Ponzi schemes are becoming common in the country with Kenyans losing millions to fraudsters regularly. The allure of investments makes us vulnerable to such schemes as we seek to make quick and big returns. Let’s look at how to identify a Ponzi scheme.

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For you to avoid falling prey to these schemes, you need to find a way to identify them before they happen.

What is a Ponzi scheme?

According to Investopedia, a Ponzi scheme is an investment fraud that promises vulnerable investors large profit at little to no risk.

These schemes operate based on the ‘robbing Peter to pay Paul’s analogy. This analogy works when you borrow funds to pay another debt.

The term Ponzi comes from the famous Charles Ponzi. Ponzi is the guy who used this strategy to con thousands of investors in the 1920s. By the time of his arrest, Ponzi had swindled over 2 billion shillings then.

His approach was simple, he would take money from vulnerable investors and promise them 50% profit within 45 days. To finance these profits, he would take more money and use it to pay the earlier investors. The challenge with this approach is soon or later, it becomes unsustainable if no more people are willing to give you funds.

These roots of Charles Ponzi seem to have spread in the country with various schemes coming up in the last few years.

Some of the other common Ponzi and Pyramid schemes include Amazon web worker Ponzi scheme, Petron pay, Crowd1, Public likes, and Bold cashers.

Amazon web worker Ponzi scheme

For the Amazon web worker scheme, the fraudsters created an app and made it available on the Google play store, for interested parties to download. The participants were required to deposit a minimum of Ksh 300 to be given some tasks to perform. After the deposit, they would receive payment for completing the tasks.

There was also the option of earning high interest if you left the money on the site for more than 30 days. The Amazon web worker app was designed with the Amazon logo hence many Kenyans assumed that it was affiliated with the Amazon company. However, after a few months, the fraudsters deleted the app from the play store and vanished with the deposited money.

How do Ponzi and Pyramid schemes work?

A Ponzi scheme promises investors high returns within a short time. Usually less than a year. When more investors join the Ponzi scheme, their money is used to pay off the first investors together with the fraudster behind the scheme.

However, once the number of new investors reduces, there is no more money to pay off the existing investors. The founder has no choice but to close the scheme resulting in investor losses.

A Ponzi scheme can sometimes be confused with a pyramid scheme. However, there is a difference between the two.

A pyramid scheme is also a fraudulent investment scheme where investors are promised high returns and dividend yields. However, their potential earnings are pegged to the number of members that they recruit to the scheme.

In a pyramid scheme, the investors have to recruit more people to earn more money. The aim of this is to recruit as many people to the scheme as possible.

The main beneficiaries of these schemes are the early investors because, by the time they collapse, they usually have already made their investments.

Characteristics of a Ponzi scheme

Now that you understand what a Ponzi scheme is, let us look at its unique characteristics.

1.  Abnormally high returns with very low risk

The basic investment principle is; that the higher the risk, the greater the rewards and vice versa. However, Ponzi schemes defy this principle y promising you very high returns for very low risk.

When the deal is too good, think twice. As an example, the Amazon web worker was promising investors a 50% investment return should they choose to invest their money in the app for 30 days.

Under the normal market principles, this is unrealistic as very few investment options can manage such returns. Even if it happens, the risk must also be very high.

The normal payout for high-yield investment projects is usually 10-20% annually. Anything that is way out of this range should immediately raise alarm bells.

2.  Pressure to invest immediately

When a Ponzi scheme is started, the fraudster usually wants to get as many investors as possible. Due to this, you will be pressured into investing immediately with the luring promise that the early investors get higher returns.

As we saw earlier, Ponzi schemes work by using investments from new investors to pay off the earlier investors. In the beginning, the fraudster will ensure early investors are paid on time making it seem a legitimate scheme.

However, the goal for this is to use them to get more investors from either referrals or positive testimonials. You should always take your time before joining any investment scheme that seems to rush.

3.  Guaranteed income/returns

Another distinct characteristic of the Ponzi scheme is the promise of guaranteed returns.

Very few investment options have guaranteed returns due to the unpredictable nature of the future. Even for those that tend to have such as fixed bank deposits and government bonds, the return rate is minimal. How to Invest in Kenya Government Bonds.

Hence, you should be careful about any venture that is promising you guaranteed fixed returns. This should be an eye opener that requires you to do more investigations before committing your funds.

Businesses that have been operational for years never give their customers consistent and guaranteed returns on their investments. Their annual earnings and dividend payouts fluctuate every year depending on the prevailing market conditions. That is the nature of all businesses.

Therefore, anybody promising you that you will get guaranteed payouts every year is a red flag.

4.  Little to no documentation required

Normally, when you are getting into a legal business deal, there is a lot of documentation required. This includes information such as personal documentation contracts.

These documents act as proof of contract and help with the Know Your Customer details. Sometimes, the such process involves other professionals such as lawyers to ensure the transactions are legal.

However, for a Ponzi scheme, you will find there is very little documentation involved when starting. The reason for this is to hide the real intentions and eliminate the chance of legal liability.

In case of losses, you will have no documents to show the transactions that happened. Hence, make it a habit to document your transactions legally for protection in case of losses.

5.  Little or no regulation

The majority of the investment organizations in Kenya are highly regulated. Some of the regulatory bodies include the Capital Markets Authority and the Central Bank of Kenya.

Hence, as an investor, ensure to invest in regulated businesses to reduce the chances of loss through fraud. One of the best ways to know if a business is regulated is by asking for its license or engaging the regulator directly for confirmation.

Regulated entities are required to operate within some legal framework that works in the best interest of the investors. Some of these include operating in some level of risk threshold and ensuring the business is insured in case of losses.

Ponzi schemes lack these protection measures leaving investors exposed when the business collapses. Hence, when you find an organization operating without any regulation, this should be the first signal to take extra care.

6.  Lack of financial reports

It is normal for most businesses to provide past financial reports to investors. This enables them to review the data and make informed decisions. However, most of these fraudulent schemes don’t have this kind of information making it among the ways how to identify a Ponzi scheme.

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Any investment opportunity where you are struggling to get the financial reports should be questionable. This is because either they are nonexistent or are not a true representative of the business position.

A good investment should be open with information readily accessible to interested investors.

7.  Vague business explanation

As an investor, you should invest in business ventures that you understand. Don’t shy to research or question in case you need more clarification.

In case the business is not available online, you can ask the business rep to explain more about the business to you.

Ponzi schemes usually don’t have any clear business explanation. This is because there is none in the first place.

When inquiring about any business, they should be transparent about where they invest their money and the strategy used to ensure that the customers remain profitable. If the business personnel is giving a vague explanation or is using complicated terms, take this as a red signal.

Most Ponzi schemes will also claim to have secret strategies enabling them to make super-normal returns. Hence. If you don’t understand it, don’t invest your money.

8.  Complicated deposit and withdrawing procedure

Due to the opaque nature of Ponzi schemes, there are a lot of difficulties when you want to invest cash out of your investments.

Some of the signs for this include when they ask you to deposit the money to another business account bearing a different name from the official business name.

Another sign to look out for is when it comes to withdrawing money. Some of the actions include asking you to consider reinvesting the money with them. More often than not, you get a promise of higher rewards if you leave the money in your account for a longer time.

9.  Common among people with a shared affinity

Many of the Ponzi schemes rely on their initial investors to get more customers through referrals. Therefore, the scheme will be popular among people who share a common affinity such as close family members, a group of friends, a religious network, or people working in the same place.

Fraudsters could also target their family members, thus creating a feeling of legitimacy among the potential investors. Therefore, beware of schemes where almost all the members have a common relationship. This makes this among the best ways of how to identify a ponzi scheme.

How to avoid a Ponzi scheme

1.  Trust your instincts

Sometimes instincts can save our day especially when it comes to investments. Hence, if you get any doubts regarding an investment idea, stay out of it. This could end up being the best decision that saves you from future losses.

2.  Do adequate market research

Before getting into an investment, the first step should be performing intensive market research. Some of the areas to research include the type of business and potential returns in the market.

This information will be key to checking normality with the business at hand. If there are major discrepancies in areas such as business model and returns, this should be a sign of a potential Ponzi scheme.

3.  Be extra careful when approaching retirement.

Many Ponzi schemes target the old demographic since they have accumulated a lot of money for their retirement. If you are approaching or are already in your retirement years, do not rush into investments.

Take time to make such decisions. In case of doubts, you should engage professionals for guidance.

4.  Deal with regulated firms only

Since regulated firms and organizations have a specified legal framework within which to operate, they are safer for investors.

As an investor, you also have legal protection in case of some losses due to some checks such as insurance.

Dealing with schemes under regulations helps to minimize the chances of loss.

5.  Understand the difference between a custodian and a scheme manager

A scheme manager is a person who organizes the scheme, while a custodian is a person in charge of the money invested in the scheme.

In Kenya, a custodian is usually a financial institution, since they are regulated by the Central Bank of Kenya (CBK).

The safest schemes are the ones that have a custodian who is separate from the scheme manager. Both the custodian and the scheme manager should be regulated by a domestic or international regulatory body.

The purpose of a custodian is to hold the invested money on behalf of the fund manager. Once the manager identifies a potential business investment, the custodian invests the specified amount as directed by the manager.

Involving two regulated parties in the money management reduces the risk of fraud by the scheme manager.

For Ponzi schemes, you will find that the manager is also the custodian. This gives the fraudsters the chance to use the invested funds as they please.

Therefore, the next time you wish to invest, inquire who the custodian of the investment is.

Conclusion on How to Identify a Ponzi Scheme

Ponzi schemes have been around for more than 100 years and fraudsters are still learning new tricks. It is therefore important for you to learn how to protect yourself against any Ponzi schemes that might come your way.

Some people have lost all their life savings, while others have been left with massive debts due to these schemes.

The above factors are critical in how identifying a Ponzi scheme. With the increase in research and due diligence, it is possible to avoid a fraudulent investment.

To recap, the characteristics of Ponzi schemes are:

  1. Abnormally high returns with low risks
  2. Pressure to invest immediately
  3. Guaranteed income
  4. Little to no documentation required
  5. Unregulated organization
  6. Unavailable financial reports
  7. Vague business explanation
  8. Complicated deposit and withdrawal process.
  9. Common among people with a shared affinity


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