and boosting investors’ confidence, among others. Ibrahim said, “The bill seeks to repeal the existing Investments and Securities Act 2007 and to establish a new market infrastructure and wide-ranging system of regulation of investments and securities businesses in Nigeria, especially in the areas of derivatives, systemic risk management, financial market infrastructure and Ponzi scheme and platforms.”

These Ponzi schemes (also known as pyramid sales schemes) are essentially a money laundering system where investors are wooed or lured in with the promise of high returns on investment after a specified period. The system runs in a somewhat cyclic fashion by paying old investors with deposits of new investors but usually becomes unsustainable when the backlog of old investors eligible for payments exceeds the investments coming into the system. Over the years, millions of Nigerians who patronized the Ponzi schemes lost huge sums to those illicit ventures. According to Nigeria’s Securities and Exchange Commission (SEC), three million Nigerians lost N18 billion when the popular Ponzi scheme, Mavrodi Mundial Movement (MMM) crashed in 2016. As of 2022, Nigerians have lost over N300 billion in Ponzi schemes in five years, according to a report generated by the Norrenberger Financial Investments scheme.

All these make the ISB 2023 not only imperative but also timely. It is therefore a matter of necessity that it gets Presidential assent not later than 29 May 2023 when the tenure of the current Federal administration would end. Since the far-reaching impact of the infamous MMM in 2016, many other Ponzi/Pyramid schemes had sprung up and ruined the lives and livelihoods of many Nigerians who patronized them. Experience shows that victims of these illicit schemes, once deceived, end up seeing the capital market and most other investment windows as all fraud. They get disinterested in investing, even in any arm of the financial market.

The point however remains that millions of Nigerians who had been victims of the Ponzi schemes had usually disregarded the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) repeated cautions against participating in those schemes. This was more so the case with MMM which came when the country was plunged into its worst economic recession in decades (2016), and many people saw the illicit scheme rather as an opportunity for huge financial returns. But even by then, and up till now, section 38(1) of the Investments and Securities Act (ISA) 2007 prohibits the operation of Ponzi schemes. The section provides that “no persons shall (a) operate in the Nigerian capital market as an expert or professional or in any other capacity as may be determined by the commission, or (b) carry on investments and securities business unless the person is registered in accordance with this Act and the rules and regulations made thereunder.”

The Nigerian Deposit Insurance Corporation (NDIC) in a report in 2017, estimated that about three million Nigerians lost N18 billion in the MMM Ponzi scheme, founded by three brothers, Sergei Mavrodi, Vyacheslav Mavrodi, and Olga Melnikova. The (then) NDIC’s managing director, Umaru Ibrahim, had described the scheme as “the phenomenon of illegal fund managers, popularly called ‘Wonder Banks’ which have continued to defraud unsuspecting members of the public of their hard-earned money.”

Unfortunately, the crash of MMM gave rise to other Ponzi schemes that surfaced afterwards, with many Nigerians still falling prey despite having lost huge sums of money. Ponzi schemes have since then remained (un)popular in the country, with investors expecting unrealistic returns. Among them was Loom, considered a peer-to-peer pyramid scheme. For Loom, participants created WhatsApp group chats, invested money, and expected to get eight times the value of money invested once they can recruit new members. Upon payments, they were to invite (other) persons to join the system.

However, despite its seeming ‘smooth’ methods, former SEC director-general Mary Uduk, had in May 2019 declared Loom an “illegal outfit,” warning Nigerians against investing in it. She said:  “We, therefore, wish to notify the investing public that the operation of this investment scheme has no tangible business model. Hence, it’s a Ponzi scheme, where returns are paid from other people’s invested sum. Also, its operation is not registered by the commission.” Apart from Loom, there have been other online investment schemes such as Twinkas, Donation Hub, Get Help World Wide, Smile2Charity, Ultimate Cycler, Givers Forum, I-Charity, Crowd Raising, Clarrita, Help2Get, amongst other mushroom schemes that collapsed in recent years. Yet, several others also sprang up with Nigerians falling prey and the promoters disappearing with their money. These included MyBonus2u, RackSterli, Quintessential Investment Company, Inks Nation, and Wales Kingdom Capital Limited, etc.

However, while the ISB 2023 is a necessity to deal with illicit operators in the financial markets, it is really not a silver bullet. The variety and magnitude of abuses and fraud in Nigeria’s financial services industry remain benumbing. It is very doubtful if the content of the ISB 2023 can deal with motely issues in the financial system and the wider economy that stand as disincentives to local and foreign investors. Nor can it deal with greed, ignorance, unemployment, poverty, and worsening economic conditions that really propel many Nigerians to put their money in Ponzi schemes. The ISB 2023 should in all honesty be an integral part of a more comprehensive law to deal will numerous existing and emerging challenges in the (investment windows of) financial services industry. After all, the SEC, the Stock Exchange and numerous participants therein operate in mostly esoteric fashion. This, in part, is why the entire economy needs to be made attractive and confidence-holding to existing and prospective investors. Nigeria needs ISB 2023, and more!

• Mr. Okeke, an economist, sustainability expert and consultant on business strategy, is a Columnist with National Daily. Email: [email protected]