Finance Guest Columnist

PONZI SCHEMES: THE ILLEGITIMACY AND LEGAL IMPLICATION IN NIGERIA by FOWOWE A.I.

INTRODUCTION[1]

In Nigeria, the “get-rich-quick” and “easy money” mindset syndrome are hardly uncommon for an average Nigerian to be unaware of. Closely related to these syndromes is the Ponzi Scheme, a very popular means of acquiring money by investing a certain amount with little or no risk yield, to yield a double of the original amount invested within a very short period of time (45 minutes or 1 hour as the case may be); invest 50k, get 100k in 30 minutes. The acceptance of this enticing deal and the participation in Ponzi schemes can, according to researches, be traced to the following diverse factors arranged in a top-ten order;[1]

  1. Friend’s recommendation
  2. Expected benefits
  3. Current economic situations
  4. Ease of obtaining funds
  5. “Get rich quick”
  6. Testimonials on ‘Schemes’ involvement in solving people’s problem
  7. Personal judgment
  8. Past performance of the scheme
  9. Family member(s) opinion
  10. Perceived ethnics of the scheme

Unfortunately, most times, after the intoxication of the sweet-savouring words of fraudsters, many people become heavy victims of financial scam or fraud. Ponzi schemes [are] fraudulent investing scam[s] promising high rates of return with little risk to investors [which] generates returns for early investors by acquiring new investors and is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers.[2] Most of these fraudsters that perpetuate these schemes do not actually invest any amount of money anywhere. Instead, they use monies ‘invested’ by latter investors to pay earlier investors and eventually pocket the remains.

Constant inflow of cash is highly required for the survival of Ponzi schemes. Where new investors are hard to come by or large numbers of existing investors’ cash out, these schemes consequently collapse. A very good example is MMM, arguably the most notorious Ponzi scheme ever in Nigeria. The Nigerian Deposit Insurance Corporation (NDIC) estimated that around N18 billion ($49.3 million) was lost when MMM was shut down in December 2016.[3] Little wonder Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.[4]

THE POSITION OF THE LAW ON PONZI SCHEMES

In relation to the rapid spread of Ponzi schemes in Nigeria, it has become imperative that members of the general public become acquainted with the position of the law on the subject. By virtue of section 67(1) of the Investment and Securities Act (ISA), 2007:

“No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with any Body Corporate for a fixed period or payable at call …”, Ponzi schemes are therefore illegal and a felony punishable under the law as evident in subsection 2 which states thus;

(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.

Furthermore, by a combined effect of sections 58(1) and 59 of the Banks and Other Financial Institutions Act (BOFIA), 2004, 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 Central Bank of Nigeria (CBN). Unarguably, Ponzi schemes operate without the license and authorization of the CBN and are thus, illegal.

Ponzi schemes have also been recognized by the Nigerian Court as illegitimate and fraudulent thus in the case of Mekwunye v. Lotus Capital Ltd. & ORS[5], the Appellant sought a declaration that the 1st Respondent’s Telecom Private Equity Fund is Ponzi scheme and an instrument of fraud used by the Respondents to defraud unsuspecting Nigerians which was held in favour of the Appellant.

It is also worthy to note that, although earlier stated that engaging in Ponzi schemes according to section 67(2) of ISA attract a fine of N100 000 (one hundred thousand Naira) for individuals (natural persons) and N500 000 (five hundred thousand Naira) for corporate entities, by provision of section 59(6)(b) of BOFIA, participation in Ponzi schemes attracts a punishment of 5 years imprisonment or a fine of N1 million (one million Naira) or both as the case may be.

THE POSSIBILITY OF RECOVERING ‘MONEY ‘INVESTED’ IN A PONZI SCHEME

Having examined the illegality of Ponzi schemes, can monies invested into Ponzi schemes be recovered? This writer answers this question in the negative.

In the case of Albia Trading GMBH & ANOR v. Madunka Int’l Ltd & ANOR[6], the Court of Appeal held thus;

“The court of law cannot protect or promote such transaction founded on exploitation and illegality … no court will be friendly with or countenance illegality.” Per Mbaba J.C.A (Pp. 25-27, paras. F-C)

Also, the Supreme Court in the case of Onyiuke III v. Okeke[7] held thus;

“It is the law 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.” Per Alexander, C.J.N. (P. 9, paras. B-D)  

CONCLUSION

Nigerians participating in Ponzi schemes should bear in mind that if apprehended and tried, the law might hold in the position of imposing a fine on such individual or a prison term or both; this applies to both the perpetrators of Ponzi schemes and the ‘investors’. This is also regardless of the plea for not being aware as ignorantia juris non excusat – ignorance of the law is not excused.

[1] Fowowe Adetomiwa Isaac, Undergraduate Law Student, Faculty of Law, Adekunle Ajasin University Akungba-Akoko, Ondo State, Nigeria. Email: fowowe.adetomiwa@gmail.com, Phone: +234 905 750 1333.

[2] Obamuyi, T.M., Iriobe, G.O., Afolabi, T.S., Akinbobola, A.D., Elumaro, A.J., Faloye, B.A., Adeyefa, A.F., Adepoju, T.F., & Oni, A.O., ‘Factors Influencing Ponzi Scheme Participation In Nigeria (2018), Advances in Social Sciences Research Journal, 5(5) 429-444, accessed 1 July 2020.

[3] Chike Olisah, <https://nairametrics.com/2020/04/01/sec-discovers-12-ponzi-scheme-operators-warns-the-investing-public/> accessed 1 July 2020.

[4] O.G. Chukkol, ‘Beware: Engaging in Ponzi Scheme Attracts 5 Years Jail Term or 1 Million Naira Fine or Both’, <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3588923&gt; accessed 1 July 2020.

[5] SECEd, ‘Ponzi Scheme – “Red Flags” and How to Spot One’, www.proshareng.com/news/Frauds-Scandals/Ponzi-Scheme-“Red-Flags”-And-How-T/41325> accessed July 1 2020.

[6] (2018) LPELR–45546(CA)

[7] (2013) LPELR–22312(CA)

[7] (1976) LPELR–8039(SC)

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