Charles Ponzi, the Italian -born U.S based Fraudster made Ponzi Schemes, named after him, popular in 1920 even though he was not the first to practice it. The schemes, similar to the Wonder Banks in Nigeria, operated using the same principles as present day Nigerian "Wonder Banks".
They are typically fraudulent operations and pay returns to investors from their own money or money paid by subsequent investors, rather than from profit earned by the individual or company.
Using his company, the Securities Exchange Company, Ponzi promoted the scheme. He hired agents and paid them generous commissions for every dollar they brought in. By February 1920, his total take was $5,000 (approximately $54,000 in 2010 dollars).
By May 1920, he had made $420,000 ($4.53 million in 2010 terms). Bernard L Madoff, who is presently serving a 150-year prison sentence for similar fraud, created a $65 billion commercial empire using the same principles. Madoff promised his clients double-digit returns on their investments. He never made any investment, instead he paid existing clients with new investors money. In the end, the scheme burst bringing down thousands of traumatized investors.
Umanah Umanah raised the profile of Wonder Banks in Nigeria in 1992. He left many victims impoverished after his Ponzi Scheme failed. When he was arrested for running the illegal scheme, about N77milion was recovered from him. He claimed then that the amount he left in the three houses where security operatives found the cash, was actually three times more. Depositors were paid 50 per cent of their initial investments.
Umanah was never prosecuted and the discrepancies in the reported recoveries were never accounted for. There have been several other schemes after him in Jos, Onitsha, Lagos and other cities around Nigeria. Claims by investors who have been defrauded totaled over 560, 882 valued at over N106.9 billion as a result of the operations of over 440 illegal companies recently. It would be much higher now. Nospecto Oil and Gas Ltd, one of the illegal Fund Managers was reported to have accounted for 48 percent of these claims.
Investors in these schemes often make representations to the Securities and Exchange Commission, Central Bank of Nigeria and the Economic and Financial Crimes Commission, not realizing that their greed got them involved with illegal and unregistered operators and illegal schemes. Investors should know that when a scheme has high investment returns with little or no risk, has overly consistent returns and is unregistered, it is obviously a fraud. Usually, when a Ponzi scheme is not stopped, the promoter vanishes, taking away all the investment money.
As the scheme requires a continuous stream of investments to fund higher returns, a drop in new investments makes it to collapse as the promoter cannot pay promised returns, and a liquidity problem is triggered. External forces, such as economic decline, as in the case of the Madoff scheme, can also cause depositors to make withdrawals, thereby triggering off a liquidity problem for the operator.
Efforts have been on by the regulatory authorities to stem the tide of Wonder Banks as they are popularly called in Nigeria. According to some regulatory authorities, some commercial banks may be encouraging such illegal schemes by giving credibility to the operations.
They are said to do so by collecting the depositors funds and not raising the necessary alarm. What has happened to the know-Your-customer (KYC) rule? Fraudulent registered Fund Managers who do not register such schemes may also be responsible for the growing trend in Wonder Bank operations. To what extent is the surveillance machinery of the Security and Exchange Commission (SEC) being used to track down illegal schemes by registered Fund Managers.
The operations of Wonder Banks are clearly illegal. The authorities, including the Central Bank of Nigeria, the Securities and Exchange Commission, the Economic and Financial Crimes Commission, the Corporate Affairs Commission and the Nigerian Deposit Insurance Corporation, have a duty to collaborate and reduce the prevalence of wonder banks. Perhaps, this can be done by an aggressive enforcement regime and a well articulated enlightenment programme targeted at investors.
I have seen a pamphlet published by the Securities and Exchange Commission. It says "Beware of Investment Scam (Wonder Banks)". The pamphlet explains what wonders banks are, how investors should respond to them. It finally gives a warning. It has also been reported that there is an Inter agency committee that has been set up to attack the problem. We need more visibility of the committee's activities.
The US SEC, for example, prosecutes many Ponzi Schemes every year, both to prevent new cases and to recover investor's assets. There are several cases of investments that are not registered. Without registration, information about the companies, products, services and finances cannot be ascertained. Its focus is also on unlicensed sellers, secretive and complex strategies. The absence of necessary information for investors as well as complaints and difficulties in receiving payments often trigger investigations.
There is no doubt that the Wonder Bank phenomenon can be a difficult one for the authorities to handle. For the reason that their activities contribute to investor losses and trauma, even though it is the investors' greed that lead them on, the authorities have a duty to remove illegal operators from the system, and to ensure that investors and the general public are adequately informed. Will Wonder Banks ever go away? I doubt as long as greed never goes away. The "Wonder Banks" have always been around and in every economy. But we can minimize their activities and impact.