The
MMM investment scheme has generated a lot of controversies in recent
times as argument for and against it soar among Nigerians. These are
cogent questions about the scheme which have been answered.
Any investment that offers 30% returns on investment monthly(360%
annually) is too good to be true, especially when the best returns from
the banks is 5 – 15% annually. The traditional banks have to always pay
staff salaries, offset all staff bonuses, pay rents, and always build
new branch outlet. A virtual bank(one without brick offices) will not
need to pay any of the above, and can invariably return higher margin on
investment. But can this justify 360% return annually?
Putting this in perspective, an N500,000 investment in an MMM in
January will become N1,800,000.00(profit N1.3 million ) by January of
next year. Compared to a traditional bank investment with a maximum of
N575,000.00(profit N75,000) if lucky. The two returns are like a race
between a snail and a horse. Now we should not be surprised at so many
Nigerians believing strongly in the MMM doctrines and willing to herald
it to the gates of IDP camps.
What is MMM, and is this type of investment sustainable. Where are
the returns coming from? Or are the founders of MMM in Nigeria printing
their own monies?
According to Wikimedia, MMM was established in 1989 by Sergei
Mavrodi, his brother Vyacheslav Mavrodi, and Olga Melnikova. The name of
the company was taken from the first letters of the three founders’
surnames. Initially, the company imported computers and office
equipment. In January 1992, tax police accused MMM of tax evasion,
leading to the collapse of MMM-bank, and causing the company to have
difficulty obtaining financing to support its operations.
MMM created its successful Ponzi scheme in 1994. The company
started attracting money from private investors, promising annual
returns of up to one thousand percent. It is unclear whether a Ponzi
scheme was Mavrodi’s initial intention, inasmuch as such extravagant
returns might have been possible during the Russian hyperinflation in
such commerce as import-export.
MMM grew rapidly. In February 1994, the company reported dividends
of 1,000% and started an aggressive TV ad campaign. An important factor
in the scheme’s success was word of mouth, but most of the company’s
success came from its extremely aggressive ad campaign.
At its peak the company was taking in more than 100 billion rubles
(about 50 million USD) each day from the sale of its shares to the
public. Thus, the cash flow turnover at the MMM central office in Moscow
was so high that it could not be estimated. The management started to
count money in roomfuls (1 roomful of money, 2 roomfuls of money, etc.
Regular publication in the media of the rising MMM share price led
President Boris Yeltsin to issue a decree in June 1994 prohibiting
financial institutions from publicising their expected income.
The success of MMM in attracting investors led to the creation of
other similar companies, including Tibet, Chara, Khoper-Invest, Selenga,
Telemarket, and Germes. All characterised by extremely high promised
rates of return. One company promised annual returns of 30,000%.
On July 22, 1994, the police closed the offices of MMM for tax
evasion. Everyone lost money. In January 2016 the Chinese government
banned MMM on the grounds that it is a pyramid scheme, (Ponzi scheme),
and it is not registered in the country (and as a fraudulent scheme
cannot be registered).
Is MMM a Ponzi Scheme?
A Ponzi scheme is a fraudulent investment operation where the
operator, an individual or organisation, pays returns to its investors
from new capital paid to the operators by new investors, rather than
from profit earned through legitimate sources. Operators of Ponzi
schemes usually entice new investors by offering higher returns than
other investments, in the form of short-term returns that are either
abnormally high or unusually consistent.
Typically, well-above-average returns are promised on the original
investment and vague verbal constructions such as “high-yield investment
programs”, or “offshore investment” might be used. The promoter sells
shares to investors by taking advantage of a lack of investor knowledge
or competence or using claims of a proprietary investment strategy which
MUST BE kept secret to ensure a competitive edge.
Initially, the promoter will pay out high returns to attract more
investors and to lure current investors into putting in additional
money. Other investors begin to participate, leading to a cascade
effect. The “return” to the initial investors is paid out of the
investments of new entrants, rather than solely from profits.
Often the high returns encourage investors to leave their money in
the scheme, with the result that the promoter does not have to pay out
very much to investors; he simply has to send them statements showing
how much they have earned. This maintains the deception that the scheme
is an investment with high returns.
Where is MMM Getting All The Money From
From the 1977 ‘Seven laws of Money’ by Mike Phillips. Mike, a Bank of America banker –
Law 6 – “You can never really receive money as a gift. Money is
either borrowed or lent or possibly invested. It is never given or
received without those concepts implicit in it. Giving money requires
some payment; if it’s not repaid the nightmare elements enter into it. A
gift of money is really a contract; it’s really a repayable loan, and
it requires performance and an accounting of performance that is
satisfactory to the giver.”
At 30% monthly rates for everyone, it seems MMM is making money
faster than money can be printed by Minting and Printing Agencies of
government. It is most likely MMM pays the “return” to the initial
investors from the investments of new entrants, rather than solely from
profits – this is even confirmed since no physical goods are being sold.
Will MMM Crash?
When a Ponzi scheme is not stopped by the authorities like Federal
Government or EFCC, it sooner or later falls apart for one of the
following reasons:
1. The promoter vanishes, taking all the remaining investment money.
2. Since the scheme requires a continual stream of investments to
fund higher returns, once investment slows down, the scheme collapses as
the promoter starts having problems paying the promised returns (the
higher the returns, the greater the risk of the Ponzi scheme
collapsing). Such liquidity crises often trigger panics, as more people
start asking for their money, similar to a bank run.
3. External market forces, such as a sharp decline in the economy
(for example, the Madoff investment scandal during the market downturn
of 2008), cause many investors to withdraw part or all of their funds at
the same time.
Government Crackdown
The operations of MMM Nigeria is under investigation, the Economic
and Financial Crimes Commission (EFCC) confirmed on the 15th of
November, 2016
Last week, the House of Reps ordered its committee on banking,
currency, and financial crimes to investigate the activities of MMM
scheme in Nigeria. It also ordered all law enforcement agencies to start
arresting those promoting the MMM Ponzi scheme.
Central Bank of Nigeria(CBN) warned Nigerians against patronising
MMM which it said was fraudulent, not regulated and not in tandem with
any known business model.
The crash of Ponzi schemes always starts with any of government
regulations or intervention or interference. The end will justify
whether MMM is a wonder bank, smart investment portfolio, high-yield
investment, Ponzi scheme, Pyramid Scheme or a disaster waiting to happen
to many.
**********
- Via NTA
No comments:
Post a Comment