Page 11 - Unlicensed Digital Investment Schemes (UDIS)

to consumers (see box 1 for further details). In neigh- Also, it has been observed that once a fraudulent in-

boring Kenya, more than 26,000 consumers lost money vestment scheme collapses, consumers rarely get their
to hundreds of Ponzi schemes operating in the same funds back. Their recovery from such losses could take
period. It has been estimated that some USD 300 mil- many years; if it ever happens. The authors have not
lion USD were lost in Kenyan Ponzi schemes within this found sufficient research on the long term effects of
period. In India, estimates from a 2014 BBC article sug- Ponzi schemes on victims. Most Ponzi schemes are
gest that around USD 160 billion USD have been lost linked to affinity frauds promoted by people enjoying
in Ponzi schemes (though, no source was provided for close affinity with the victims’ entire families and social
their data). networks being affected. In situation where State sup-
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As Ponzi schemes have migrated to the Internet, new port is unavailable, and and extended families are un-
schemes such as Ezubao in China emerged. Ezubao able to assist, we can only presume that recovery from
purported to be earning profits from peer to peer lend- losses to a Ponzi may take many years. See the COWE
ing, whereas it turned out to be a Ponzi scheme, which example below.
inflicted massive damages in a relatively short period.
From its inception in 2014, to its discovery in 2016 only 3.3 UDIS can cause financial exclusion
two years later, Ezubao inflicted a USD 9 billion USD to Financial exclusion can be inferred once consumers
the Chinese economy. An economy of China’s size may have lost money to fraudulent, unlicensed investment
be able to withstand a loss of 9 billion USD by consum- schemes: they no longer have these funds to invest in le-
ers, but a loss of this scale in a smaller economy would gitimate, profit generating activities, nor in asset build-
very likely result in significant civil unrest. ing. Furthermore, these consumers may also experience
distrust towards the financial sector and the regulators,
3.2 Consumers from UDIS may be irreparable, which have failed to protect them. This distrust may be
impacting several generations passed on to their children, and extended families.
The harm from UDIS to consumers can be life threaten- In fact, researchers at Cornell University described
ing, impacting more than one generation in the same the trust shock that rippled through the US economy
family. The sudden loss of large amounts of money may following Bernie Madoff’s fraud which lead to other in-
cause utmost emotional distress, which may even lead vestors collectively withdrawing $363 billion from in-
to suicide in the worst cases. During the years of 2008– vestment accounts. It was found that the shock waves
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2010 for example, coinciding with the recession trig- resonated primarily through social networks.
gered by the subprime crisis, suicides in North Ameri- In the age of Internet, Ponzi schemes are first and
ca and Europe were estimated to have caused 10,000 foremost easier to commit, secondly have greater im-
deaths more than in previous years. 7 pact, and thirdly resonate more profoundly through
communities.

BOX 1
UGANDA: CARING FOR ORPHANS WIDOWS AND THE ELDERLY (COWE)

A study interviewed 65 victims of the Caring for (SACCOs) which they used to invest in the COWE
Orphans Widows and the Elderly (COWE) Ponzi and Dutch International schemes. Families were
scheme which collapsed in Uganda in 2007, with torn apart, and many victims were also forced to
an estimated USD 7 million USD in losses to con- pull their children out of school, due to an inabil-
sumers. It was found that the COWE fraudsters ity to pay school fees. 65 victims of the COWE
had contributed to 11 suicides. Some suicides at- scheme were interviewed in person in 2014 and
tempts were only prevented by the victim’s lack another 150 victims of the same scheme were sur-
of financial resources (e.g. to purchase poison). veyed with the assistance of the COWE Victims
Some died attempting to flee debt collectors. Association in Kbale, Uganda. A case summary
Countless other victims experienced high blood was prepared by Simmons and Simmons law firm
pressure and other stress-related illnesses, includ- of London.
ing depression. Divorces rates rose, other victims More than 8 years after the COWE Ponzi scheme
fled the country to war-torn Sudan and South Af- collapses, interviews with COWE victims showed
rica to avoid creditors, and others were incarcer- that many of these victims were still battling signif-
ated by their creditors for failure to repay funds icant growing debts. It was also found that many of
borrowed from commercial banks, microfinance the victim’s friends and family members had accu-
institutions and savings and credit cooperatives mulated similar debts.
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