The Bank of Uganda has cautioned the public against investing in Ponzi schemes.
A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors.
Money invested by clients is not invested in any legitimate business but used to pay the people operating the scheme as well as those who invested earlier on.
This is why Ponzi schemes can sometimes appear to be genuine and profitable investments; because the people who invested first seem to be benefiting, the bank said in a statement Thursday.
A pyramid scheme is similar to a Ponzi scheme but, like the name “pyramid” suggests, it is based on a hierarchy whereby new investors are the bottom of the pyramid.
The income they provide by paying membership fees or an initial investment is used to pay original investors.
These new investments are marked as a profit from a legitimate transaction.
However pyramid schemes, like Ponzi schemes, do not sell products or make real investments – they simply rely on money from new investors which is channelled to those at the top of the pyramid.
They only generate income by promising extraordinary returns to new recruits to convince them to invest; and may require recruits to bring in additional investors before receiving payment.
Both Ponzi and pyramid schemes always collapse though, as it becomes unsustainable for those running it to deliver on the promises they have made to investors.
Once they collapse, there is often no way for those who invested to recover their money.
“The public is urged to trust their investments with licensed investment firms regulated by Capital Markets Authority (www.cmauganda.co.ug), and licensed deposit taking institutions which are regulated by Bank of Uganda and for which there is a clear recourse mechanism – a full list of these is available on www.bou.or.ug.”