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How To Avoid Ponzi Schemes In Nigeria

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As a Nigerian living in these economically fraught times, it can be tempting to consider investment opportunities that over-promise on returns. But it’s in your best interest to avoid investments that look too good to be true, like Ponzi schemes, as they can cause you financial ruin. You might assume you’re too clever to get scammed, but even some of the most diligent Nigerians have fallen victim to a Ponzi scheme. This is why we want to share how to avoid Ponzi schemes in Nigeria.

Nigerians can avoid Ponzi schemes by approaching all investment opportunities with scepticism, doing thorough research before investing money, and investing with licensed organisations like PiggyVest.

In this article, we’ll discuss the suspicious traits of Ponzi schemes and their negative consequences. We’ll also delve into how they work, how you can identify them and how to avoid them.

What is a Ponzi scheme?

how to avoid ponzi schemes — What is a Ponzi scheme? — How to avoid Ponzi schemes

Ponzi schemes are usually disguised as legitimate investment opportunities, enticing you with unusually high, above-market returns on short-term investments. The term “Ponzi scheme” (also known as “pyramid scheme”)is named after Charles Ponzi, an Italian swindler who fathered one of the most well-known cons in the 1920s. A Ponzi scheme is a rob-Peter-to-pay-Paul investment programme that sustains itself by using the money from new investors to pay off older ones.

You might already be asking, is MMM a Ponzi scheme? Yes. The popular, albeit now inoperative, MMM (Mavrodi Mondial Moneybox) is an excellent example of a Ponzi scheme in Nigeria. According to the Nigerian Deposit Insurance Corporation (NDIC), an ‎estimated three million Nigerians lost ₦18 billion to the scheme in 2016.

My Money Mistake: I Took A Loan To Invest In A Ponzi Scheme

More often than not, these fraudsters misrepresent the true nature of the business, claiming the money collected will be appropriately invested with minimal or no risk. However, the scheme’s reliance on volume and constant cash flow from new investors is usually a telltale sign of suspicious activity. And it’s only a matter of time before cash flow dries up, and the entire system falls apart.

How does a Ponzi scheme work?

To understand how to avoid Ponzi schemes in Nigeria, you need to know how they work. Jerome* invested ₦50,000 of his money and ₦250,000 of his mother’s money in MMM in 2016. The framework of the scheme, groundbreaking as it was to Nigerians at the time, was glaringly Ponzi-like. MMM Nigeria was a Ponzi scheme that enabled people to “help each other”. In return for providing help (PH), the platform assured a yield of 30% within a month, meaning that providing help of ₦10,000 would entitle you to get help (GH) of ₦13,000.

Jerome had joined the scheme using his allowance as a student, months before its eventual crash in December 2016. Four months later, freshly graduated and ready to take the world by storm, he decided to make more out of his investment by taking a loan from his mother and injecting it into the scheme.

My Money Mistake: I Lost All My Savings To A Ponzi Scheme

Had Jerome known that his first stint as an investor would be marked by irreversible trauma, he might have made different choices. After he got the call that MMM had crashed — or temporarily frozen, as the founder announced — his world crumbled. There was a scarcity of cash flow, meaning they would need more people to pay in cash or provide help (PH) before receiving their money.

“My biggest concern was where I would find the money to give my mother. She was already struggling financially, and I couldn’t find the words to tell her I had lost a whopping ₦250,000,” Jerome narrated. “I was unsettled and depressed, and it affected my everyday life. It wasn’t until a friend encouraged me to open up to my mother and accept the consequences that I told her everything. I was surprised by how calmly she took the news, and we haven’t spoken of it to this day.”

Like many Nigerians, Jerome was introduced to a world of financial anguish after losing his hard-earned money to this scheme. Among the victims were those who invested their emergency funds, school fees, rent, and other funds set aside for essential purposes. Despite warnings issued by the SEC and CBN, some Nigerians even took loans to invest in this fraudulent scheme. When the predictably bleak end came, causing massive losses of thousands, and in some cases, millions of naira, Nigerians despaired. Many went into depression, some were hospitalised, and a few, most unfortunately, took their lives.

I Went From Making ₦500K/Week To Begging From Friends

Weirdly, several fortunate Nigerians made some money from the scheme. A few early patrons of the system, especially those who “cashed out” before the crash, were the lucky ones. But an investment platform built on models like “gratitude” and “reciprocity” does not inspire confidence and should be considered a ruse, not a serious investment opportunity. Recently, rumours that MMM had plans to make a return as “MMM Krypto” circulated the internet. Nigerians must be wary of this and other investment opportunities with similar brow-raising strategies.

How to spot a Ponzi scheme

Multiple Ponzi schemes have sprung up (and died) since the advent of MMM, each following the same fundamental, unsustainable models. To spot a Ponzi scheme, you have to be on the lookout for the neon-red flags that differentiate them from legitimate investments.

We have outlined a number of them below:

Unusually high ROI: One major working of a Ponzi scheme is the unrealistically high returns on your investment. High-yield investments exist, but the risks are just as high. So, any investment that promises maximum yield with little to no risk is a potential red flag.
Guaranteed returns: Investments are inherently risky, and typically come with warnings stating the risks. Market conditions often affect overall yield, so returns could fluctuate over time. Any investment opportunities that guarantee positive returns regardless of market factors is quite possibly a Ponzi scheme.
Fixation on recruitment: Ponzi schemes thrive on their ability to attract new investors. So, if the model relies on (the influx of) other investors rather than the investment itself, it’s likely a pyramid scheme.
Unlicensed bodies: The Security and Exchange Commission (SEC), Nigeria, requires that investment companies be regulated by law. Do not buy investments from unlicensed sellers, as you risk losing your money to scammers.
Prior warnings: Take any signs or past warnings of legal issues seriously; this includes founders who were involved in scandals or suspicious activity in the past.
Unclear strategies: Avoid any investment company with obscure profit models, unclear products or services, or suspicious investment strategies. A company that cannot articulate its investment model plainly, is not worth investing money in.
Difficulty cashing out: Investors finding it difficult to reclaim their funds or being asked to roll over their investments indicates a serious issue. Be suspicious of schemes like this.