In this episode of Deep Dive with Abhinav Khare, we delve into the many ponzi schemes that have plagued the nation. Why do they exist? Is there a political nexus? Does it exist across the globe? How can investors be careful? Read/watch this detailed report.
Bengaluru: In March 2019, probably for the first time in 13 years, the I Monetary Advisory (IMA) Group, which had taken money from tens of thousands of investors across Karnataka, defaulted on payments. This could be the state’s version of Sarada chit fund scam. A multi-crore ponzi scheme, which thrived on a politician-police-criminal nexus in the form of IMA (I Monetary Advisory), has rocked the state.
On June 9, the police received a trickle of complaints from a few citizens. In less than a week, while Eid was being celebrated, they grew into a flood with more than 33,500 complaints against the group and its founder and managing director Mohammed Mansoor Khan.
Bengaluru is no stranger to fly-by-night companies, which have duped gullible investors of crores of rupees—Ajmera, Aleefa, Aala, Injaz, Burraqh, Ambidant and now I Monetary Advisory (IMA). Each time, the USP of these fraud companies was “religion”. The companies assured the investors that their investment schemes were halaal (permissible in Islam) or shariah-compliant (interest-free transactions).
In this case too, the modus operandi was the same. IMA roped in local politicians, community leaders, moulvis and an army of agents to brainwash the community into believing that they were shareholders of the company and would get high return on investments.
Of all the fraudulent companies who made fortunes by pauperising the masses and coolly exited the scene, IMA, floated by Mohammed Mansoor Khan, lasted the longest. It took 13 years for the IMA bubble to burst. It owned two jewellery showrooms, a slew of pharmacies, had a few ongoing construction projects, educational institutions and a hospital, instilling confidence among its investors, drawn mainly from among lower middle-class Muslims.
The company inveigled the clerics into its parlor through a variety of stratagems. It funded the construction of the Madrassa Maseehul Uloom, an elegant edifice with ultramodern amenities. It even funded a computer lab in Darul Uloom in Deoband in Uttar Pradesh, a seminary well known across the entire sub-continent.
A modern printing unit set up by the IMA published the Holy Quran for free distribution. In one case, some Umrah (lesser pilgrimage) pilgrims stranded in the Holy city of Mecca were rescued and flown back to the city with financial assistance of the IMA. One wondered as to how a business group in its infancy could undertake such humongous CSR ventures with such aplomb. Evidently, the company was on this unsustainable trajectory. only to woo investors.
Companies like Ambidant, IMA, Injaz, Aala Ventures and Morgenall exploited religious inhibition and publicised their products to be Shariah-compliant. The pliant ulema even issued the 'Halal certificates’, thereby facilitating deposit mobilisation from among devout Muslims.
The deceitful trap masked under religious jargon worked beyond expectations and brought in investors who would not think before selling off properties and investing the proceeds into such dubious ventures. What is galling is that the majority of those who made a beeline at the portals of these firms were least aware whether they were putting in their money as 'deposits' or were investing' in a business.
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The short-term gains through 'monthly dividends' — with returns diminishing month after month — deluded them enough against undertaking a serious scrutiny of the business model or ascertaining the bona fides of the promoters.
What is a Ponzi Scheme?
A typical 'ponzi scheme involves the operator collecting a large amount of money from investors and paying them returns from their own money or the money collected from subsequent investors. rather than from profit earned by the person or the entity operating such a scheme.
The scheme is named after Charles Ponzi who became notorious for using the technique in the early 1920s. Ponzi did not invent the scheme but his operation took in so much money that it was the first to become known throughout the US. Ponzi duped thousands of people into investing in a postage stamp speculation scheme.
Roy, founder of Sahara India, has been in jail for the past few years.
Once a powerful and influential businessman who owned an airline, sponsored India’s cricket team, and even had a stake in a cricket team in the Indian Premier League, Roy is now accused of duping investors of some $5.4 billion (Rs36,000 crore).
The case relates to an investment option that Sahara ran in 2008 where investors had deposited money in schemes launched by Sahara India Real Estate Corp Ltd and Sahara Housing Investment Corp Ltd.
Even as Roy and Sahara were busy defending themselves in court, another fraud—with huge political ramifications—unraveled in the eastern Indian state of West Bengal.
The Saradha scam, where more than 1.74 million people lost their savings and investments worth $3.7 billion, was exposed when Kolkata-based Saradha group went bankrupt in January 2014. The crisis did not end just there. It led to some 35 people committing suicide. Politicians from the ruling Trinamool Congress Party in West Bengal were alleged to have been the beneficiaries of the scam.
Why do you think chit funds or ponzi schemes still persist in spite of many scams?
There are two obvious reasons why such Ponzi schemes persist. One is regulatory overlap and confusion. Regulators work in silos, making it possible for fraudsters to come up with ingenious schemes to bypass individual regulators - also called "regulatory shopping". The court notes that while SEBI has claimed that chit funds are not within its jurisdiction, it has also passed two orders directing the winding up of such schemes and refund of deposits. So, there is now an urgent need for the highest authorities in the country to put in place a system that quickly spots any scheme seeking to raise money from large numbers of people by promising exceptional returns and treats it as prima facie suspect and fit for quick investigation and regulatory action.
A political nexus?
A new feature of the ponzi schemes is the link between some political leaders and the promoters of ponzi schemes and it is obvious that the much requisite protection for such schemes (to ward off enforcement authorities) is provided by the politicians. Per se, the political leaders have nothing to do with the schemes since they are neither the promoters nor the operators, but it is evident that but for their support the schemes cannot thrive. Another feature is that the leaders supporting such schemes are from all the political parties.
A promoter of a ponzi scheme hailing from Hyderabad promoted a political party and even fielded candidates during the Assembly elections in Karnataka. This is another case of politics and ponzi schemes being inter-twined. The same was noticed during Sahara, Sharada or as a matter of fact for almost every Ponzi scheme in India.
Ponzi schemes around the globe
In June 2005, in Los Angeles, California, John C. Jeffers was sentenced to 14 years in federal prison and ordered to pay $26 million in restitution to more than 80 victims. Jeffers and his confederate John Minderhout ran what they said was a high-yield investment program they called the "Short Term Financing Transaction". The funds were collected from investors around the world from 1996 through 2000.
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On September 15, 2010, Nevin Shapiro pleaded guilty to a 2005–2009 ponzi scheme in a Newark, New Jersey court. The scheme brought in approximately $880 million. Headquartered in Miami, the scheme was based on an import/export grocery business but was diverting investments to attract new investors.
What should investors do to prevent chit fund scam?
✓ Check for the credibility and creditworthiness of the company and its promoters.
✓ Warn people about fraudulent companies and report them to concerned authorities.
✓ Opt for state-run chit companies and go with firms with a long record and financially sound promoters.
✓ Understand the difference between organised chit fund schemes which are required to register with the registrar or firms, societies and chits and money circulation schemes.
✓ Invest in a scheme with no incentives for subscribers to bring in more people to the scheme.
✓ Implementation of easy-to-use web-based Chit Fund Management System (CFMS).
About Abhinav Khare:
Abhinav Khare is the CEO of Asianet News and hosts a daily show Deep Dive with Abhinav Khare.
He is the proud father of two beautiful daughters. He lives in Bengaluru with his loving family and a lifetime collection of books and gadgets. He is a hands-on Tech Startup professional with an entrepreneurial DNA. He is passionate about policy, technology, economy and the synergy of them all. An avid traveller himself, he has already ticked over a 42 countries and hundred cities around the globe!
Last Updated 12:07 PM IST