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Act holistically to tame Ponzi schemes menace


Ponzi schemes operate on the precarious precipice of legal ambiguity in Kenya, leaving a breeding ground for predators.

In theory, the Ponzi-style business model is outlawed worldwide, including in Kenya. Yet, despite its prohibition, a regulatory void in our legal framework exists. As victims of these schemes grapple with the fallout, it becomes clear that the key to eradicating Ponzi schemes lies in a three-pronged approach: education, regulation, and enforcement.

Ponzi schemes and pyramid schemes, while distinct in their mechanics, share a common thread – exploiting participants for financial gain. Pyramid schemes focus on recruiting members, offering bonuses for new recruits, while Ponzi schemes demand investment, promising extraordinary and quick returns from subsequent investors. Both operate on the precarious precipice of legal ambiguity in Kenya due to the lack of specific regulations, leaving a breeding ground for financial predators.

Consumer protection is paramount, and a specific regulatory framework is urgently needed. Kenyan regulators should enact clear and stringent rules that leave no room for exploitation by unscrupulous entities.

Read: Dangerous investments to avoid like the plague

This involves a meticulous examination of existing legislation and, where necessary, the creation of new laws tailored to combat Ponzi schemes. A unified approach by regulators, law enforcement, and legal entities is crucial to closing the regulatory gaps that currently enable these fraudulent activities.

Regulators must proactively educate the public about the risks associated with Ponzi schemes and increase public awareness about the tell-tale signs of fraudulent investment schemes. The Central Bank of Kenya (CBK) and, the Directorate of Criminal Investigation (DCI) play a pivotal role in disseminating information and have acknowledged the dangers posed by these schemes.

Despite the efforts made to curb fraudulent investment schemes, a more proactive stance is required.

The absence of a specific law targeting Ponzi schemes hampers the swift prosecution of fraudsters. In the long term, regulators should advocate for legislative reforms that strengthen penalties for financial fraud and Ponzi schemes.

By imposing hefty fines, extended prison sentences, and other punitive measures, regulators can create a deterrent effect, dissuading potential fraudsters from engaging in such criminal activities. Publicising successful prosecutions and the restitution of funds to victims will amplify the message that financial crimes will not go unpunished.

Victims of Ponzi schemes, who are left grappling with the financial ruin, deserve justice. Regulators must prioritise the implementation of robust regulations that not only prevent Ponzi schemes but also provide swift legal remedies for victims.

Prevention lies at the heart of this battle. Education, regulation, and enforcement must work in tandem to protect citizens from falling victim to these schemes. Regulators, through the CBK and other enforcement agencies, should intensify their educational efforts, utilising various channels such as public announcements, media coverage, and direct community engagement.

In a stark reminder of the pervasive threat posed by Ponzi schemes, recent global events have exposed the vulnerabilities even in seemingly sophisticated financial ecosystems. Sam Bankman-Fried, once hailed as a pioneer in the cryptocurrency industry, faced a meteoric rise and subsequent downfall that culminated in his conviction for fraud and money laundering on November 3, 2023.

This underscores the need for vigilant regulatory oversight across all sectors to safeguard investors from unscrupulous schemes.

Closer to home, the Directorate of Criminal Investigations (DCI) in Kenya detailed a chilling case in September 2023. NMK Capital Investment Limited, a Kenyan registered investment firm, orchestrated a well-choreographed scheme that duped over 5,000 investors.

Under the guise of a six-month investment contract with a minimum investment of Sh50,000, participants were promised a monthly interest of 15 percent or a similar percentage of compounded interest redeemable at the end of the contract period.

This case serves as a stark reminder of the urgent need for comprehensive regulations targeting Ponzi schemes. The absence of specific laws allows these fraudulent activities to persist, causing untold financial and emotional distress to unsuspecting victims.

Regulators must act swiftly to close these regulatory gaps, ensuring that perpetrators of such schemes face the full force of the law.

The battle against Ponzi schemes requires a holistic approach. Education, regulation, and enforcement are the pillars upon which we must build our defence against financial predators.

The recent revelations, both globally and in Kenya, underscore the urgency for regulators to fortify their efforts.

Let us strive for a future where every Kenyan can invest with confidence, knowing that the regulatory framework is robust, and justice prevails.

Read: Firm loses Sh10m to government in pyramid scheme war

The time for comprehensive and decisive action is now before more lives are ruined, and the credibility of our financial systems is compromised.

The writer is a certified governance, risk and compliance specialist

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