Beware, no investment scheme makes high returns without risk

Published on 08/06/2009

By Polycarp Ngoje

Before investing money in any investment plan that promises quick returns you should find out where your money will be invested.

And always remember if the scheme promises quick returns with no risk, you should raise the red flag and exercise caution before parting with your money.

Thousands of Kenyans have been swindled of more than Sh35 billion in get-rich-quick pyramid schemes that have no economic activity to satisfy their existence.

The fraud starts with one person, the initial recruit, at the apex of the pyramid. This person recruits a second person, who is required to ‘invest’ money, which is paid to the initial recruiter.

To get his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest Sh100.

If the recruit gets ten more people to invest, this person will make Sh900 with just a Sh100 investment.
The ten new ‘investors’ become recruiters and each one is in turn required to enlist an additional 10 people each, resulting in a total of 100 more people.

new recruits

Each of those 100 new recruits is also obligated to pay Sh100 to the person who recruited them; recruiters get a profit of all of the money received minus the initial Sh100 paid to the person who recruited them.

The process continues until the base of the pyramid is no longer strong enough to support the upper structure.

The problem that many don’t understand is that the scheme cannot go on forever because there is a finite number of people who can join the scheme (even if all the people in the world join).

People are deceived into believing that by giving money they will make more money (with an investment of just Sh100, one is promised Sh900 in return).

The fraud lies in the fact that it is impossible for the cycle to sustain itself.

Those who are most vulnerable are those at the bottom of the pyramid, when it becomes impossible to recruit more people.

Because most people are attracted to quick money, many pyramid schemes have succeeded in fooling people under the guise of microfinance, aaccos, investment clubs, welfare associations or multi-level marketing.

Legal multi-level marketing (MLM) recruit people to sell a product or service that has some inherent value.

One is able to make profit from sales, so they don’t necessarily have to recruit more sales people below them. Though they can recruit other people whose sales would give them more profit, they can stick to just selling the product directly.

A pyramid scheme wearing MLM tag, however, will most likely sell a product with no independent value.

In this kind of fraud one would be required to recruit new members into the MLM to make a profit and keep the MLM going.

A Ponzi scheme is another fraudulent investment plan.

In this scheme, the fraudster collects money with a promise that it will be invested where it can generate high returns.

chain letters

The ‘investors’ return on investment could be generated by anything, it could come from money taken from new investors, which means new investors essentially pay off the old investors or money made by gambling in casinos.

Chain letters can take on the form of a pyramid scheme when the letter asks one to give a money to the people on a list, and then delete the name of the first person on the list, add their name, and forward the letter to more people.

Other people receiving the letter are then asked to do the same, so that they can receive the money as well.

By forwarding the letter, they ask those in the chain to give money with the promise of making money.

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