The rate at which some micro finance institutions in Ghana are fraudulently extorting monies from local investors, especially petty traders, is very alarming. There is therefore the need for the relevant authorities and agencies in the country to constantly offer financial literacy to potential investors to save the situation.
Historically, micro-financing started as ‘Ponzi scheme’ by Charles Ponzi who was imprisoned in 1920 as a result of a $15-million fraud.
Ponzi scheme is an investment scam which involves the payment of purported high returns to existing investors from funds contributed by subsequent investors.
Managers of Ponzi schemes are always out soliciting for prospective investors with the promise of supposedly high returns with little or no risk. The truth of such claims is that there are no such extraordinary investments. 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 enable them to fulfill promised payments to earlier investors, as well as divert some of these funds for their personal use.
The inescapable destiny of Ponzi schemes is that the bubble will definitely burst with time. One classic example of a Ponzi scheme gone bad 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, leading his arrest.
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” (that is, Regulators).
Another aspect of a Ponzi scheme people must look out for is the use of virtual currencies such as bit coins other than conventional currencies. Such virtual currencies are often traded on online in exchange for conventional currencies like the US. Dollar, or used to purchase goods and services online. The reason for the use of virtual currencies for fraudulent activities such as Ponzi schemes is that in some jurisdictions, transactions in those 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 current wave is not the first of its kind in Ghana as there have been several other instances of such scams previously. The situation raises questions about the average Ghanaian’s level of financial education and financial literacy. A lot of accusations and counter accusations flooded the Ghanaian media as to who is responsible for the perpetration of current wave of micro finance scams.
While a section of the Ghanaian population is pointing fingers at the official Regulators or watchdogs of the financial sector, others also blame what they see as 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 the regulators and the Ghanaian public at large should be the main focus.
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 principles on investment returns.
Common Red Flags to Watch Out for:
* 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 high returns for little risk should be viewed with great caution.
* Do not rely on reputation, word of mouth or shared affinity. In most fraudulent investments such as those we have witnessed in Ghana, 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 even be aware that their names are used as an advertising tool to market a dubious investment enterprise. Also, religious and ethnic affiliations may be employed to perpetrate such fraudulent activities in order to boost the number of the investors.
* 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.
* 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.
* Verification of the investment details and any paperwork. At least, investors should ask detailed questions about the investment and get convincing responses before committing funds. 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 on.
* 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 scam case in Ghana that is being grappled with now, promotional activities were carried out regarding increases 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 some victims’ untimely death through shock and loss of livelihood. Effective financial literacy will empower the people to make basic financial decisions in areas such as investment, savings and insurance.
The absence of financial literacy can result in making poor 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 their deficiency in 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 to give financial literacy a great deal of 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 in preventing such occurrences other than coming out with possible solutions after the harm has been done. Individual Ghanaians should also open up and get involved in open discussions on financial issues and report any symptoms of fraud upon the least suspicion.
By Caesar Abagali and Dr Wayo Mahama