self-reliance is the solution
NO doubt many Basotho received news of the collapse of a subsidiary of convicted Russian fraudster Sergey Mavrodi’s MMM Global scheme with a sense of déjà vu. As reported in this edition, Mr Mavrodi has allegedly gone into hiding after announcing the collapse of his Bitcoinbased subsidiary which promised up to 100 percent returns.
It brings back memories of MKM, which also promised investors unsustainable returns until it went bust in 2007 and left an estimated 400 000 people stranded. While the Bitcoin-based subsidiary is different from the scheme that has taken Lesotho by storm, the former’s collapse is an ominous sign.
The scheme’s hook is the promise of high returns on investments — as much as 30 percent per month — along with “testimonials” from clients who claim to have achieved great success with the scheme.
However, MMM Global fits the bill of a Ponzi scheme according to the South African Consumer Protection Act which describes any scheme with a return than is 20 percent higher than the monetary policy rate, which in Lesotho is seven percent. In a Ponzi scheme, there is no real underlying business, and investors are asked to buy shares in a business, or sign an “investment contract”. Early investors are simply paid with funds received from later investors. In some variations, there may be an underlying business used as a “front” to make the scheme seem more legitimate. These schemes can continue only as long as new investors provide additional funds.
Ultimately, there is one thing which always holds true for Ponzi schemes? They all have to close down, and at least some of the investors have to lose money.
When the scheme collapses, as it always does, current investors lose their money and the promoters walk away rich as is now the case with Mr Mavrodi.
While the allure of unrealistic returns gets the better of people the world over, there can be no denying that acute poverty and unemployment increases the vulnerability Basotho to such schemes. Despite the condemnation of MMM Global by the Central Bank of Lesotho and Consumer Protection Association, Basotho have consistently rallied behind the scheme saying they had been disenfranchised by the formal economic structures. Some of the supporters of MMM Global argue that the scheme gave them a platform to generate start-up capital for their businesses, since they did not qualify for bank loans.
The depositors were not even put off by the fact that Mr Mavrodi was convicted of defrauding 10 000 investors of around M520 million in a Russian court in 2007.
There has been a lot of media coverage about MMM Global and other related investment schemes where the users were adequately warned about investing in such schemes. Yet they went ahead knowing all the risks. Instead of the authorities dismissing the depositors as gullible people who are being taken for a ride, they need to see the underlying problem. In fact the popularity of MMM Global is a microcosm of the macrocosm of very limited opportunities for the populace to better their lives.
Resultantly, the limited options are driving many people towards such pyramid schemes, crime and prostitution among other vices.
That is why there is an urgent need for the development of an ethos for self-reliance and hard work. In this edition, we also run a story in which the Ministry of Small Business Development, Cooperatives and Marketing has engaged a Wales-based consultant as part of efforts to revive ailing youth cooperatives.
According to the story, the ministry hopes to take the cue of Wales, which has a thriving cooperative movement which contributes significantly to the European nation’s economic development. Resuscitating cooperatives and related enterprises, as well as coming up with frameworks for their sustainable operation, are among the steps that need to be made to ensure Basotho learn to become self-reliant.
However over the long-term, the culture of self-reliance and hard work needs to be inculcated starting at primary school.
And as much as investors have to take responsibility for their actions, surely regulators need to get more involved and have more firepower to stop situations like this. Prevention is certainly better than a cure.
However, the government can only go so far in regulating such schemes, ultimately, the investors have to bear the consequences of their decisions.