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BW Businessworld

The Moolah Trick

Deep in the recess of the World Wide Web resides a proud community of money dealers which calls itself the Mavrodians. Its lineage is not particularly kosher, but it makes no bones about that either. Its website warns you in no uncertain terms that it is a financial pyramid. In red, bold letters. Thrice.

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Financial pyramids, to the uninitiated, are a money-making business model in which a person is persuaded to invest with the promise of big returns. A part of the money raised from new investors goes into paying off the returns promised to earlier investors. Governments worldwide have been cracking down on such schemes as, inherently, they are not sustainable beyond a certain level; the money from new investors will not be enough to pay earlier investors. Promoters go off the radar once the scheme amasses a critical corpus. And investors are left in the lurch.

“I don’t create any misconception,” claims Sergey Mavrodi, the pharaoh of the pyramid, known as the Mavrodi Mondial Moneybox, on his blog. “I don’t say you’ll get rich in no time (quite the other way, you can lose everything to the devil).” After a page of similar warnings, he exhorts people to invest. “If you still feel like a madman, then click ‘Here’.”

And, clicks there are aplenty. His Indian arm, MMMIndia, has a Facebook page with close to 16,000 ‘likes’. MMMIndia is the first name on regulators’ list of dubious schemes today. It functions like any other money circulation scheme. People are invited to invest in the business with the promise of big returns. “It is like a drawer in which people place money and take it out again. For example, you put in Rs 10,000 and want to take out Rs 15,000 —no problem, you can. It would be a problem only in the case of all the money being taken out,” explains its website. “But in practice, such a situation would not occur. So do not panic! Be calm and everything will be alright.”

But his claim does not stand scrutiny. A simple Google search shows that in one of the biggest scams to hit Russia in the 1990s, 2-5 million people lost their entire savings after they invested in a company run by Mavrodi. Though he defended himself then, he was sentenced to four and a half years in prison. In his second coming, he launched a scheme called MMM-2011. Evidently, MMMIndia is part of this new avatar.

To be fair, MMMIndia says it does not claim to be an investment scheme. Its India representative Dinesh Kotian says people should see it as “a free donation of money they can afford to give away”. Mavrodi, he claims, only intends to create a substitute for the banking system by bringing together people who have surplus money and those needing money. In fact, MMMIndia challenges the notion that ponzi schemes are unhealthy. It says the model openly admits that new people who join will fund people who have earlier “invested in the system”.
1. Once you register, you agree to ‘give help’ — which essentially means make an investment when called upon to do so
2. At the same time, there are other older members who demand to ‘get help’
3. You are eligible to get help to the tune of your investment compounded at a rate of 30 per cent a month 4. At any given point in time, the system matches requests for help and offers to help, and randomly picks donors
5. If the requests outnumber the offers by a huge number, the system enforces a calm period when payments are stopped

1. Initial investment: Rs 1.09 lakh (Rs 70,000 towards City Limouzine + Rs 39,000 in cash)
2. What you get
n Non-convertible debentures as surety
n Rs 10,000 a month promised for five years, but with Rs 6,000 deducted as EMI for the car to be received after five years
n Rs 4,000 received by the investor
3. After one year, the investor is convinced to invest in another car
4. The catch: The Rs 70,000 and EMI amount were supposed to be paid by the company towards the car. But not all the money goes into that kitty

1. One-time upfront investment: Rs 11,000
2. Returns: Rs 500 per survey filled. One gets to fill two surveys per week (in one year, the return will be Rs 52,000)
3. One person can fill up to four surveys. There is an annual referral bonus of Rs 1,000 for each new person brought into the scheme
4. A total investment of
Rs 44,000 can bring in a possible annual return of Rs 2.08 lakh or more for referrals

Of course, MMMIndia is not the only one of its kind operating in India today. In 2012, such firms duped investors of over Rs 1,420 crore, notes the India Fraud Report 2012 put out by Ernst & Young. StrategyIndia, a website that tracks similar firms, lists 523 that could be fradulent. It studies their payment plans or business models for viability gaps and deception.

“We have seen several foreign firms operating as portals in India and doing the business of money circulation,” says Rajyawardhan Sinha, assistant director general of police in charge of the Economic Offences Wing in Mumbai. As it turns out, like all scamsters, those who run these schemes are a tad beyond the reach of the law. “Regulating them is practically impossible,” says Sinha. In cases where the company has a physical presence, promoters frequently go underground — only to re-emerge promoting yet another similar scheme, adds Sinha.

In 2011, when the Mumbai police called for complainants in the ‘City Limouzine’ case, a whopping crowd of 74,000 turned up in one day at its Azad Maidan office. With time, more complaints poured in — some via post from places as far off as the hinterlands in Tamil Nadu.

One of the many people who lost money in the City Limouzine affair was Salim Mirza from Coimbatore. He says a relative convinced him to invest Rs 1 lakh — from the Rs 2 lakh he had saved from his job in Dubai — in the scheme. For about six months in 2009, the promised monthly cheque of Rs 8,000 was promptly despatched. And then it stopped.By then, investigators say, its perpetrator, Sayed Mohammed Masood, was on the run, with at least Rs 400 crore in investor money. The report by the Serious Fraud Investigation Office (SFIO) says the money raised could be as high as Rs 7,000 crore. Masood was arrested in December 2010. And the case is still going on.

But what draws people to such schemes? “Greed,” says a senior ­investigative officer with SFIO. And promoters hatch business models that make investors feel they are investing in a legitimate business idea with extraordinary returns. The SFIO receives complaints about several such cases every month, and its officials say every scam has a predictable pattern that explains why so many people get hooked.

The model is usually sold as a way to get the kind of quick returns otherwise unimaginable through conventional routes. People seen as successful in society (sportspersons, actors) are roped in to sell products as leaders of the network. According to investigators, more than 6,000 policemen, several officials of the RBI and Income Tax department found themselves to be part of the scheme.

With such ‘respectable’ people on its rolls, the whole scheme gets an air of respectability. For added credibility, members usually brandish periodic cheques received from the company to convince potential recruits. With such marketing, and with the relatively quick returns on investment promised, even people who are generally wary of such programmes are taken in.

For instance, a few years ago, S. Ganapati, an Oxford-educated executive working with a top accounting firm in Bangalore, was lured into such a scheme, GoldQuest. The bait for him was the returns that his roommate was getting. GoldQuest, which soon wound up, was selling gold medallions with ­pictures of deities at a huge premium, calling them ‘limited edition’ items, which would naturally appreciate in value.

That said, nobody had any idea how many of the ‘limited edition’ coins were being sold. When Ganapati tried to value the coins later, it turned out that they were worth at only 40 per cent of the money he had paid to buy them.

Elusive Questions
“If it is too good to be true, then it probably is,” says an official in the Ministry of Corporate Affairs, talking about the promises of such fraudulent schemes. Sometimes, the promised returns can go up to 500 per cent in just one year. That was the case of SpeakAsiaOnline, which promised unbelievable returns to subscribers for filling up surveys the firm claimed to be conducting for consumer goods companies.

With an initial investment of about Rs 11,000, a person could make up to Rs 52,000 a year — just by filling up two forms a week. Each survey would give them Rs 500. The catch was: A single person could open four accounts at the same time (for Rs 44,000). Why would any company pay for surveys filled multiple times by the same person? It wouldn’t; but not many thought of posing that question.

The company wound up in 2011 after raising an estimated Rs 2,300 crore, with approximately 2.4 million ‘panels’ (accounts, in other words) in India and another 300,000 in ­Bangladesh. The Economic Offences Wing of the Mumbai police estimates that around 100,000 people who invested in the scheme did not get even a single paisa back (despite repeated efforts, we could not reach SpeakAsia for comments). A few officials of the company have been arrested. But not only are many of the perpetrators still at large, the investigators claim to have evidence that at least part of the swindled money has been routed back to India, with the surmise being that the money could have been used to start a similar venture. The litigation is on, and the firm is contesting the charges.
In 2012 alone, fraudulent money-marketing schemes took away about Rs 1,400 crore in investors’ funds. Today, as many as 523 such schemes are running across the country

That said, the suspicions are not without basis. According to officials, prior to SpeakAsiaOnline, its CEO Manoj Kumar Sharma had floated another venture called SevenRings International, targeting the affluent sections of society, and which operated the failed watch-and-earn venture called AdMatrix in India and another one, Mister Colibri, in Brazil. AdMatrix offered to pay investors (who had to put in Rs 15,000 initially) Rs 1,000 a week for viewing a certain number of advertisements on television.

By the time the authorities started cracking down on SpeakAsia, a good part of the money had been transferred out of the country to a company known as Haren Ventures, according to investigators. Meanwhile, the company was telling its investors that their dues could not be paid since the RBI had frozen their ­accounts.

“The RBI never froze their accounts,” says Sinha. He feels this is a classic example of why it is difficult for authorities to protect investors. “By the time we get complaints and the agencies catch up, it is too late,” he says. “The company goes on an overdrive claiming that the payments were stalled because of the intervention, while they move courts to stall the probe.”

But that still does not explain why investors do not ask relevant questions. Investigators estimate that up to 50 per cent of the money collected by SpeakAsia was in cash. “It is an offence of greed. People invest knowing full well that such returns are not possible in legal business models,” says an investigator. In support, the officials show accounts opened with names such as ‘Jaimaavaishnodevi’, ‘Shootingstar007’ and ‘pluto01’. “Most people had some kind of idea that it was a ponzi scheme,” says an official. Just that the offer of easy money with a quick turnaround was too attractive.

There’s more. Holding seminars at five-star hotels are a standard practice among such companies. Authorities investigating SpeakAsia found that the firm used to bulk-book five-star hotels near the Mumbai international airport at discounted rates to hold such meetings over weekends. The purpose of the meetings would be to train investors to sell the scheme to others. SevenRings had an e-learning programme called Power Living & Life Enrichment (from what its ­brochure calls ‘International Institute for Personal Growth’).

“You can’t become a scientist without training. You can’t drive a car without training. What makes you think you can be a successful entrepreneur without training,” asks the SevenRings brochure. “SevenRings offers you a structured, tried and tested method to transform your life in stages…We call it transforming learning into earning,” says the publicity literature.


Those Many Layers
Officials at the SFIO say such schemes are inherently intended to defraud when they offer such huge returns. “If anybody knows of a business opportunity that gives him such high returns to enable sharing it with investors, why would he even invite a partner,” asks an investigative officer. “A bank will be willing to lend at 12-15 per cent (after due diligence of its sustainability).” His argument is that most such businesses do not have an underlying profitable business model. This makes them purely money circulation schemes.

Money circulation schemes are banned by a 1978 Act. It, however, defines a scheme in the vaguest possible terms — a scheme to make quick or easy money or to receive money with the promise to pay money on the enrolment of other members into the scheme.

Here, the problem is that several legitimate direct selling companies may also fall under the definition, and many fraudsters may go to court claiming they are direct sellers. Sinha of the Economic Offences Wing says that lack of a proper regulatory framework becomes a hindrance, because there exists no clear way to differentiate the legitimate firms from the others.

Most of the companies call themselves multilevel marketers, a legal occupation. But their activities, with no product to sell or service to offer (unlike, say, an Amway or Tupperware), become pure money-marketing. Both the stockmarket regulator Sebi and the RBI say such sc­hemes do not come under their pur­view. So the hapless investor is left with just the police to turn to.

In May, the government set up an inter-ministerial panel to check fraudulent money marketing schemes. The corporate affairs ministry is also said to have set up a regulator for multilevel marketers. Sinha says that if there is a regulator, then anybody operating without a licence can be easily stopped.

Of course, all measures have their naysayers. Economist Bibek Debroy says that compulsory registration may not work in an undeveloped market like India because of the costs of compliance. He says the government must allow a transition from the unorganised to the organised sector. “We need gui­delines on what we can permit and how we can distinguish a py­ra­mid scheme from the rest,” says Debroy.

A solution may be on the lines mooted by the Financial Legislative Reforms Committee in its draft submitted to the finance ministry on a new framework for India’s financial laws. The panel’s chairman, Justice B.N. Srikrishna, says the draft report envisages two solutions. Under the proposed framework, any aggrieved customer can directly approach a newly ­created Redress Agency, which can take immediate action, and also the regulator, which will have jurisdiction over all financial products. “The arbitrage that people are enjoying by claiming a regulator does not have jurisdiction will be eliminated,” says Srikrishna.

But what worries the government is also the impact of such schemes. A small investor who gets sucked into such a scheme initially makes money. But later on, he re-invests his earning into the scheme for better returns, and gets his friends and relatives to invest as well. When the fraud unravels, the damage to an investor can be substantial.

And, sometimes, all they get to do is vent their ire on online forums. Sinha speaks about how after every scam breaks, investor forums crop up, purportedly to argue the investors’ case collectively. But in SpeakAsia’s case, they found that the president of the All India SpeakAsia Panelists Association, a certain Melwyn Cresto, was in cahoots with the promoters of the firm. Autho­ri­ties say the same about the City Limouzine Investor Forum, which they point out has not challenged the claim that only Rs 400 crore was lost. MMMIndia has so far not generated complaints. It is still nascent in India. Not many have an idea what the companies enrolment is, or how much they have raised.

However, authorities are certain this is a scam waiting to happen. Their reasoning? “There has to be a product or a service. This model is more like gambling and has to unravel at some point. Till then, they target investors who will ultimately lose money.” That logic could have applied to any of the hundreds of cases they come across.

All said and done, lost between the scamster and lethargic law, the investor keeps getting lured into schemes that promise “to change his life once and forever”. And while the government dithers on a solution, the scamsters make merry.


(This story was published in BW | Businessworld Issue Dated 03-06-2013)

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Abraham C Mathews

The author is an Advocate, practicing in Delhi, and a Chartered Accountant

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