While lawmakers ponder the dismantling of financial pyramids, scammers are mastering new scams. Gullible citizens are being encouraged to invest in cryptocurrencies and learn non-existent professions.
Who allowed the pyramids to be created?
Less than three years have passed since the parliamentary committee on financial policy and banking activities reviewed and approved the latest version of bill No. 0959 "On the prohibition of financial pyramids in Ukraine," recommending its adoption in a second reading. The long-suffering document was first submitted to the Verkhovna Rada back in April 2013. It prohibits the creation, advertising, and facilitation of financial pyramids, and provides for criminal liability for such activities. But most importantly, the law defines financial pyramids, which is still absent from legislation. This is precisely why fraudsters are now so difficult to prosecute.
According to lawyers, the previous version of the bill needed significant revision. Its definition of a financial pyramid was vague and left numerous loopholes for fraudsters. The Committee on Financial Policy and Banking Activities claims to have revised the document and eliminated the "gaps." However, they refuse to make the new version public. It is also not available on the Verkhovna Rada website. According to Oleksandr Zaletov, a member of the National Commission for Regulation of Financial Services Markets, the document is completely ready, and the timing of its adoption will depend solely on the deputies: "We have recommended this bill to the Cabinet of Ministers as a priority," Zaletov emphasized.
While parliamentarians are hesitating, financial schemes are flourishing, fueled in no small part by the crisis. None of the financial regulators—not the National Commission for Financial Services, not the National Bank of Ukraine, not the National Securities and Stock Market Commission—has any statistics on the number of pyramid schemes or the number of victims. These agencies have a good excuse: they only oversee legitimate financial structures, officially registered and with the necessary permits. As for fraudulent schemes, law enforcement should be dealing with them. "But the fact is that such organizations have appeared in greater numbers recently. We receive complaints from citizens about the activities of certain financial companies. The nature of their operations suggests illegal fundraising. Many pyramid schemes are not registered as financial companies or even as legal entities, so no one knows their exact number," says Alexander Zaletov.
Combating pyramid schemes is extremely difficult. After all, their participants voluntarily contribute their money, often without entering into any contracts with the pyramid's representatives or receiving any documents confirming the deposit of funds into the company's account. Gathering evidence to open a legal case is often extremely difficult, if not impossible. Therefore, it is crucial for the judicial system to define a financial pyramid.
How do scammers work?
As Sergei Kosarenko, a lawyer with Mozhaev & Partners Law Firm, told DS, there are two types of pyramid schemes: multi-level schemes (similar to MLM sales) and so-called "Ponzi schemes" (named after the founder of one of the first such schemes). The former operates on the principle of investing money, convincing three (four, five, etc.) more of your friends to do the same, and then receiving a percentage of their "investment." Three newcomers must convince three more, and so on down the line. For example, the infamous "millionaire mentor" Robert Fletcher, who founded the company "Global Training System" in 2007-2008, operated under this scheme. According to law enforcement estimates, the pyramid scheme attracted approximately 3 people, who transferred almost 60 million hryvnias to the scammer. Fletcher was arrested but released several years later on bail of 1 million hryvnias. In 2015, he created a new Ponzi scheme, Freedom Training System. According to media reports, it is now successfully running various projects, including attracting investors to invest in cryptocurrencies.
The second type of pyramid scheme operates differently. First, the organizer gathers a small group of investors, paying them exorbitant interest rates from their own funds. After that, all that remains is to wait for word of the "miracle" investment to spread around the world, and the number of gullible investors begins to multiply. Then, the organizer simply pays out funds to existing investors at the expense of new ones. But both pyramid schemes collapse for the same reason: as soon as the flow of new investors dwindles.
An example of the second system is one of the largest financial pyramids, the "Mercury Mutual Fund." It was one of the largest schemes operating in our country in 2015. Investors wishing to join the fund had to deposit at least 1 hryvnias into the company's account. They were promised regular interest. There was no guarantee of return. Instead, investors were encouraged to believe that the larger the investment, the higher the return. According to the organizers, the interest rate could reach 360% per annum. The scammers were willing to accept any currency commonly used in the CIS from investors. They even invented their own currency, the karat. As with any classic pyramid scheme, there were "bonuses" for attracting new participants. Incidentally, this pyramid scheme wasn't limited to Ukraine. Investors were also attracted from Russia, Kazakhstan, and Moldova. The pseudo-fund was not registered as a legal entity and, accordingly, was not included in the registers.
The activities of the Mercury Mutual Fund quickly became apparent as signs of a Ponzi scheme. Banks began blocking the accounts of its officials and warning citizens that the organization was dishonest. The National Financial Services Commission also reported that the activities of the Mercury Mutual Fund violated Section 7, Part 3, Article 19 of the Federal Law "On the Protection of Consumer Rights" and were misleading. However, after most banks refused to work with the company, the organizers of the Ponzi scheme began encouraging investors to transfer funds via PayPal, WebMoney, and even Bitcoin. As of early April, the pseudo-fund was still operating, and its website offered enticing terms to gullible investors.
Mavrodi's heirs
Ponzi schemes often impersonate various financial companies—credit unions, insurance and leasing companies, investment funds, etc.—but recently, they increasingly don't identify themselves at all, simply moving online and profiting from manipulation of various cryptocurrencies or online accounts, which are unregulated in our country.
Last year, several large companies emerged and began a flurry of activity. Among them are Kladinfo, Rekordfin, Depositgroup, Sati Plus, Energeticheskaya Strategiya, and Sovremennoye Sotrudnichestvo. Some of them purportedly offer cash loans at very low interest rates. These companies post ads offering cash loans from 10 to 600 UAH to individuals with problematic credit histories. Potential clients are asked to pay "mandatory insurance," make a "security deposit," and so on, but after this, they begin to mislead them and ultimately refuse to issue the loan.
Other companies offer gullible individuals various courses, seminars, and training sessions. They promise to "reveal all the secrets of millionaires" and "teach them how to make big money," after which they promise employment. But ultimately, it turns out, their job is to attract equally naive people to training sessions and sell them informational materials.
In early 2016, a new project called "MMM Global" launched in Ukraine, promising incredible earnings using the cryptocurrency BitCoin. Many attribute it to Sergei Mavrodi, but according to media reports, other people are behind it, simply using the well-known schemer's name to promote the project and deflect suspicion. This financial pyramid offers its investors more than just interest on deposits (0,67% per day, or 20% to 100% per month). Participants must complete certain tasks daily, for each of which they are promised an additional 3,33% per day. Similar interest is promised for posting advertisements for the pyramid scheme on a personal online page or sending them via email.
Whether the adoption of Bill No. 0959 will help bring fraudsters to justice will depend on how precisely the new version of the document defines it. "The main thing is to have a clear, legally accurate definition of a financial pyramid. This will enable law enforcement agencies to correctly classify this crime and prevent fraudsters from escaping punishment or getting away with 'lighter' charges under the Criminal Code," says Sergey Kosarenko.
Subscribe to our channels on Telegram, Facebook , Twitter , VK - Only new faces from the SKLEP section!