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Why Law Is a Bad Cure for Ponzi Schemes



By Oleksii Khrystoforov, Attorney at Law, Head of Ilyashev & Partners Kharkiv Office
Source: Focus.UA

Ukrainian MPs have long been harping on pyramid and Ponzi schemes. Early this year, this matter was brought up again in a bill banning fraudulent investing plans. The bill allegedly builds on the most recent developments with vehicles like the revamped MMM, a notorious Russian Ponzi scheme*.

Frankly speaking, in the eyes of those who once lost all of their savings in the pyramid, such initiatives can be useful and even necessary. But is there a real need for regulatory intervention in the matter?

First of all, it is important to understand that unlike early nineties when MMM was first deployed, today the overwhelming majority of recruits are perfectly aware of all risks as they get involved in the scam but fall to the temptation of a quick buck. There is no more forcing or cheating people of their money – just show them an ad with smiling men and women who had allegedly benefited from the vehicle with very little effort. As we all can remember, there are plenty of these ads everywhere, both legal (on billboards and in media) and illegal (slogans on the asphalt, stickers etc.), during the launch of a pyramid.

Now, let’s imagine that a hypothetical victim has never seen an ad like this. Is he likely to search for a pyramid or rather try to find a more reliable way of making money? I believe the answer is obvious. This means that the government should better tighten control over the advertizing of “quasi-financial” services – prosecuting unfair advertising and consumer fraud is a common international practice.

But that’s all about fighting consequences. The most efficient way to counter financial pyramids and Ponzi schemes is not to ban them. Besides, con artists have long learned to camouflage pyramids under mutual aid funds or charity. Protecting investors in such schemes is a highly difficult job. These ventures are not officially incorporated or licensed and have no registered office or directors who can be sued if the enterprise bursts.

Instead of doing business legally, promoters of pyramid and Ponzi schemes act by abusing the trust of their investors. In Ukraine, this may qualify as fraud which the law defines as “obtaining property or interest or ownership in the property by deception or abuse of trust”. This is the message that has to be sent across to every Ukrainian in persuading him pr her to treat their savings responsibly and think twice before giving the money to a bank or a fraudulent venture.

It also important to remember that every pyramid and Ponzi scheme is geared toward providing returns to early investors from the funds collected from later recruits. This means that the scheme can be sustained as long as there are new recruits.

Thus, there is a reasonable question whether all pyramid investors can be seen as accomplices of the scammers, as, again, these days they are all pretty well aware of its illegal nature. More than that, does it make sense fighting pyramids if there is no liability for investors who with their own hands secure the enrichment of another con artist and then curse the government demanding their money back?

The problem is that, although fraud is a prosecutable offence under Ukrainian laws, it is not until someone has already suffered (say, one has already given his money away expecting returns but ended up with a loss). Remember a famous con artists who, “whenever he saw a dollar in another man’s hands he took it as a personal grudge, if he couldn’t take it any other way.” Now, things have become even easier for con men who avail of a whole range of modern equipment and facilities including Internet.

As a matter of fact, fraudsters feel safe in the world-wide web. First six months of this year alone have seen 2,000 of scams. Not all of them were acting as pyramids, with some camouflaged under charities and some offering to buy goods with a suspicious 100% prepayment. There are great many of such schemes, and it is virtually impossible to make laws against all of them. What remains is counting on your own sense and reason. A hunt for easy money is a risky business – It’s like casinos where wins are possible but rare. By the way, I have come up with some police statistics: in average, recruits in a pyramid are able to recover 40% of what they have originally invested.

There is, therefore, no sense waiting for the Parliament to pass an act on pyramid and Ponzi schemes. All in all, issues like are often addressed by Ukrainian politicians before elections to win more votes and kept in store for the rest of the time. It is better to carefully analyze any tempting offer and beware of any plan that makes exaggerated earnings claims. Remember that there’s no such thing as a free lunch.

* MMM was an infamous Ponzi scheme deployed in Russia by Sergei Mavrodi who issued investors shares of stock. Though referred to as a “pyramid scheme” in Russian, it is really characterized as a Ponzi scheme. In 2011, Mavrodi launched another pyramid scheme called MMM-2011, asking investors to buy so-called MAVRO currency units. He frankly described it as a pyramid, “warning” people: “It is a naked scheme, nothing more.” In May 2012 he froze the operation and announced there would be no more payouts.

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