Fraudsters still reaping from collapsed pyramid schemes

A Cabinet minister is among people suspected of masterminding pyramid schemes in which Kenyans lost Sh34 billion.

Investors who testified at the public hearings of the government Task Force on Pyramid Schemes also cited a former MP, relatives of senior politicians, five prominent law firms and several church leaders as having been behind pyramid schemes that collapsed in 2007, leaving many of the investors destitute.

The task force led by former Cabinet minister Francis Nyenze heard painful stories of how investors throughout the country were left penniless or in huge debt when the schemes collapsed after the Central Bank of Kenya raised the red flag.

One investor told the task force in Nyeri that she had convinced her husband to sell the land on which their matrimonial home stood to put money in one of the schemes expecting huge returns only to lose everything.

She said her husband got so depressed he died. Today, she is a homeless, jobless widow with three children to raise.

An Embu pastor told of how he quit his job with a new motor vehicle dealer in Nairobi to start a branch of a pyramid scheme.

And in Kisii, a witness told the task force how his family had raised more than Sh400,000 and invested it in a pyramid scheme.

When it collapsed, his family members were diagnosed with illnesses such as high blood pressure and diabetes.

The problem for depositors has been that the law is vague on pyramid schemes.

When the schemes collapsed in 2007, some of the victims rushed to the Kenya Anti-Corruption Commission for help but KACC, by law, deals with public agencies or officers only and is not mandated to pursue private individuals or institutions.

The investors were advised to seek redress in the courts, where the wheels of justice turn painfully slowly.

Though the Central Bank of Kenya and the police instituted several cases against suspected managers of the schemes, no one has been punished for defrauding Kenyans.

Though CBK has the Banking Fraud Investigation Unit, it proved ineffective in preventing the schemes from luring the public with the false promise of quick riches.

Inquiries by the Sunday Nation have revealed that only a few cases were reported to the Banking Fraud Investigations Unit.

One of the schemes, Deci Capacity Building Entrepreneurship, is said to have gone down with millions of shillings in deposits.

Detectives moved to have the bank accounts of Deci and Sylvia Investment frozen but Deci later moved to court and had the freeze lifted.

The BFIU took Mr George Odinga Donde, the chief executive and founder, to court in September 2006 for allegedly carrying out banking business without a licence but the case was later dropped.

Other organisations reported to have taken deposits include Jitegemee, Akiba Micro Finance, Acid, Clip, Sasanet, Kenya Business, Global, Circuit, Swop Silver Ventures and Fino. Akiba has a pending case in court for allegedly receiving deposits without a licence.

The Sunday Nation has learnt that Kenyans lost Sh34 billion through 166 pyramid schemes.

And as the government, through the Ministry of Cooperative Development, tries to investigate the perpetrators of the fraud, reports from Tanzania say authorities there have uncovered a scheme similar to one that was run here.

The scheme, promoted by prosperity gospel preachers, was started there in July 2007, at about the time the Kenyan one was folding.

In Tanzania, just like in Kenya, depositors were encouraged to “plant” (deposit) their “seed” (money) and “harvest” it after a short period of time with interests of up to 300 per cent.

In Kenya, the masterminds started off paying monthly interest rates of between 10 and 16 per cent. This means that someone who invested Sh100,000 would earn at least Sh10,000 a month from their investment. Someone investing Sh1 million would earn at least Sh100,000 a month in interest.

For the scheme to survive, the masterminds and the initial beneficiaries spread word about the high returns, drawing in new investors whose money would be used to pay off interest and attract even more investors.

By 2006, the schemes had spread from Nairobi to Mombasa, Kisumu, Kakamega, Kisii, Nyeri, Meru and Embu.

Moral duty

According to the Central Bank, the law that governs operations of pyramid schemes does not outlaw them and all they can do is alert the public as a moral duty.

But Section 16 (1) of the Banking Act states that “no person, other than an institution which holds a valid licence, shall invite or accept deposits in the course of carrying on a deposit-taking business.”

The schemes were deposit collection businesses but the authorities did not move in to stop them. Instead, CBK issued a warning in February 2007, stating that pyramid schemes were doomed to fail, were a contravention of the law and asked the public with information on the schemes to forward it so the culprits could be prosecuted.

Further inquiries at the Ministry of Cooperatives revealed that as soon as the masterminds saw the government raise a red flag over the schemes, they quickly moved the money to different accounts.

Thus, by the time the BFIU, a section of the Criminal Investigations Department housed by the Central Bank moved in, the accounts had been cleaned out.

But the Sunday Nation discovered from officials who asked not to be named because they are not authorised to speak to the press that following the alert, 17 pyramid schemes rushed to the Ministry of Cooperatives and registered their outfits as cooperative societies to avoid investigation.

The pyramids were based on what is known in financial circles as a Ponzi scheme, named after an Italian who pulled off a similar scheme in the US in the early 1900s.

It is a fraudulent investment operation that pays unusually huge returns to investors from money deposited with the scheme rather than from any actual profit earned.

The latest Ponzi scheme to have captured the world’s attention is one masterminded by Bernard Madoff in the US. Madoff, who was arrested on December 8 last year for running a $65 billion pyramid scheme, pleaded guilty to charges brought against him by Federal investigators on March 3.

His crimes, which include securities fraud and money laundering, could attract a possible 150-year jail sentence.

Early investors in Madoff’s scheme would be paid off with money from later investors and the cycle continued until detectives moved in on him, cut off the scheme and hauled the perpetrator to court.

However, unlike in the US, the process in Kenya has been long with investors losing hope of ever recovering even a fraction of their billions.

The lure of easy money blinded the public to the risk of placing their money in the hands of institutions that said little or nothing about the operations they ran and how they were able to guarantee such high returns.

Thousands of Kenyans are still paying a heavy price – some have even lost their loved ones – while the masterminds romped home with untold riches.

What was supposed to be a short-cut to riches turned into a nightmare as life savings, and even loans, simply vanished.