Are Some Classes of Consumer-Investors of Collapsed Pyramid and Ponzi Schemes Vulnerable? A Multi-Jurisdictional Perspective

Abstract

The paper aims to analyze one of the rarely discussed paradoxes corollary to making affordable financial accessible to the neediest: the paralyzing effects the collapse of pyramid and Ponzi schemes have on vulnerable consumers’ access to finance. As the schemes – save a few notable exceptions – collapse normally within a year or two making investors lose all their investments with minimal or no chances of any recovery, that may hinder and otherwise negatively affect the efforts aimed at making affordable finance available to the poorest segments of the society.

Although no country is immune to these, they appear in fledgling financial and legal systems regularly well-before the paraphernalia of a robust financial system get established and stabilized. This makes the topic of special importance to the latter category of countries.

The negative effects may take various forms from the ensuing ‘trust shock’ that may survive for more generations. The collapse may cause financial exclusion as well because the investors having lost their savings would not be in the position to make the required downpayments, contributions, or pay the minimal but required fees that would allow them to qualify for projects targeting vulnerable consumers. Last but not least, as the collapse of some high-profile schemes showed, this can endanger even the entire financial system. Schemes of such magnitudes present a systemic risk that could negatively impact policies aimed at helping vulnerable consumers, too.

To make things worse, the mushrooming of digital Ponzi schemes (or Unlicensed Digital Investment Schemes - UDIS) thanks to the spreading of such new technologies as Blockchain, or novel methods of exploiting mobile telecommunication networks, make the problem even more acute. This because now the promoters can not only more easily and cheaply reach vulnerable investors through their computers, but the horizons of their activities have as well radically been expanded.

Considering the above, the article will first briefly introduce pyramid and Ponzi schemes by canvassing the saga of several collapsed pyramid and Ponzi schemes in fledgling economies where vulnerable consumers inherently form the dominant percentage of the population and thus the true dimensions of the devastating impact of collapsed schemes are most visible. These include examples from Ethiopia, Nigeria, Myanmar, and Sri Lanka, as well as from the Albania and Russian of the 1990s, the first years of transition towards market economy.

Given the focus on countries with fledgling regulatory frameworks, special focus is devoted to multi-level marketing schemes (MLM) that routinely surface in these countries often luring the poorest segments of the society. They present a problem many of the MLMs are disguised pyramid schemes. As distinguishing legitimate and fraudulent MLM schemes remains a hurdle even in the United States (US) as the system possessing the most sophisticated securities regulatory system, the freshly appointed regulators of the fledgling systems face insurmountable problems dealing with these preventing vulnerable consumers.