With the current state of unemployment in our country
(Ghana), it seems absolutely normal to find people, especially the youth,
entering into business and investment schemes without necessarily considering
the pros, cons and the modus operandi of these companies. Two years ago, an
investment company known as OBO funds came into the scene and made away with
monies my friends have invested with them after promising them with
incredulously high returns on their investment. The current trend now with
these fraudsters are what they call network marketing. Few days ago, a
friend of mine introduced me to an investment opportunity that promises to grow
my investment of GHS100.00 over a period of twelve (12) months to the tune of
GHS10,000.00. The package sounded very tempting, but upon requesting for the
literature of the company to understand their modus operandi, realized it’s a
scam, a Ponzi Scheme, and I know there are a number of them out there requesting
for nothing from our you but an unreasonable promise to grow your money upon
your willingness to join the scheme and get others too on board.
Investment fraud, especially the Ponzi Scheme is now very
common on our market. While it is illegal to operate such businesses in Canada,
am yet see the full implementation of the same legislation here in Ghana. While
the government is not doing anything right now in terms of enforcing the
legislation that makes their operation illegal, it is therefore our
responsibility to be able to distinguish between a legitimate network marketing
and fraudulent schemes such as the pyramid and Ponzi scheme.
NETWORK MARKETING [MULTI-LEVEL MARKETING]
Network marketing is a direct selling method in which
independent agents serve as distributors of goods and services and are
encouraged to build and manage their own sales team by recruiting and training
other independent agents. In this method, commission is earned on agents own sale
revenue as well the sales revenue of the sales force he/she manages (also known
as downline). A key feature of network marketing is a low upfront
investment usually for the purchase of a product (sample kit) and an
opportunity to sell as well as recruit others. Note that, the main idea behind
network marketing is the distribution of a product, therefore things get sticky
when a network marketing company compensate participants primarily for
recruiting others rather than for selling the company’s products or services.
Another typical characteristic of a legitimate network marketing is, the
company buys back products an agent is unable to sell but that can’t be said
about illegal pyramid schemes. A network marketing company in which most of the
revenue comes from recruitment may be considered an illegal pyramid scheme.
PYRAMID SCHEME [PYRAMID SCAM]
Pyramid scheme (also known as pyramid scam) is a business
model that recruit members via a promise of payment for enrolling others into
the scheme rather than supplying investment or sales of product. There are
basically two (2) forms namely; product-based pyramid scheme and the naked
pyramid schemes (also known as the Ponzi scheme)
1.
Product-based pyramid scheme
disguises as a legitimate network marketing opportunity. Here’s how it works:
·
A distributor recruits 10 sales people who each
pay GHS500.00 for a starter kit of product to sell.
·
The distributor gets 10 percent of each starter
kit that is sold.
·
The distributor also gets 10percent of each
product any of his recruits sell.
·
The recruits are told the fastest way to make
money isn’t by selling the product, but by recruiting more people to buy
starter kit (hence the lucrative commission based on the number of downlines
one has).
·
The people at the top of the pyramid get
commissions from everyone in their downline.
The problem with most product-based pyramid scheme is the
product themselves don’t sell very well, so the sure way to make money is to
find more recruits whereas with legitimate network marketing, the money is in
the sale of the product. And this is the type of network marketing which has
now hit the streets of Ghana. They offer lucrative commissions for introducing
others into the business to purchase sample kits without focusing on the
distribution of their underlying product. Most if not all will ask you to
determine your own sales margin without buying back unsold products. Such
schemes makes the top men richer by rubbing the people below and is
unsustainable.
2.
NAKED-BASED PYRAMID SCHEME [PONZI SCHEME]
With the naked pyramid scheme, no product is sold (it is very
naked). And this is how it works;
·
One person recruits 10 other people to
participate in a "no-fail investment opportunity."
·
The 10 recruits each pay the recruiter $100.
·
The recruiter now tells them to go out and
recruit 10 more people to do the same.
·
If each recruit is successful, they'll all end
up with $900 in profit from a $100 investment.
In simple language, this scheme rubs Peter to pay Paul. This
was exactly the type of scheme my friend introduced me to in my introduction.
It looks pretty simple looking at it from afar, but the truth is, it is not
sustainable and only those at the top seems to benefit from it. So in their
first few years of operations they will allow payouts to serve as a basis to be
used to propagate the business (preaching of the good news to lure others on
board). But as the number of recruits increases, the scheme automatically
collapses as the money in the schemes becomes inadequate for all members on
board. So definitely someone will lose eventually, but the question is, will it
be you or that sister you introduced on the scheme.
These schemes are fraudulent and has emerged in our country
to take opportunity of the unemployment situation here in Ghana as well as the
desire of people to earn cheap income. But the truth is, these schemes are not
new in the financial world. The Ponzi scheme as we have it now was first
initiated by Charles Ponzi (hence the name) in the year 1920 in the US. Bernard
Madoff also orchestrated the largest Ponzi scheme in world History from early
1990s to 2009. Where he robbed his clients to the tune of $65 billion. He is
currently serving 150 years prison sentence with a confiscated asset of $17.179
billion.
You can read more about the Ponzi and pyramid
schemes from the below links:
LITMUS TEST TO DETECT
NETWORK MARKETING SCAMS: Where is the company’s focus? Product distribution
or recruitment of new agents? If product, then legitimate but if recruitment,
then a scam.
Emmanuel Sackey
Actuarial Science Student, UG
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