Ponzi Schemes: The Legal Implications and Regulatory Responses in Nigeria
ABSTRACT
The harsh economic realities of the Nigerian populace, unemployment and poor financial literacy have created a market for drivers of fraudulent investment schemes called Ponzi schemes.
The notoriety of Ponzi schemes in Nigeria gained traction during the official declaration of the economic recession in early 2016, where thousands of Nigerians fell prey to supposed “money doublers” who promised massive interests upon investment but instead eloped with funds ploughed in these schemes.
An estimated loss of over 300 billion naira to Ponzi schemes have been recorded over the past five years, and there’s a new surge in Ponzi scheme engagements following the current economic hardship.
This paper espouses the concept of Ponzi schemes, the position of the law regarding these schemes and the possibility of recovery for victims of investment fraud. It uses the doctrinal method to achieve this end, and recommends adjustments to existing laws in order to adequately tackle the menace of Ponzi schemes in the Nigerian space.
Key words:
Ponzi schemes, returns, investment, registration.
Introduction
The desperation for fast wealth has left many individuals high and dry by leading them into ‘investing’ heavily in corporations that cascade themselves as legitimate business enterprises promising massive Return on Investments (ROI). These false enterprises have been termed Ponzi schemes and have thrived on the backs of the masses.
Ponzi schemes, are not peculiar to the Nigerian space alone, in fact, one of the earliest Ponzi schemes recorded was a British Joint Stock Company, the South Sea Bubble of 1711, which swallowed millions of Euros, welcoming an economic crisis in England.
In recent times, however, Ponzi schemes have become a rampage in Nigeria, causing losses spiraling into billions of naira. Regardless of the recorded losses, Ponzi schemes are still on the increase for various reasons around the country.
Ponzi Schemes
A Ponzi scheme is a type of investment fraud wherein investors are promised artificially high rates of return with little to no risk; original investors and the perpetrators of the fraud are paid off by funds from later investors, but there is little or no actual business activity that produces revenue.[1]
A Ponzi scheme usually maintains the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own. They depend on new, constant money inflow in order to offset the old investors and upon failure to meet up, the scheme collapses.
A classic example, and arguably the most notorious Ponzi scheme to ever raid the Nigerian sphere is MMM. The Nigerian Deposit Insurance Corporation (NDIC) estimated that around N18 billion was lost when MMM was shut down in December, 2016.[2] Another notorious Ponzi scheme was MBA Forex, which was in operation from 2018 to late 2020; it defrauded people to the tune of 213 billion naira.
One thing is similar in all of these schemes, the promises of massive, unrealistic ROIs. For instance, MBA Forex promised investors monthly returns of 15% or more – for contrast, this is around the average range for ROI per annum in some actual investment schemes – and that they could withdraw their funds at “any time”.[3] The same was the case with MMM, which promised 30% to 100% ROI in 30 days. As is typical of Ponzi schemes, it crashed 18 months into the its introduction into the Nigerian market.
Despite the advent, crash and losses accompanying these abovementioned schemes, more have emerged, like Ultimate Cylcer, Quitessential, Barazza, those of Chinmark groups, with CEO Marksman Ijomah on the run, and Ovaioaza, which thrived particularly on the back of the social media platform, Facebook. The potential for more victims of Ponzi Schemes in Nigeria is still increasingly large, especially following the economic downturn, inflation and general hardship.
Ponzi Scheme or Investment Scheme?
“If it looks like a duck, swims like a duck, and quacks like a duck, then it is probably a duck”. Ponzi schemes try to mirror legitimate investment businesses; however, upon close inspection, there are signs pointing to whether it is an investment or Ponzi scheme.
Ponzi schemes closely resemble one another, hence, it is very possible to recognize one. The following are some tips to potential investors:
a. Massive ROIs: The returns on investment promised by Ponzi schemes disguised as legitimate enterprises are high and overly attractive. If the percentage return promised is overly high and fixed, on a short-term scale or time frame, it is a Ponzi scheme.
b. Unregistered Investments: Any manner of business calling on members of the public to plough funds into such an entity ought to be publicly listed and registered with the Securities and Exchange Commission (SEC). While most of these schemes may be registered as companies under the Corporate Affairs Commission (CAC) – because of the ease of registration it affords – they fail to do the same under SEC, which is the primary regulator for businesses requiring exchanges with the public. Registration with the SEC provides the public access to the company’s information, its management, services as well as products rendered. Due diligence can be carried out on an entity, by checking the SEC database to confirm the authenticity or otherwise of such entity before investment is made. The Commission advised Nigerians to conduct due diligence on investment platforms through its portal before investing.[4]
c. Undisclosed strategies: Most Ponzi/investment schemes operators do not disclose the strategies through which they intend to attain the ROIs promised to their investors or potential investors. They make secret “what” the money is being used for and just request, on a basis of “mutual trust” that money be given them, to be returned in high interest rates.
d. Affinity: Most of these Ponzi schemes are made based on recommendations by persons who claim someone they’re closely related to or affiliated with made profit off the said investment platform.[5]
e. No past financial records: Majority of the Ponzi schemes have no past financial records of businesses or transactions engaged in with relevant business regulators such as the Corporate Affairs Commission, Securities and Exchange Commission, Central Bank of Nigeria, etc.
Position of the Law on Ponzi Schemes
It is the primary function of institutions such as the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN) and agencies such as the Economic and Financial Crimes Commission (EFCC) to regulate, curtail, investigate and prosecute matters surrounding investment fraud.
The position of the law as to the legality or otherwise of these schemes are clear and contained in several legislations, among which is the Banks and Other Financial Institutions Act (BOFIA), 2004. Sections 58(1) and 59 of the BOFIA stipulates that “No person shall carry on financial business in Nigeria other than insurance and stockbroking unless it is a company duly incorporated in Nigeria and holds a valid license granted by the CBN”.
Under BOFIA, a person or entity is regarded as conducting financial business other than insurance or stockbroking if it solicits and accepts money deposits from members of the public.[6] The interpretation of the aforementioned combined provisions show that Ponzi/Investment schemes are illegal by virtue of the fact that they lack authorization from the CBN and proceed to request for and accept funds from the public.
Additionally, and primarily, section 67(1) of the Investment and Securities Act (ISA), 2007, is explicit on the matter thus:
“(1) No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money of any Body Corporate for a fixed period or payable at call…”
(2) If an invitation to the public is made in breach of subsection (1) of this section, all persons making the invitation and every officer who is in default or any Body Corporate making the invitation shall be separately liable to a penalty of N500,000, in the case of a body corporate and N100,000 in the case of an individual.
In addition, Section 38(1) of ISA states “no person 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 there under”.
The combined provision of the above forbids persons and entities from requesting and receiving investments from the public without express permission by way of registration under the Act and its commission. In buttress of this, the commission, on the 17th of March, 2022 put out a disclaimer on their official website, notifying the general public and warning that it is unlawful for any private enterprise whether incorporated as a company or not, to solicit for funds from the public by whatever means to fund its private ventures in contravention of the ISA, 2007.[7]
This Act and the punishments contained therein have however been considered inefficient and ineffective – for these times – in combating the problems of Ponzi schemes, as they are still high rising. Thus, it is no surprise that the House of Representatives have passed for second reading, a bill seeking to regulate Ponzi and pyramid schemes as well as other forms of investments called “A bill to repeal the Investment and Securities Act 2007 and to enact the Investments and Securities Act, 2021”.
The bill introduces an express prohibition of Ponzi/Pyramid schemes and other illegal schemes, it also proposes to grant more regulatory powers for SEC to sanction unregistered investment schemes, and upon conviction of any person found guilty, an imprisonment term of ten years or a fine of 5,000,000 or both.[8]
The Attitude of the Court Towards Ponzi Schemes?
The Nigerian courts have recognized Ponzi schemes as a fraudulent enterprise. In the case of Mekwunye v Lotus Capital Ltd & Ors[9], the Appellant sought a declaration from the court that the 1st Respondent, which guised as a legitimate Telecom Private Equity Fund was a Ponzi Scheme used to defrauding Nigerians. The court held in favour of the applicant and made the order.
The courts have also hammered down on perpetrators of these Ponzi schemes in a myriad of cases.
In the case of the inventor of Quintessential Investments, the founder of the scheme,Joshua Kayode[10], was arraigned before Lagos Division of the Federal High Court on the 5th of August, by the Force Criminal Investigation Department (ForceCID) on a 170-count charge bordering on conspiracy and obtaining by false pretense. He defrauded people to a tune of N10.8 billion under the scheme. While the case is still on going, the Judge, Justice Nicholas Oweibo, issued a bench warrant for his arrest after he failed to show up for trial after being reported to be “at large”.
Also, in the case of FRN v Kingsley Nwegwu & 2 Ors,[11] the perpetrators, who were siblings, were convicted by Justice M.L. Abubakar of the Federal High Court, Akwa, Anambra state for obtaining money by false pretense by way of Ponzi scheme to the tune of N98.7million.
They lured the public to invest their monies in a venture called ACJEC Global Services Ltd. with the promise of mouth-watering 30 – 34 percent interest annually on their investments. Investigations showed that more than 4 billion was paid into their account in the course of their operation. The trial judge sentenced them to one year imprisonment, and ordered that all the properties traced to them in the course of investigations be forfeited to the Federal Government. He also gave them an option of a fine of 1 million each.
Recourse for Victims of Ponzi Schemes?
In majority of the judgments of the court with regard to funds fraudulently obtained by Ponzi schemes, orders have been made that the monies as well as properties gathered from these schemes be forfeited to the Federal Government. This begs the question: Whether or not monies invested into Ponzi schemes by victims can be recovered by them?
In the case of Albia Trading GMBH & Anor v. Madunka Int’l Ltd & Anor[12], the court of appeal held thus: “The court of law cannot protect or promote such transactions founded on exploitation and illegality… no court will be friendly with or countenance illegality.” In support, the case of Ochedi & Ors v CBN & Ors[13] is instructive, where the court held that the attempts by the appellants to recover their monies from the respondents were futile as the company in which they “invested” did not have the valid license to carry out such business, their act was expressly prohibited and illegal, therefore, the transaction between the parties from the beginning was illegal, whether or not the appellant knew of this was held to be immaterial, as ignorance of the law is no excuse.
It held further that “being illegal, the transaction between the Appellants and Wealth Zone Limited could not have vested the Appellants any legal right that is recognizable and enforceable by a court of law.”
Many victims have insisted on the legality of their actions, as contracts were signed between the false corporation and themselves. However, the case of Onyuike v Okeke[14] begs to differ, as it was held that “…a contract is illegal if the consideration or the promise involves doing something illegal or contrary to public policy; and an illegal contract is void and cannot be the foundation of any legal right.” Drawing from the foregoing, and a list of cases with similar decisions,[15] it can be concluded that the chances of recovering monies so put into these schemes by victims is impossible.
Conclusion
“If it looks like a duck, swims like a duck, and quacks like a duck, then it’s probably a duck”. If an enterprise looks suspiciously like a Ponzi scheme, promising incredible but unrealistic ROI, if it’s not registered under the relevant agencies, is secretive about its means and built mostly on affinity; it is not a road out of economic or financial turmoil, it is the road towards it – a Ponzi scheme.
It is rather unfortunate that there is rarely any solace in the courts for victims of these fraud; however, it is strongly advised that the bill proposing to award jail time for drivers of Ponzi schemes be passed as soon as possible, in order to serve as a deterrent, as well as give some level of satisfaction to victims that justice in some form, has been served.
[1] Legal Information Institute, “Ponzi Schemes” (2022) Cornell Law School. Available here Last accessed 14 October, 2023.
[2] A. Fowowe, ‘Ponzi Schemes: The Illegitimacy and Legal Implications In Nigeria’ (2020) Law Axis 360o Available here Last Accessed 12 October, 2023
[3] C. Mitchell, “The Story Behind the MBA Forex Scam and Closure” (2023) Trading biz Available here Last accessed 14 October 2023
[4] W. Azeez “SEC Advises Nigerians to Investigate Before Investing in Any Scheme” (2021) The Cable. Available here Last accessed 13 October 2023
[5] Ibid
[6] Banks and Other Financial Institution Act, 2004, s. 1(5)(a)
[7] SEC Nigeria, “Activities of Some Unregistered Investment Schemes” (2022) Available here Last accessed 14 October, 2023
[8] L. Baiyewu, “Reps propose 10-year jail for Ponzi scheme operators” (2022) The punch Newspaper Available here Last accessed 13 October, 2023.
[9] Unreported, suit no. CA/L/1349/2016
[10] M. Ebolosue “Alleged N10.7bn Fraud: Court Grants 22-year-old N2bn Bail” (2021) The Punch Newspaper Available here Last accessed 12 October 2023
[11] Unreported, suit no. FHC/AWK/74C/2011, 2/12/2019.
[12] (2013) JELR 35344 (CA)
[13] (2018) JELR 38576 (CA)
[14] (1976) JLER 46291 (SC)
[15] Unitrust Insurance Co. Ltd v Ambico Sendiran Nigeria Ltd (2012) LPELR-15417 (CA)
About Author
Favour Woyengideigha Osuluku, is a promising legal researcher and budding academic writer who hails from the heart of the Niger Delta – Bayelsa state. She is a law graduate from Niger Delta University, Wilberforce Island, Bayelsa state, and has keen interest in Cybersecurity, Corporate and Commercial Law and Maritime Law.
