BOU warns public against ponzi, pyramid schemes

The Bank of Uganda has released a statement cautioning the public against investing in Ponzi and pyramid schemes. 

In the statement, BOU defines Ponzi schemes as fraudulent investing scams 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," reads the statement.

The statement further likens a pyramid scheme 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," reads the statement.

However pyramid schemes, like Ponzi schemes, do not sell products or make real investments, they simply rely on money from new investors which is channeled 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.

The statement warns that both Ponzi and pyramid schemes always collapse 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," warns the statement. 

The public is urged to trust their investments with licensed investment firms regulated by Capital Markets Authority, 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 Bank of Uganda website