23rd February, 2022
By Julius Masaba
You must be wondering why I am writing about Ponzi schemes today. First, I was requested by a someone.
Secondly, if you read the last article here I wrote before last Christmas, you will know. Anyway, it was an alternative investment suggested in the list of ideas that can turn UGX3Mn into UGX30Mn in six months. Not a bad idea, but what is a Ponzi scheme?
But first, let me tell you about my experience with Ponzi schemes or near-Ponzi schemes. For ‘near-Ponzi schemes’, allow me to refer to multi-level marketing (MLM) companies.
While in my second year at university (UCU) a neighbour friend of mine approached me one day. He was in year 1 of his Development Studies degree. I used to see him pass near our place every morning with a sling bag and dressed smartly in a suit and tie.
One day he met me and we chatted. I asked him whether he was a student at campus. He said ‘yes’. But I never used to see him during day, only evenings as my lectures ended. He said he worked during day and studied in the evening. I asked him what exactly he did in his job.
He said he worked for GNLD company. I asked further what the company did then he pulled out a brochure and some booklets of the company to show me, adding that it was a company selling/marketing health products or supplements.
‘So you sell them?,” I asked. He said ‘yes’. But when I looked at the prices, they were very scary, way above those of ordinary pharmaceutical products because some of them looked like capsules, tablets in tins but just food supplements.
That aside, he invited me to their meetings or call them trainings – where they meet as GNLD marketers to be taught and learn about the different products, their purpose, prescriptions, prices and other elements.
I dodged for a few weeks due to lectures during day and yet their meetings were in the evenings after 5PM – bad time for a campuser. You can’t fix any programme at such a time. But I finally attended the meeting and all I needed was a pen and note pad.
We introduced ourselves and who brought who and in all that, I discovered that my guy and many others were attending the meeting under another person, who had also recruited them into the business. So it was him training the level 2 guys under him and those ones had also recruited or were trying to recruit us (I inclusive) level 3 guys.
So at the end of the day we/I would be the recruit(s) in the last level. That is my guy’s boss, my guy and then I at the bottom. It sounded funny and what came into my mind was that “These guys want to exploit me”.
But I sat through out the meeting and learnt how they get the products (imported from South Africa or Nigeria), how they make money by selling the products – hawking by the way, networking at events, referrals from family and friends, earning points if you sell above a certain amount for certain products, getting commission from recruit’s sales of any product and how you grow though the levels/ranks, silver, gold, platinum, etc. where you enjoy recognition, awards, free vacations, status, etc.
The reason you see some of those guys posing next to or flaunting posh cars, donning suits, etc. So, from the trainings, I discovered that you needed a certain amount of money to start buying the key/essential products (and first consume them) before selling them to others.
When I looked at all other things and what my guy told me, I needed about UGX500,000 (USD294) for a starter kit. Half a million! I was like ‘what’. UGX500,000 was a lot of money back in 2010. I was even wondering how I was going to approach my benefactor/sponsor to ask for such a sum yet paying tuition was always an uphill task. I shelved this whole business opportunity thing.
But one thing with these guys in Ponzi schemes or network marketing is their persistence, even when unnecessary. My guy, realizing I had gone silent on him for weeks decided to come to our place to find out whether I had got the money to start. I told him ‘no’.
However, this time around he had come with another strategy – to motivate me. He came with his laptop with videos of philosophical and motivational icons. We watched, interesting stuff but I was not about to be ‘motivated’ into letting go of any dime even if I got it. That meeting was our last.
This made me conclude that it was not the business meant for me; no, not my kind. Besides, I was studying day student programme and wouldn’t feel comfortable doing business in the evenings. The business also involved walking a lot here and there. I gave up.
Then there was Telexfree in 2014.
When I came to Kampala and started working in a young business advisory firm, we had a female Marketing Lead who had joined Telexfree. Colleagues at office always argued with her about that ‘thing’ not really being able to work or yield, telling her that it was a fraud.
What business is that where you invest little and you are promised a cash out every other day, aside from income/commission you get from recruiting others under you? Personally, I was earning a very small salary then and I didn’t want anything shady fleecing me of my little hard earned money.
Alas, people woke up one morning to the news that Telexfree had crushed – with people’s money of course. I don’t know how much our colleague had invested, but I asked one office colleague and I was told she had invested between UGX280,000 (USD112) and UGX300,000 (USD120). When she came to office she was not happy at although she didn’t want to show it, she lost morale. I think she took some days off due to the shock.
Then came Alliance in Motion Global (AIM Global).
This one I have survived too, twice. I am sure 50% of you have been met by some of the guys or girls working there. The first one was a lady who called me anonymously to a ‘business meeting’ at an office located around Kubiri – Bombo Road.
I promised to attend but never showed up after doing a background check on her and discovering that she is into MLM like the GNLD I had survived. She stalked me on Facebook with a friendship request and inboxing. But it ended there – no response to her messages.
Another was a friend on Facebook who invited me. He was dressed smartly. So after work I went to where we had promised to meet – Ham Plaza opposite Makerere University. I don’t know how gullible I was (even for this meeting), but the signs were there. I think his suits.
He took me to their floor and showed me other people seated in groups being talked to by his colleagues. I found guys in dust-coated suits and some with worn out shoe soles. Then it dawned on me that I was in the wrong place. I even said to myself ‘God, I am not going to be like this’.
When he started taking me through the entire process of joining, what to do, et cetera, he finally said I had to join under him and order for some products, which I will need to sell. In my mind I was like ‘I can do better than this’.
Despite all the rosy pictures he was painting and video clips he played on phone, I was not awed. I was nodding my head in pretentious agreement; because the whole thing was a GNLD replica which I survived while at campus. These Ponzi MLM companies use almost the same modus operandi.
The origin of Ponzi/pyramid/MLM schemes dates back to the likes of Charles Ponzi – the infamous conman who paid out returns with other investors’ money. The schemes were named after him. He was an Italian national who moved to USA in search of greener pastures like any other immigrant.
He did several odd jobs like washing dishes at restaurants before landing a job as a bank teller at Bank Zarossi. The bank catered for Italian immigrants. It later collapsed due to bad loans since it had been charging very high interest rates to borrowers. He became jobless but went to prison once for forging a bad cheque, including smuggling Italian immigrants into USA.
He started his scheme after receiving a post/mail letter coupon from Spain that could be converted/exchanged for a number of priority postage/mail stamps. He realised that he could get huge profits by exchanging such stamps with expensive ones.
He could work with his recruited agents to buy the stamps for him and sell them in the USA to make more than 400% profit on some of the sales!
Most MLM companies also do the same – buying/making a health living product/food supplement at low prices, and sell to you at high prices alongside promising you points and other rewards yet in actual sense are using like Ponzi’s postal card/coupon analogy. I fear them, they all have multi-level, pyramid like characteristics and promise ‘high profits’ to recruits, which never materialise. I would rather do trading in food produce.
When he was not satisfied with running it alone, he sought investors with the aim of turning very higher profits. He promised them outrageous through-the-roof returns of 50% in 45 days or 100% in 90 days.
The mistake he did was paying old investors using new investors’ money instead of using actual profits from the stamp sales. There was once another biggest conman by the names Bernie Madoff who did a similar scheme.
Below is how Ponzi schemes operate.
One man at the top (Level 1) recruits 02 men (Level 2) below him and sells to them a product or not, promises them rewards/points and commissions if they also recruit other 02 men. When they do, the men become 04 (Level 3), who can also recruit 02 each to make 08 (Level 4).
Level 4 men can recruit 02 each and we have 16 and so on and so forth. When you look closely, you will realize that the guy in the top level benefits more than the rest since a lot of commissions (about 50% of amount invested) from the other men (at the base) goes to him upwards.
The guys at the base do a lot of work and may end up earning less. Note that their earnings are affected by the current economic situation, people’s disposable income, geographical location (the reason they trek long distances), prospect’s perception of the product or ‘opportunity’, et cetera especially here in Uganda.
The pyramid collapses when the men at the base of the pyramid are not receiving their payments (dividends, commissions, rewards, points, etc.). The men on the top levels usually disappear or if the scheme is online, it ‘crushes or collapses’. That’s how simple it is.
From his scheme, it’s reported that Ponzi made USD250,000 (UGX925Mn) a day!
Unfortunately, his luck ran out when a Boston based newspaper investigated his business and income – which investigations incited investors to withdraw from the scheme. He pleaded guilty when he was arrested.
Beware of any ‘business ‘opportunity’ that promises you astronomical profits in an unreasonably short period of time, where you need to persuade others to join under you or join under someone using ‘little starting amounts’ and selling a very expensive product that you or your customers don’t easily understand.
Ps. Leave a comment, share your Ponzi scheme experiences.
NB: This article also appeared on Medium, click here.
About the Writer
Julius Masaba is a private investment researcher and business consultant; a WordPress writer/blogger on startups, entrepreneurship, business and finance. He’s also the Business Development Lead at Ablestate, https://www.theablestate.com/. He loves tech. Visit: https://consultmasaba.com/