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The plague of Ponzi and pyramid schemes

Saturday 17 October 2020 | Written by Emmanuel Samoglou | Published in Economy

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The plague of Ponzi and pyramid schemes
Under Cook Islands law, anyone found to be operating or promoting a pyramid scheme can be hit with a fine of up to $10,000. 20101627

Government officials are working against the odds to alert the public over a plague of misinformation and greed that’s being promoted on social media within the community.

Their wages aren’t high but they’ve managed to set aside enough money to take up an offer they’ve seen on social media.

The offer was sent by a family member in Australia and it has the appearance of an opportunity to make some cash. All it takes to get involved is one click of a mouse before handing over money to a faceless website.

Then the hard work begins, as the need to find new recruits increases one’s chance to stack some cash.

Most people, including the individual interviewed above, won’t admit publically that they’ve lost money after being lured into a pyramid or Ponzi scheme.

These types of schemes, labelled by many as “scams”, have increased in prevalence around the world since the onset of the Covid-19 pandemic.

People are spending more and more time online, and in some cases, desperation sets in with many feeling the effects of the economic downturn.

Earlier this week Cook Islands News published a story regarding an online cryptocurrency-based scheme called Lion’s Share.

Observers we spoke to described Lion’s Share as a “scam”.

When the story was posted on social media, there were comments from those breathing a sigh of relief as they were pondering joining.

And then there were comments from some individuals who attacked the newspaper’s reporting and levelled a type of criticism that is often thrown at the ones who question the legitimacy of these schemes.

One commenter wrote “Cryptocurrency is legal and it’s helping so, so many families get by during these tough times and now our people back home will not be willing to step into the Crypto world.”

Walter Henry, the senior intelligence analyst at the Financial Intelligence Unit, says the trend of targeting vulnerable people during the Covid-19 pandemic has been noticed in the Cook Islands.

And along with the Ministry of Internal Affairs, they are increasing their efforts to warn the public.

“Friends and family members, that’s where it starts, and where they get a strong footing,” says Henry. “If they want to increase their numbers, which is the way to get higher returns in these schemes, you need to start recruiting more and outside of that circle.”

A number of schemes have recently appeared in the Cook Islands and Henry says he’s seeing locals being recruited by friends and family members in New Zealand and Australia.

“Covid-19 has laid a foundation for this,” he says. “The ones we’ve spoken to have said ‘times are tough, I was given an opportunity to make some money on the side, and I saw it as an opportunity to make some money’.”

Pyramid scams need new users and a continuous source of cash in order to pay out those on top.

Henry says a particular concern is by the time the schemes arrive in the Cook Islands, they may be reaching the point where they are about to collapse, as overseas members begin running short on new recruits.

“They may have exhausted their outreach in New Zealand and Australia, and they could be spreading out to Pacific Island countries,” he says.

Last week, Henry says he was contacted by a member of the public who asked his office to look into Lion’s Share.

At the same time, the Labour and Consumer Division of the Ministry of Internal Affairs decided to resume their public awareness campaign over the risks and illegality of participating in pyramid schemes.

According to division’s director, Sandrina Thondoo: “If you look at some of the people getting involved, they are quite educated.”

“Last year we heard of lawyers getting involved, so I don’t think it’s only a matter of education as there’s also the allure of quick money, and that why we’re doing a lot of awareness work.”

Thondoo is quick to point out that under Cook Islands law, anyone found to be operating or promoting a pyramid scheme can be hit with a fine of up to $10,000.

But enforcing that law creates a dilemma: In enforcing the law, they’ll likely be punishing locals and those at the bottom of the pyramid, while the overseas organisers and those at the top escape unscathed after cashing out.

And Walter Henry admits: “They are beyond our reach.”

“If big countries are having a hard time prosecuting those behind pyramid schemes, then for us it’s really difficult. That’s why we need to maximise on prevention and awareness. That’s where we’re putting all of our energy.”

New Zealand’s Commerce Commission Te Komihana Tauhokohoko says there are three essential elements to pyramid schemes.

Firstly, it offers a financial return based on the payments made by new recruits. Secondly, any financial reward is dependent on the ability of the scheme to recruit new members. And lastly, the primary motivation of scheme’s participants is the opportunity to make money by recruiting others.

In summary, there is no sweat or toil involved or no selling of a product or service, just a push for more recruits, and more money.

Thondoo says: “If you don’t know what you’re buying, if it looks too good to be true, it’s probably not a good thing.”

“Be wise about how you spend your money.”