Page 10 - Unlicensed Digital Investment Schemes (UDIS)

working group’s definition of an unlicensed, digital in- diction, the Ponzi operator can simply target other ju-
vestment scheme. risdictions; they are limited only by their own linguistic
abilities, or the ability to collude with likeminded crim-
inals in the new jurisdictions. For example, the above
2 ICTS AND UDIS mentioned MMM scheme was hatched in 1989 by Sergei
Mavrodi and has now spread to many countries with the
Prior to the existence of the world wide web, social net- advent of the Internet and Facebook. The author would
works, or digital financial services, the perpetrators of suggest that bank robbers almost always get caught,
financial frauds, such as Ponzi and pyramid schemes but Ponzi operators rarely do.
were charismatic salesmen, exerting a lot of time and
effort to defraud victims. Generally, fraudsters would
also enlist an inner circle of first line investors, who si- 3 IMPACT OF UDIS
multaneously acted as a secondary sales force. Promo-
tion of the phony investment product to one’s close cir- In the post Internet world, there are three main reasons
cle of friends, family and business associates was done why financial and telecom sector regulators, criminal
the old fashioned way: in person and on the telephone. investigators, consumer advocates and all financial in-
In this manner, Bernie Madoff was able to accumulate clusion stakeholders should take the problem of UDIS
an estimated USD 65 billion dollars in his Ponzi scheme very seriously:
due to his charismatic, trustworthy demeanor which i. UDIS can harm the financial system
allowed him to mobilize feeder funds from amongst
global money managers to the uber wealthy, including ii. The harm to consumers from UDIS may be irrepara-
members of European royal families. Like many affini- ble, impacting several generations
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ty fraudsters, Madoff also preyed within his own social iii. UDIS can cause financial exclusion
circles; including within the Jewish communities in New
York and Florid. A significant allocation of resources may be needed to
Today, with the advent of the Internet, social net- address the UDIS problem, including utilizing existing
works and mobile phones, running a Ponzi scheme has technologies to monitor the Internet and the dark web.
become much easier. Promotion of the schemes can Financial institutions can also look for suspicious trans-
be done from the comfort of one’s home, or from any- fer patterns and report as per existing anti-money laun-
where using social networks and SMS to promote the dering (AML) requirements. Financial fraud is after all a
scheme and mobile money to facilitate the transfer the predicate offense to money laundering.
funds in and out. Crypto currencies are also available To date, judging from the many flourishing UDIS, su-
to launder the proceeds so today’s Ponzi operator can pervision and monitoring efforts have either been inad-
reach a much greater volume of victims with arguably equate or antiquated. As a result, the volume of UDIS
much less effort, and hide the ill gotten gains easier. continues to increase exponentially.
The Internet and digital money also offer new tech-
nologies in which to disguise a Ponzi so that few con- 3.1 UDIS can harm the financial system
sumers truly understand its underlying, fraudulent na- The impact of UDIS on a national economy can be dev-
ture. For example, Initial Coin Offerings (ICOs) of crypto astating, causing harm which lasts for years. The histo-
currencies have recently provided a new product offer- ry of unlicensed investment schemes, which previously
ing for Ponzi perpetrators to use to defraud unwitting operated within a single country’s boundaries serves to
investors. It is difficult to analyze the underlying soft- illustrate that impact can cause systemic risk, and un-
ware code at issue in an ICO, and thus determine wheth- dermine the political stability of a country
er it is a valid business or a Ponzi. More often than not For example, in the late 1990’s, Albania was riddled
potential investors lack the capacity to analyze whether with Ponzi schemes and an estimated 50% of the na-
there is indeed a legitimate business model. tion’s GDP (Gross Domestic Product) was invested in
This is not to say that all ICOs are Ponzis, but merely fraudulent schemes. The collapse of the schemes were
to point out that fraudsters utilize complicated technol- subsequently followed by civil unrest causing approxi-
ogies to disguise the true nature of their offering. For mately 2,000 deaths and a change of regime according
example, the scheme devised by Charles Ponzi known to the IMF (International Monetary Fund). Caribbean
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as the original Ponzi master, involved the purported ar- nations, such as Jamaica and Grenada, are known to
bitrage of international postal reply coupons. The aver- have suffered from Ponzi collapses whereby 12% and
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age person was not familiar with postal reply coupons, 25% of the nations’ GDPs were invested, according to
and thus did not question the charismatic salesman’s the IMF. During the peak of the microcredit industry
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purported superior knowledge. in East Africa (2005–2007), Ponzi schemes flourished
With digital means, a Ponzi perpetrator can promote there causing untold damage to financial inclusion ac-
schemes virally, setting schemes in motion simultane- cording to the media. For example, the COWE and
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ously in multiple jurisdictions. If they are ever subject Dutch International Schemes which collapsed in Ugan-
to regulatory intervention or investigation in one juris- da in 2007 causing an estimated USD 7 million in losses

8 • Unlicensed Digital Investment Schemes (UDIS)