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NASS proposes jail terms for Ponzi scheme promoters

by Daudu John

NASS proposes jail terms for Ponzi scheme promoters

The National Assembly has passed the Investment and Securities Bill, which includes provisions for possible jail sentences for those who promote Ponzi schemes in Nigeria. Oluwakemi Abimbola examines the implications of the bill on investment when it is signed into law

The Investment and Securities Service Bill 2023 finally scaled through the final hurdle of the National Assembly when the Senate passed it on March 29. The bill, which is expected to aid the functioning of the capital market and facilitate the ongoing economic diversification in the country, had been passed by the House of Representatives in December. It is only awaiting presidential assent to below a law.

At the plenary, the Senate President, Ahmad Lawan, stated that the bill is expected to protect investors, adequately regulate the market, reduce systemic risks as well as provide for more stringent punishment for operators of Ponzi schemes.

He said, “The bill for an act to repeal the Investments and Securities Act 2007 Act No. 29 2007 and enact the Investments and Securities Bill 2023 to service the SEC as the apex regulatory authority for the Nigerian capital market as well as regulation of the market to ensure capital formation, to protect investors, maintain fair, efficient and transparent market and reduction of systemic risk and for related matters is hereby passed.”

Speaking as of the time the House of Representatives passed the bill, the Chairman of the House Committee on Capital Markets and Institutions, Babangida Ibrahim, stated that the ISB 2023 was capable of transforming the capital market, attracting foreign investors as well as boosting investors’ confidence, among others.

Ibrahim said, “The bill seeks to repeal the existing Investments and Securities Act 2007 and to establish a new market infrastructure and wide-ranging system of regulation of investments and securities businesses in Nigeria, especially in the areas of derivatives, systematic risk management, financial market infrastructure and Ponzi scheme and platforms.”

One of the developments that the new bill brings is the prohibition of Ponzi/Pyramid schemes, which have led to the loss of billions of naira on the part of victims and also affected confidence in the investment climate in Nigeria.

The passed bill prohibits Ponzi/pyramid schemes as well as other illegal investment schemes and prescribes a jail term of not less than 10 years for promoters of such schemes.

Ponzi schemes, also known as pyramid sales schemes, are a money laundering system where investors are lured in with the promise of high returns on investment after a specified period. The system runs in a somewhat cyclic fashion by paying old investors with deposits of new investors. Usually, this cycle becomes unsustainable when the backlog of old investors eligible for payments exceeds the investments coming into the system.

According to Nigeria’s Securities and Exchange Commission, three million Nigerians lost N18bn when the popular Ponzi scheme, Mavrodi Mundial Movement aka MMM, crashed in 2016. As of 2022, Nigerians have lost over N300bn in Ponzi schemes in five years, according to a report generated by the Norrenberger Financial Investments scheme.

The promoters of a popular investment scheme, Ovaioza Farm Produce Storage Business Limited, are facing prosecution for luring members of the public to an unregistered collective investment scheme. The promoters, Imu Yunusa and Goodness Omeiza have been accused of defrauding their victims up to N2bn.

Reacting to the introduction of the prohibition of Ponzi schemes, Chief Executive Officer of Enterprise Stockbrokers, Mr Rotimi Fakayejo, said that the move was long overdue and a welcome idea.

He said, “I remember very well, this Ponzi scheme that got a lot of people in trouble, MMM. In the end, it is not just about people losing money. It is the disinterestedness in investing. First, they invested in the wrong window and ultimately, they will not invest again.

“Some foolishly and gullibly invested in it and some because of ignorance entered into it and others because of greed. Those who entered into it because of greed know what they were doing, they are just greedy. But the ones who get into it ignorantly, not knowing that such schemes are not authorised by the SEC are the ones who may never enter into any viable or regulated investment window again. Every economy needs investment, for money to be revolving through profitable channels.”

Fakayejo also argued that both those who get involved in Ponzi schemes and their promoters should be punished, albeit, the sanctions would be different.

He said, “The person who goes into it should get a small punishment and the person that starts the scheme should get a huge penalty. For anything, you are supposed to make findings.”

Regarding the proposed jail term of not less than 10 years, Fakayejo stated that the inclusion of asset forfeiture and also a fine of 10-20 per cent of the amount of money collected from victims may not be a bad idea.

Expressing a divergent opinion on the Ponzi scheme prohibition, the National Chairman of the Progressives Shareholders Association of Nigeria, Boniface Okezie, stated that Ponzi schemes have been embraced in other places.

“The Ponzi scheme has worked elsewhere; people have embraced it but the Nigerian market has not embraced it and SEC said that it is not known to them and that it is a scam and so they cannot allow Nigerians to patronize it.”

Okezie also accused the National Assembly of copying foreign laws that may have little or no impact on the Nigerian scene and doubted that the President, Major General Muhammadu Buhari (retd) would sign the bill before the expiration of his tenure next month.

The PSAN boss said, “I do not think the outgoing president will assent to that bill before he leaves office on May 29 because previous bills sent to him, it took him time to assent, not to talk of now that he is going for retirement.”

Speaking on some highlights of the bill in a statement released after the Senate passed the bill, the Director-General of the Securities and Exchange Commission, Lamido Yuguda, said that a recommendation was made in the bill for the inclusion of the National Pension Commission on the SEC board for increased collaboration between the two agencies, particularly to encourage greater investment of pension funds and in capital market products/instruments.

This is a welcome development, according to stakeholders, given the visible role that pension funds play in the capital market already.

Capital market operator, Fakayejo, said that Pencom having a seat on the board of SEC was long overdue.

He said, “The pension funds have been a major investor in the capital market. Look at all the major instruments, either bonds or equities, commercial papers, at the different classes of bonds, whichever way you want to look at it, the pension funds are the largest investors. So, I believe they should have a say in how the market is being regulated.”

Okezie also agreed, saying that the pension funds had been a major player in the capital market.

He said, “The Pension Fund has contributed to a large extent to what are seeing today of the rallying in the capital market. If they are investing in the SEC-regulated market, they should be mindful of where they invest their money so that their money does not get trapped when they need to pay those retirees.”

Commenting on the bill being able to boost investors’ confidence and attract foreign investments like the Chairman of the House Committee on Capital Markets and Institutions, had boasted, Fakayejo, pointed out that the reasons foreign investors left and are leaving are still very much around.

He said the unstable exchange rate was a major deterrent for foreign investors.

“I don’t see anything in the bill that is a plus for foreign portfolio investment. You and I know that the reason they are not here or why they have taken away their money is the instability of the naira. That has been the basic reason they (FPIs) are not here.”

Professor Olawale Ajai of the Lagos Business School also agreed that the country’s business environment has not been investment-friendly.

Ajai said, “Insecurity and the opaque naira foreign exchange regime have not helped in recent times, in spite of strenuous efforts on ‘doing business reforms.’”

Others highlights of the bill include the expansion of the categories of issuers as a key step towards the introduction of innovations and offerings such as crowd-funding as well as the facilitation of “commercial and investment business activities”, subject to the approval of the commission and other stipulated controls.

The bill also expands the definition of a Collective Investment Scheme to include schemes offered privately to qualified investors, and contains an entirely new part which regulates Commodity Exchanges and Warehouse Receipts.

The SEC DG said that the new parts of the bill “are essential for developing the entire gamut of the Commodities ecosystem”.

According to him, a new part on the management of systemic risk has been introduced, covering the following themes: monitoring, management and mitigation of systemic risk in the Nigerian capital market; arrangements with other regulators relating to information required from entities that are regulated by other regulators; sharing of information between financial sector regulatory authorities or government agencies; and use of a legal entity identifier to provide for proper monitoring of systemic risks.

The bill classifies securities Exchanges into composite exchanges and non-composite exchanges. A composite exchange is one in which all categories of securities and products can be listed and traded. In contrast, a non-composite exchange focuses on a singular type of security or product.

Furthermore, the duties/responsibilities of exchanges have been expanded, and the conditions for revocation of registration clearly stated. There are also new provisions on Financial Market Infrastructures such as Central Counter Parties, Clearing Houses, Trade Depositories, etc.

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