BY MURIEL ADHIAMBO
DECI is just one of the many pyramid schemes that have preyed on unsuspecting Kenyans, making away with their hard-earned money. This type of business is premised on the recruitment of members rather than the sale of products or services. Pyramid schemes promise participants large returns if they persuade other people to join. New participants’ contributions are then used to pay earlier members.
Pyramid schemes derive their name from their structure, which assumes the shape of a pyramid. At the apex are a small number of members who orchestrate the entire exercise, taking a cut of every contribution, with the number of members increasing at every subsequent level.
The model is inherently unsustainable, inevitably occasioning losses to the majority of its participants. As more recruits join, it becomes increasingly difficult to pay them any returns. In most countries, running a pyramid scheme is illegal, as it is a form of financial fraud. So, why do they continue to thrive?
The allure of pyramid schemes lies in the promise of high profits within a relatively short time. For people who are facing financial difficulties, this may seem like the solution to their problems. This illusion of profitability is maintained by initial payouts to early investors. These returns are highly persuasive to new recruits.
Pyramid schemes also place immense pressure on members to recruit more. Who among us can say that they haven’t agreed to meet a friend for coffee only for them to pitch a dubious business idea to you? These efforts create a sense of urgency and a fear of missing out that causes new members to join. People are also more likely to trust their friends and relatives.
This business model also exploits members’ financial illiteracy. The lack of awareness about the warning signs of a pyramid scheme often cause many people to fall victim. The persons behind pyramid schemes usually use complex terms to explain their operations to deliberately obscure their fraudulent nature. They also market their business aggressively, casting their net as wide as possible.
A key reason pyramid schemes thrive in some jurisdictions is lack of regulation or laxity in enforcement. This allows fraudulent businesses to operate with impunity and defraud their members. By the time the relevant authorities step in, it is usually too late.
Governments play a crucial role in protecting people against pyramid schemes by implementing robust regulatory measures, raising awareness, and enforcing strict laws to deter fraudulent activities. Here are some ways governments can protect their citizens against pyramid schemes:
To protect unsuspecting Kenyans from fraudulent schemes, regulators should enact laws that specifically target pyramid schemes. In Kenya, prosecutors often charge the persons behind pyramid schemes with conspiracy to defraud under Section 317 of the Penal Code, as there is no specific law targeting these schemes. A designated statute would provide a legal definition for pyramid schemes, putting potential recruits on the alert, and outlaw them entirely. regulatory agencies should also develop mechanisms for detecting pyramid schemes and preventing their operations.
The allure of pyramid schemes lies in the promise of high profits within a relatively short time.
As pyramid schemes are rampant in Kenya, public sensitization would go a long way in protecting potential investors. It is also important for regulators to take steps to preserve assets owned or held by pyramid schemes and their owners to ensure victims can recover their investments.
A healthy dose of skepticism can protect potential investors from the dubious machinations of pyramid schemes. It is important to proceed with caution if an investment opportunity raises one’s hackles. Investors should shun any business model that requires them to recruit more members and promises high returns within a short period of time without providing any value to customers. If a company has run into previous legal troubles or has a chequered track record, it is best to give it a wide berth.
One of the most popular pieces of investment advice is “do not invest in something you do not understand.” Sometimes, it may be necessary to seek the professional opinion of a financial advisor, who can help evaluate the potential investment opportunity and advise on whether to proceed.
It is also important to do due diligence. Inspecting documents and conducting searches in public registries could reveal pertinent information about suspicious businesses. Investors should avoid making decisions solely on the strength of recommendations from friends and family and seek independent advice.
Most importantly, investors should trust their instincts when making financial commitments
Muriel Adhiambo is a writer, journalist and Advocate of the High Court of Kenya with a focus on current affairs, new media, and law. When she isn’t reading or trying to write fiction, she enjoys watching HBO series and playing guitar. Her work also appears in People Daily Kenya
