REPORT OF TRUST WORKSTREAM
SECURITY, INFRASTRUCTURE AND TRUST WORKING GROUP
Unlicensed Digital Investment Schemes
(UDIS)
b • Unlicensed Digital Investment Schemes (UDIS)
Unlicensed Digital Investment Schemes
Flourishing criminal activity in the global financial ecosystem calls for
collaboration amongst telecommunications, financial sector
regulators and criminal investigation authorities.
SECURITY, INFRASTRUCTURE AND TRUST WORKING GROUP
© ITU 2019
This work is licensed to the public through a Creative Commons Attribution-Non-Commercial-Share Alike 4.0 International license
(CC BY-NC-SA 4.0).
For more information visit https://creativecommons.org/licenses/by-nc-sa/4.0/
Foreword
The International Telecommunication Union (ITU) is the United Nations specialized
agency in the field of telecommunications, information and communication tech-
nologies (ICTs). The ITU Telecommunication Standardization Sector (ITU-T) is a
permanent organ of ITU. ITU-T is responsible for studying technical, operating and
tari questions and issuing Recommendations on them with a view to standardizing
telecommunications on a worldwide basis.
A new global program to advance research in digital finance and accelerate digi-
tal financial inclusion in developing countries, the Financial Inclusion Global Initia-
tive (FIGI), was launched by the World Bank Group, the International Telecommu-
nication Union (ITU) and the Committee on Payments and Market Infrastructures
(CPMI), with support from the Bill & Melinda Gates Foundation.
The Security, Infrastructure and Trust Working Group is one of the three working
groups which has been established under FIGI and is led by the ITU. The other two
workinggroups are the Digital Identity and Electronic Payments Acceptance
Working Groups and are led by the World Bank Group.
This paper was written by Jami Solli with substantial input and research from the
following persons: Assaf Klinger (Vaulto), Niyi Ajao (Nigeria Interbank Settle-
ment System), T.O. Fatukun (Central Bank of Nigeria), Md. Rashed Mohammed
(Bangladesh Financial Intelligence Unit), Amol Kulkarni (CUTS International, In-
dia), Mercy Buku (CGAP), Felicia Monye (Consumer Awareness Organisation,
Nigeria) and Prof Louis de Koker (La Trobe University, Australia). Substantive
editorial guidance was provided by Vijay Mauree and Charlyne Restivo of the
Telecommunication Standardization Bureau of the ITU.
The author would like to thank the Security, Infrastructure and Trust Working
Group for its continued assistance. The opinions expressed in this report are
those of the author and do not necessarily reflect the views of the International
Telecommunication Union or its membership.
Acknowledgements
Unlicensed Digital Investment Schemes (UDIS) • 3
Executive Summary ........................................................................5
1. Background ...........................................................................7
2. ICTs and UDIS .........................................................................8
3. Impact of UDIS ........................................................................8
3.1 UDIS can harm the financial system ..................................................8
3.2 Consumers from UDIS may be irreparable, impacting several generations ................9
3.3 UDIS can cause financial exclusion ...................................................9
4. A survey of existing research/initiatives on unlicensed investment schemes ................10
5. Case studies by country (India, Kenya & Nigeria) .........................................11
5.1 Everyone is the boss, but no one is really in charge of UDIS. ........................... 12
5.2 Low rates of prosecution for UDIS and rare reimbursements for the consumer .......... 12
6. Outreach and awareness raising eorts with consumers ..................................13
7. The dark web complicates the Ponzi picture ............................................14
7.1 Inclusion ..........................................................................14
7.2 Monetization ......................................................................14
8. New technologies could be used to combat UDIS ........................................16
9. Why do victims continually fall for such obvious frauds? .................................16
10. Recommendations for addressing UDIS at national and international level .................17
Annex A : Questionnaire ...................................................................19
Endnotes .................................................................................20
Contents
4 • Unlicensed Digital Investment Schemes (UDIS)
Executive Summary
I
nternet fraud in the form of unlicensed digital investment schemes (aka digital Ponzis) is at
an all-time high. Yet, the impact on financial exclusion is unknown, because few regulators
have been measuring the magnitude of the problem. Judging from past Ponzi statistics in the
pre-digital era, however, we know that this type of financial fraud can severely harm individual con-
sumers and their families and cause financial system risk, which may induce civil unrest.
This paper aims at providing a better understanding of the impact of this specific type of fraud
on both the consumer and financial exclusion through an analysis of unlicensed digital investment
schemes and the legal/regulatory frameworks in which they thrive in India, Kenya and Nigeria. It
also proposes new means to address a digital mutation of a very old problem, and makes con-
crete recommendations regarding the use of new technologies and new partnerships, including
the involvement of the telecommunications regulator to take up the unlicensed digital investment
schemes challenge.
Unlicensed Digital Investment Schemes (UDIS) • 5
AML Anti-Money Laundering
DFS Digital Financial Services
GDP Gross Domestic Product
ICO Initial Coin Oerings
IMF International Monetary Fund
ISP Internet service provider
MMM Mavrodi Mondial Money
RBI Reserve Bank of India
SACCO Savings and Credit Cooperatives
SEBI Securities and Exchange Board of India
SMS Short Messaging Service
TRAI Telecom Regulatory Authority of India
UDIS Unlicensed Digital Investment Schemes
URL Uniform Resource Locator
Abbreviations and acronyms
6 • Unlicensed Digital Investment Schemes (UDIS)
1 BACKGROUND
UDIS are fraudulent schemes which are promoted digi-
tally via a domain name/URL, on social networks or text
messaging services. These schemes promote and sell
investment opportunities to consumers which are not
licensed by the appropriate regulator. They pay returns
to investors from the new capital that is paid in by new
investors, rather than from a legitimate, profit-generat-
ing business or activity. These schemes usually end, or
collapse when there is insucient new capital paid in to
sustain pay outs to existing investors.
The paper will not consider unlicensed investment
schemes where there is no digital element to the fraud,
nor where the solicitation is an attempt to elicit consum-
er’s private financial data online (e.g. phishing) nor will it
consider social engineering frauds such as solicitations
for funds from fraudsters pretending to be a love interest
in order to extort money from unsuspecting, and lonely
consumers.
This is not to diminish the very real harm these types
of scams, but the authors believe that the collective
harm caused by UDIS is much greater, with the potential
to adversely aect the health of the financial system.
UDIS Examples:
An example of an ongoing, international UDIS is the
Mavrodi Mondial Money, or MMM schemes, which re-
main active on the Internet with both a Facebook pres-
ence, and some form of www.countryname-MMM.net
as an URL.
MMM purports to be a community of ordinary peo-
ple helping each other. Consumers are encouraged to
send money, including via bitcoin, and are promised
monetary support at some time in the future from the
common fund. Thirty-percent returns are promised on
the website, on Facebook pages, via Twitter and even
closed MMM groups have been identified on Whatsapp.
Further, MMM oers and online school to learn how to
promote a MMM scheme.
Another example of an UDIS applying a new twist
to promote its fraudulent investment oer is the re-
cent scheme in the Uttar Pradesh region in Noida, India,
which called for consumers to invest money in a scheme
that allowed consumers to purportedly earn money by
clicking ‘like’ on Facebook for various companies, which
had supposedly paid the promoter for ‘pay for click’ ad-
vertising.
The Noida scheme had both a Facebook and URL
presence (www.socialtrade.biz) and ultimately, it too
collapsed. It was later revealed that consumers were
being misled and any return on investment was oered
solely because of later investments by new consumers
who were similarly duped, and not paid by actual com-
panies which had purchased marketing services from
the promoter. This type of UDIS illustrates that criminals
try to mask their activities as valid marketing practices
or a new business/investment model (e.g. initial coin of-
ferings which will be discussed later in the paper). And,
thus the Noida scheme too would be included in the
Abbreviations and acronyms
Unlicensed Digital Investment Schemes
(UDIS)
Unlicensed Digital Investment Schemes (UDIS) • 7
8 • Unlicensed Digital Investment Schemes (UDIS)
working group’s definition of an unlicensed, digital in-
vestment scheme.
2 ICTS AND UDIS
Prior to the existence of the world wide web, social net-
works, or digital financial services, the perpetrators of
financial frauds, such as Ponzi and pyramid schemes
were charismatic salesmen, exerting a lot of time and
eort to defraud victims. Generally, fraudsters would
also enlist an inner circle of first line investors, who si-
multaneously acted as a secondary sales force. Promo-
tion of the phony investment product to one’s close cir-
cle of friends, family and business associates was done
the old fashioned way: in person and on the telephone.
In this manner, Bernie Mado was able to accumulate
an estimated USD 65 billion dollars in his Ponzi scheme
due to his charismatic, trustworthy demeanor which
allowed him to mobilize feeder funds from amongst
global money managers to the uber wealthy, including
members of European royal families.
1
Like many ani-
ty fraudsters, Mado also preyed within his own social
circles; including within the Jewish communities in New
York and Florid.
Today, with the advent of the Internet, social net-
works and mobile phones, running a Ponzi scheme has
become much easier. Promotion of the schemes can
be done from the comfort of one’s home, or from any-
where using social networks and SMS to promote the
scheme and mobile money to facilitate the transfer the
funds in and out. Crypto currencies are also available
to launder the proceeds so today’s Ponzi operator can
reach a much greater volume of victims with arguably
much less eort, and hide the ill gotten gains easier.
The Internet and digital money also oer new tech-
nologies in which to disguise a Ponzi so that few con-
sumers truly understand its underlying, fraudulent na-
ture. For example, Initial Coin Oerings (ICOs) of crypto
currencies have recently provided a new product oer-
ing for Ponzi perpetrators to use to defraud unwitting
investors. It is dicult to analyze the underlying soft-
ware code at issue in an ICO, and thus determine wheth-
er it is a valid business or a Ponzi. More often than not
potential investors lack the capacity to analyze whether
there is indeed a legitimate business model.
This is not to say that all ICOs are Ponzis, but merely
to point out that fraudsters utilize complicated technol-
ogies to disguise the true nature of their oering. For
example, the scheme devised by Charles Ponzi known
as the original Ponzi master, involved the purported ar-
bitrage of international postal reply coupons.
2
The aver-
age person was not familiar with postal reply coupons,
and thus did not question the charismatic salesman’s
purported superior knowledge.
With digital means, a Ponzi perpetrator can promote
schemes virally, setting schemes in motion simultane-
ously in multiple jurisdictions. If they are ever subject
to regulatory intervention or investigation in one juris-
diction, the Ponzi operator can simply target other ju-
risdictions; they are limited only by their own linguistic
abilities, or the ability to collude with likeminded crim-
inals in the new jurisdictions. For example, the above
mentioned MMM scheme was hatched in 1989 by Sergei
Mavrodi and has now spread to many countries with the
advent of the Internet and Facebook. The author would
suggest that bank robbers almost always get caught,
but Ponzi operators rarely do.
3 IMPACT OF UDIS
In the post Internet world, there are three main reasons
why financial and telecom sector regulators, criminal
investigators, consumer advocates and all financial in-
clusion stakeholders should take the problem of UDIS
very seriously:
i. UDIS can harm the financial system
ii. The harm to consumers from UDIS may be irrepara-
ble, impacting several generations
iii. UDIS can cause financial exclusion
A significant allocation of resources may be needed to
address the UDIS problem, including utilizing existing
technologies to monitor the Internet and the dark web.
Financial institutions can also look for suspicious trans-
fer patterns and report as per existing anti-money laun-
dering (AML) requirements. Financial fraud is after all a
predicate oense to money laundering.
To date, judging from the many flourishing UDIS, su-
pervision and monitoring eorts have either been inad-
equate or antiquated. As a result, the volume of UDIS
continues to increase exponentially.
3.1 UDIS can harm the financial system
The impact of UDIS on a national economy can be dev-
astating, causing harm which lasts for years. The histo-
ry of unlicensed investment schemes, which previously
operated within a single country’s boundaries serves to
illustrate that impact can cause systemic risk, and un-
dermine the political stability of a country
For example, in the late 1990’s, Albania was riddled
with Ponzi schemes and an estimated 50% of the na-
tion’s GDP (Gross Domestic Product) was invested in
fraudulent schemes. The collapse of the schemes were
subsequently followed by civil unrest causing approxi-
mately 2,000 deaths and a change of regime according
to the IMF
3
(International Monetary Fund). Caribbean
nations, such as Jamaica and Grenada, are known to
have suered from Ponzi collapses whereby 12% and
25% of the nations’ GDPs were invested, according to
the IMF.
4
During the peak of the microcredit industry
in East Africa (2005–2007), Ponzi schemes flourished
there causing untold damage to financial inclusion ac-
cording to the media.
5
For example, the COWE and
Dutch International Schemes which collapsed in Ugan-
da in 2007 causing an estimated USD 7 million in losses
Unlicensed Digital Investment Schemes (UDIS) • 9
to consumers (see box 1 for further details).
In neigh-
boring Kenya, more than 26,000 consumers lost money
to hundreds of Ponzi schemes operating in the same
period. It has been estimated that some USD 300 mil-
lion USD were lost in Kenyan Ponzi schemes within this
period. In India, estimates from a 2014 BBC article sug-
gest that around USD 160 billion USD have been lost
in Ponzi schemes (though, no source was provided for
their data).
6
As Ponzi schemes have migrated to the Internet, new
schemes such as Ezubao in China emerged. Ezubao
purported to be earning profits from peer to peer lend-
ing, whereas it turned out to be a Ponzi scheme, which
inflicted massive damages in a relatively short period.
From its inception in 2014, to its discovery in 2016 only
two years later, Ezubao inflicted a USD 9 billion USD to
the Chinese economy. An economy of China’s size may
be able to withstand a loss of 9 billion USD by consum-
ers, but a loss of this scale in a smaller economy would
very likely result in significant civil unrest.
3.2 Consumers from UDIS may be irreparable,
impacting several generations
The harm from UDIS to consumers can be life threaten-
ing, impacting more than one generation in the same
family. The sudden loss of large amounts of money may
cause utmost emotional distress, which may even lead
to suicide in the worst cases. During the years of 2008–
2010 for example, coinciding with the recession trig-
gered by the subprime crisis, suicides in North Ameri-
ca and Europe were estimated to have caused 10,000
deaths more than in previous years.
7
Also, it has been observed that once a fraudulent in-
vestment scheme collapses, consumers rarely get their
funds back. Their recovery from such losses could take
many years; if it ever happens. The authors have not
found sucient research on the long term eects of
Ponzi schemes on victims. Most Ponzi schemes are
linked to anity frauds promoted by people enjoying
close anity with the victims’ entire families and social
networks being aected. In situation where State sup-
port is unavailable, and and extended families are un-
able to assist, we can only presume that recovery from
losses to a Ponzi may take many years. See the COWE
example below.
3.3 UDIS can cause financial exclusion
Financial exclusion can be inferred once consumers
have lost money to fraudulent, unlicensed investment
schemes: they no longer have these funds to invest in le-
gitimate, profit generating activities, nor in asset build-
ing. Furthermore, these consumers may also experience
distrust towards the financial sector and the regulators,
which have failed to protect them. This distrust may be
passed on to their children, and extended families.
In fact, researchers at Cornell University described
the trust shock that rippled through the US economy
following Bernie Mado’s fraud which lead to other in-
vestors collectively withdrawing $363 billion from in-
vestment accounts.
8
It was found that the shock waves
resonated primarily through social networks.
In the age of Internet, Ponzi schemes are first and
foremost easier to commit, secondly have greater im-
pact, and thirdly resonate more profoundly through
communities.
A study interviewed 65 victims of the Caring for
Orphans Widows and the Elderly (COWE) Ponzi
scheme which collapsed in Uganda in 2007, with
an estimated USD 7 million USD in losses to con-
sumers. It was found that the COWE fraudsters
had contributed to 11 suicides. Some suicides at-
tempts were only prevented by the victim’s lack
of financial resources (e.g. to purchase poison).
Some died attempting to flee debt collectors.
Countless other victims experienced high blood
pressure and other stress-related illnesses, includ-
ing depression. Divorces rates rose, other victims
fled the country to war-torn Sudan and South Af-
rica to avoid creditors, and others were incarcer-
ated by their creditors for failure to repay funds
borrowed from commercial banks, microfinance
institutions and savings and credit cooperatives
BOX 1
UGANDA: CARING FOR ORPHANS WIDOWS AND THE ELDERLY (COWE)
(SACCOs) which they used to invest in the COWE
and Dutch International schemes. Families were
torn apart, and many victims were also forced to
pull their children out of school, due to an inabil-
ity to pay school fees. 65 victims of the COWE
scheme were interviewed in person in 2014 and
another 150 victims of the same scheme were sur-
veyed with the assistance of the COWE Victims
Association in Kbale, Uganda. A case summary
was prepared by Simmons and Simmons law firm
of London.
More than 8 years after the COWE Ponzi scheme
collapses, interviews with COWE victims showed
that many of these victims were still battling signif-
icant growing debts. It was also found that many of
the victim’s friends and family members had accu-
mulated similar debts.
1
10 • Unlicensed Digital Investment Schemes (UDIS)
4 A SURVEY OF EXISTING RESEARCH/
INITIATIVES ON UNLICENSED INVESTMENT
SCHEMES
To date, the global financial inclusion stakeholders have
not dedicated much attention in terms of research, nor
concerted action to unlicensed investment schemes let
alone to UDIS. This lack of research and related failure to
act is problematic given the significant negative impact
of these frauds on consumers, markets and financial in-
clusion.
Failure to act may also be related to the perception
that first, the buyer/consumer should beware of the
dangers of Ponzi schemes, or should know better than
invest in such schemes. It may also relate to regulators
and policymakers feeling powerless to address the is-
sue. The author believes that both of these sentiments
are misguided. In fact, little eort has been made to
find new, technology based solutions, nor to under-
stand the behavioral motivations of consumers for
finding these schemes credible or worth the risk of in-
vesting. Are consumers emotions driving the invest-
ment decision-making process or do we have low fi-
nancial literacy levels to blame, or both? And if
emotions are driving the process, can they be coun-
tered by similar emotional appeals to avoid making a
bad investment decision? If so, how could these warn-
ings be eectively crafted, and who should deliver the
message? For example, would it be eective to use
the same public figures; like actors, sports stars and
religious leaders to warn consumers; as those used to
pitch investments schemes? We can only speculate
regarding the answers to the above, because this type
of research has not been done.
Aside from the aforementioned IMF research on
Ponzis (2009); the Cornell University study on the im-
pact of Ponzis on investor trust which are specific to the
Mado scheme, and an Emory University study on char-
acteristics of the typical Ponzi investor, there is very lit-
tle existing research on the matter. There are even fewer
studies on UDIS, or on eective regulatory prevention
eorts.
The authors propose that much more research is
needed. Firstly, research is required on the best practic-
es in Ponzi prevention, including the use of new artificial
intelligence technologies to better monitor markets to
identify these schemes. Secondly, research should en-
quire how the use of well framed messaging from influ-
ential sources can warn consumers and impact behav-
ioral change. There is also need for research to study the
impact of UDIS on consumers and markets, in addition
to the erosion of consumer trust. Lastly, we should ex-
plore what is the impact on financial exclusion in the me-
dium and long terms on consumers and markets.
With regard to consumer capability trainings or
awareness raising, there are a few examples of how the
financial sector and securities regulators are trying to
educate the public. However, again there has not been
an evaluation as to the ecacy of these consumer mes-
saging initiatives.
9
Malaysia, for example had an outreach campaign to
warn consumers and which informed where specifically
to check the registration status of an investment; also
telling consumers that the words Sharia compliant does
not necessarily mean licensed, and engaging religious
actors too to help inform the public.
10
This is a very good
idea, because fraudsters often use religious figures and
gatherings to promote and sell their phony investment
schemes. The aforementioned Ugandan COWE scheme,
for example hired a preacher’s wife to recruit investors.
She signed up the entire 700+ member congregation
and after the Ponzi collapsed had to move out of the
community. Indian Ponzi schemes have often used
cricket stars and Bollywood actors (who were perhaps
unaware of the illegitimacy of the oer) to promote in-
vestments which later turned out to be fraudulent. A
Bangladeshi Ponzi called Destiny which stole an esti-
mated USD 75 million was chaired and promoted by an
ex-Army general.
Outreach and consumer education eorts must be
continuous, but often warnings appear only upon the
collapse of a particular ponzi, at which time, the regula-
tor will respond by posting a warning message to con-
sumers on its website. This is too little; and too late to be
useful to the masses who have already lost money. And,
even its deterrent impact on other consumers likely to
invest in other similar schemes is also likely to be low,
simply because they have been told that the collapsed
Ponzi was a fraud, but may not be able to identify other
future Ponzi schemes as such. Further, relying solely on
one channel of communication where there is a diverse
group of consumers with varying literacy levels and who
may or may not have internet access is insucient to
protect consumers.
The Working Group did identify one eective meth-
od of educating the public of the dangers of Ponzi
schemes which was a bait site online published by the
US Federal Trade Commission. The web page oered a
too good to be true investment oer leading consumers
who took the bait to enter their credit card details on
the site to invest in the scheme; at which point the web-
page then flashed a warning message stating “you al-
most lost all of your money” and then directed the con-
sumer to an educational page explaining the dangers of
unlicensed investment schemes and how to recognize
the signs of a potential financial fraud.
Another unique method of reaching consumers was
reported by the Nigerian security exchange commission
to the International Organization of Securities Commis-
sion that it is in the process of developing a weekly soap
opera in Nigeria based on Ponzi schemes to educate the
public about the dangers of Ponzi schemes.
These are all good examples, but consistency may be
just as important as the content, and the ecacy of
messaging should be measured as well so as to not
waste funds on ineective messaging.
Unlicensed Digital Investment Schemes (UDIS) • 11
5 CASE STUDIES BY COUNTRY (INDIA, KENYA
& NIGERIA)
The countries selected for further study were coun-
tries where the working group has members with deep
knowledge of the DFS market, who were also able to
provide input on the legal and regulatory frameworks,
and provide background on past and ongoing UDIS in-
volvement in the country. The legal/regulatory reviews
were also conducted by legal professionals from the
country at issue.
A fourth country, Bangladesh, was also used as a
point of comparison as the working group, which bene-
fitted greatly from insights of a Financial Intelligence
Unit Director at the Bank of Bangladesh who is also an
AML expert.
All three countries have common law roots, but very
distinct digital financial services (DFS) markets. Kenya,
for example boasts approximately 82% financial inclusion
thanks in a large measure to the success of Safaricom’s
M-Pesa.
11
Nigeria lags behind Kenya at 40% financial in-
clusion, respectively, but arguably Nigeria has greater
geographic, and language challenges to overcome.
12
The other shared characteristic of the focus countries
is the victimization by at least one large scale, unli-
censed digital investment scheme. In fact, all three
countries have been victimized by Mavrodi Mondial
Moneybox or MMM, a scheme which originated in Russia
in the 1990’s and which has expanded globally due to
the Internet and social networks. The MMM UDIS oper-
ates via Facebook, Twitter, WhatsApp and Snapchat
and has numerous functioning web sites with a multi-
tude of domain names (several using a chatbot to in-
teract with consumers), including those URL that con-
tain the country names India, Kenya and Nigeria. None
of the three countries studied shut down the MMM
UDIS. In fact, the URL and Facebook pages aliated
with MMM remain operational in all three countries as
of March 2018. See case note 1 for more details on the
MMM scheme in Nigeria.
Because market monitoring, and apparently inves-
tigation and prosecution phases are challenging, this
research sought to better understand the roles of the
various regulators in India, Kenya, and Nigeria and to
better understand why they are failing to act, as per
statutory mandates.
During the research, country contacts responded
to ten questions in order to better understand the le-
gal and regulatory frameworks related to UDIS, what
should happen to prevent/deter these schemes, and
what improvements can be made in the future. (The
full list of questions is attached as Annex A).
Our key findings are as follows:
a) Everyone is the boss, but no one is really in charge
(of UDIS).
b) There are low rates of prosecution for UDIS and
rare reimbursements for the consumer when funds
are lost.
In an attempt to better understand how fraudulent
unlicensed digital investment schemes impact the
Nigerian economy, the Nigeria Inter Bank Settle-
ment System, PLC (NIBSS), the central switch for
the country’s financial sector undertook an analysis
of interbank transactions from commercial banks.
Transactions were analyzed from June 2016 to
December 13, 2016 for linkages with the Mavrodi
Mundial Moneybox (MMM) Ponzi scheme in Ni-
geria. Because the scheme directed customers
to put identifying information on the transfer or-
der, NIBSS was able to discern that during the six
month period that 28.7 billion in Nigerian Naira was
transferred between banks related to the MMM
fraud, or USD 77.8 million. This amount transacted
in this one fraud in six months exceeded the Nige-
rian Ministry of Education’s annual budget by 61%.
Further, the data analyzed was only from inter-
bank transfers. Thus, intra bank transfers related to
the MMM Ponzi are estimated to be at least twice
the interbank transfer volume.
CASE 1
NIGERIA: THE IMPACT OF ONE UNLICENSED INVESTMENT SCHEMES ON THE ECONOMY
CAN BE SIGNIFICANT
NIBSS conducted its analysis just following the
MMM’s second crash.
13
At the time, consumers who
had invested funds, yet who had not received any
payout lost over 11.9 billion Naira or USD 32.8 million.
At the time of drafting of its report, NIBSS also
noted that it found evidence of at least 89 other on-
going unlicensed digital investment schemes in the
country.
NIBSS has subsequently noted that the Central
Bank Nigeria has been running awareness raising
campaigns on TV to inform consumers of the dan-
gers of these schemes, however it would seem that
campaigns alone are insucient. And, given that
NIBSS own data analysis was possible because con-
sumers used keywords on their transfer orders, it
would seem that artificial intelligence could be sim-
ilarly used to monitor the Internet and social media
for indicators of similar fraudulent activity and to set
indicators for financial institutions to flag suspicious
transactions which would bely an underlying Ponzi
scheme is afoot.
12 • Unlicensed Digital Investment Schemes (UDIS)
In response to public outcry during the period
around Kenyan elections in 2007 which saw rising
levels of frauds by unlicensed investment schemes,
the Ministry of Cooperative Aairs in Kenya es-
tablished a task force charged with assessing the
scope of problem in the country. The task force
also sought to give the crime victims a voice and
to make recommendations regarding how to best
respond to the problem.
In June 2009, the taskforce presented a report
to the Ministry which indicated that 148,784 inves-
tors had lost over 8 billion Kenyan shillings (USD
78.8 million) in recent years.
14
The report identified
some 270 fraudulent schemes, and even docu-
mented land purchases by the accused criminals
with the ill-gotten gains from the fraudulent in-
vestment schemes. The report noted that the del-
eterious eects on victims were many, including
suicides, depression, hypertension and diabetes to
name only the health consequences.
The report recommended that criminal prose-
cutions proceed against the named perpetrators.
CASE 2
KENYA: REPORT OF THE PYRAMID SCHEME TASK FORCE
It is unclear whether the State ever initiated crim-
inal prosecutions related to the enumerated scams,
however, it is unlikely given that the crime victims
themselves subsequently organized an advocacy
organization called the National Pyramid Schemes
Victims Initiative (NPSVI). The NPSVI itself filed a
class action on behalf of its 40,000 members alleg-
ing negligence on the part of the Attorney General’s
Oce and the Central Bank Kenya causing them to
collectively lose 5.7 billion Kenyan shillings. NPSVI
initially filed its class action on behalf of victims in
early 2015 and has continually been met with de-
lays and postponements in the case with its next
court hearing scheduled for 6 November 2019.
15
It
is unlikely that this legal action will provide the vic-
tims with redress any time soon.
The task force’s key recommendations are that
more awareness campaigns are necessary for the
public; it proposes the formation of a permanent
agency tasked with eradicating pyramid/Ponzi
schemes.
5.1 Everyone is the boss, but no one is really in charge
of UDIS.
In the three countries analyzed, we noted multiple
regulators actually have the legal authority to take
preventative action, including seizure of accounts if
necessary. In Nigeria, for example, there are a total of
five main government actors which perform functions
that impact digital and financial services and that can
therefore investigate, intervene and shut down unli-
censed digital investment schemes; including the Ni-
gerian Communications Commission (telecom regu-
lator), National Information Technology Development
Agency (regulator for information technology prac-
tices), the Central Bank, the Securities and Exchange
Commission and the Economic and Financial Crimes
Commission.
16
None of the three countries, however, seems to have
a lead authority or coordinating body charged with UDIS
prevention/supervisory eorts amongst existing regula-
tory bodies and/or police. In fact, in India, where there
are three regulators with the authority to prevent UDIS:
the Securities and Exchange Board of India (SEBI), the
Reserve Bank of India (RBI) and the Telecom Regulatory
Authority of India (TRAI): the first of the two regulators,
SEBI and RBI both seek to renounce legal responsibility
for prevention of unlicensed investment schemes. It has
been reported that SEBI has asked the Supreme Court
for a declaratory judgment stating that Ponzi schemes
do not fall within its jurisdiction. Similarly, RBI has made
the claim that entities operating Ponzis do not fall under
its mandate.
17
If both SEBI and RBI are allowed to opt out of their
regulatory mandates vis-a-vis UDIS, then that will leave
only TRAI (and the police) left to act. Similarly, in Kenya
and Nigeria the telecommunications regulator has the
statutory authority to act to shut down UDIS, but ap-
pears to not be monitoring internet content for UDIS.
For instance, as of the drafting of this paper, the
MMM-Country Name websites are all still live.
18
5.2 Low rates of prosecution for UDIS and rare
reimbursements for the consumer
Too many responsible authorities can also cause confu-
sion for consumers, leaving them unsure of where to re-
port potential UDIS. Low rates of prosecution for UDIS
and rare reimbursements for the consumer are already
the norm.
Of the three countries compared, India appears most
prolific in its prosecutions, but as with all three focus
countries there is no central database (to date), nor one
lead authority responsible for UDIS prevention.
19
A pri-
vate consulting firm named Strategy India, does howev-
er keep a running tab on unlicensed, potentially fraudu-
lent businesses inclusive of UDIS.
20
The Ministry of Corporate Aairs in India investigat-
ed 185 such schemes in the past 3 years through the
Unlicensed Digital Investment Schemes (UDIS) • 13
Serious Fraud Investigation Oce, the Reserve Bank of
India was considering 486 cases of unauthorized de-
posit collection, and the Central Bureau of Investiga-
tion had registered 115 cases for such scams from Jan-
uary of 2014 to June of 2017. And, the Directorate of
Enforcement had investigated 36 cases in the last
three years. Also, the Securities and Exchange Board
of India, which regulates collective investment
schemes issued final orders against 65 entities for
carrying out investment activities without a certificate
of registration in the three years leading up to Febru-
ary of 2017.
21
SEBI also passed interim orders to halt activities of
76 schemes and final orders against 65 entities for unli-
censed investment activities. And, what result did these
investigations, or prosecutions deliver for the consum-
ers aected by the scams and not reimbursed for their
losses?
While, there have been reimbursements of victims
ordered by tribunals, and reported in the media as be-
ing underway (for example for Indian chit fund frauds),
we can find no forthcoming articles, nor evidence of ac-
tual reimbursement paid to the victims.
See also, box 2 on Kenya where the proceeds of a
large Ponzi were actually frozen by Central Bank Kenya
but victims remain uncompensated more than a decade
later, but the money is apparently gone.
This is a challenge in all the countries reviewed.
6 OUTREACH AND AWARENESS RAISING
EFFORTS WITH CONSUMERS
Prevention through outreach and awareness raising
eorts with consumers is limited and ineective. Ken-
ya is the only country reporting that financial services
providers, as well as a government authority regular-
ly conduct awareness raising campaigns. It is unclear
whether telecoms are similarly conducting anti-fraud
campaigns.
In India, regulators have also engaged civil society to
communicate with consumers. The frequency of the
messaging, framing of the content and ecacy of the
campaigns is heretofore unknown.
Further, usage of multiple channels/voices by regu-
lators to communicate with consumers does not seem
to be happening. Furthermore, it is necessary to en-
gage the financial services providers, including tele-
coms in messaging campaigns. Financial institutions
generally have 1) the legal obligation to track and report
suspicious transactions and patterns of transactions, as
well as 2) access to data on potential UDIS operating on
their platforms.
To date, technology has helped criminals, but it could
also be a tool for regulators for combatting UDIS.
Technology can likewise be used to monitor the web
for the existence of these schemes using natural lan-
guage searches. Yet, no regulator reported regularly
monitoring the Internet or social media for these
schemes.
In Bangladesh, for example, the Financial Intelligence
Unit of the Bank of Bangladesh indicated that they do
check the internet for the existence of UDIS, but report
that more resources are needed and that the use of ar-
tificial intelligence to scan the web for UDIS using key
words could indeed be helpful.
See Box 2 for more on a recent Ponzi prosecution in
Bangladesh.
The Destiny Group was a multi-level marketing
pyramid scheme, which operated for 12 years
in Bangladesh. At its peak, it claimed to have
4.5 million distributors of its products, and to
be engaged in an array of industries from or-
ganic fertilizer production and renewable en-
ergy to having a cooperative society. Destiny
promoters also claimed to have subsidized
rice farmers and to have a thriving corporate
social responsibility program.
22
In reality, Destiny was making money o
the constant recruits lured in by charismatic
promoters; its high profile promoters hailed
from Parliament, Dhaka University and includ-
ed an ex-army general.
23
It is unclear what specific events lead to
Destiny’s demise, but per the Bangladesh
Bank’s report for the Anti-Corruption Com-
mission (ACC), Destiny illegally laundered
some 5,000 Crore depositing funds in some
722 bank accounts in the names of 30 related
companies.
The ACC was able to seize a small amount
of the Destiny crime proceeds due to modifi-
cations in the country’s anti money laundering
legislation of 2015, which allow for emergency
seizures.
24
Prior to this modification, relevant
authorities had to wait for a final court sen-
tence to act, which allowed for funds to dis-
appear.
Though laudable, these eorts come after
the fraud was operational for over a decade
and the millions of Bangladeshis who lost
their hard-earned taka have not yet received
compensation.
BOX 2
BANGLADESH: USING ANTI MONEY
LAUNDERING LEGISLATION TO SEIZE
PONZI SCHEME PROCEEDS
14 • Unlicensed Digital Investment Schemes (UDIS)
7 THE DARK WEB COMPLICATES THE PONZI
PICTURE
Because anti money-laundering regulations have made
life more dicult for criminals, they seek a less regu-
lated space in which to conduct criminal activities. The
dark web or deep web oers fraudsters a petri dish for
growth and financial gain. It also oers anonymity, lit-
tle likelihood of being caught by law enforcement, and
it allows access to many potential victims. Of course,
the deep web was constructed with noble intentions:
such as freedom of expression and access to informa-
tion in mind; nonetheless, the dark web is actually an
ideal environment for criminals too.
The dark web’s economy is not based on any fiat cur-
rency, it is instead based on crypto currencies (e.g. Bit-
Coin). In this regard, the rise of cryptocurrencies has
also enabled criminal activities to flourish within the
protection of the dark web. However, the use of crypto-
currencies does not always imply that criminal activities
are afoot. Certainly, there are legitimate uses for cryp-
tocurrencies (e.g. an investment, unit of exchange, or
store of value).
In this section, we will address two primary ques-
tions:
a) Inclusion: does the DFS user community have, or can
it easily gain access to the dark web in order to par-
ticipate in these unlicensed investment schemes?
b) Monetization: How do DFS users who own crypto-
currency earned from Ponzis convert the funds to
actual fiat currency, because the three focus coun-
tries do not acknowledge cryptocurrency as a legal
currency?
This paper will most likely raise more questions than
it answers. Our purpose is simply to highlight that this
financial activity is happening under the cover of the
dark web, and formulate a plan to better understand
and deal with this dynamic and growing marketplace
for financial fraud.
7.1 Inclusion
The dark web is usually associated with hackers, and
cybercriminals, who are very computer literate. While
connecting to it may seem like a dicult task with
many prerequisites, it is in fact a mere two clicks away
for anyone with Internet access. The main highway
to connect is the Tor,
25
which requires a special web
browser to surf it. Once installed, access to the dark
web is granted. This access is also available on mobile
platforms such as on Google store,
26
which means that
the prerequisites for connecting are just a smartphone,
or a computer and a data connection.
With access made easy, inclusion into the world of
cryptocurrency requires one additional item—a wallet.
Since cryptocurrency is a virtual coin, a virtual wallet for
cryptocurrency is also required. A cryptocurrency wallet
is described as a secure storage on the internet (not nec-
essarily in the dark web), which records transactions and
reflects the balance on account. Although considered
less secure, many services oer free wallets, which are
good enough for the novice trader. More secure wallets
are available for a fee paid in cryptocurrency making the
inclusion process very easy. Starting from ground zero, a
person can start trading cryptocurrency within thirty
minutes. Tutorials to become a cryptocurrency trader
are available online guiding newcomers step-by-step.
Once connected with the cryptocurrency ecosystem,
the user is exposed to a plethora of UDISs which adver-
tise themselves within the dark web and in the public
domain, even the infamous MMM scam has a bitcoin in-
vestment channel.
7.2 Monetization
7.2.1 Darkweb and crypto currency
Cryptocurrency in all of its variations is not an ocial
currency anywhere in the world although Zimbabwe
is considering it,
27
thus making the task of converting
it into fiat currency quite dicult. On the other hand,
cryptocurrency can very easily converted into goods
and services, some legitimate, but many of which are
illegal. Cryptocurrency in all of its variations is not an
ocial currency anywhere in the world although Zim-
babwe is considering it , thus making the task of con-
verting it into fiat currency quite dicult. On the oth-
er hand, cryptocurrency can very easily converted into
goods and services, some legitimate, but many of which
are illegal.
As of 2015, more and more payment processors are
accepting cryptocurrency.
28
As for the illegal side, the
dark web oers dozens of marketplaces for drugs, sto-
len credit card numbers, guns and human tracking, all
of which accept payment in cryptocurrency.
29
In eect, cryptocurrencies are booming in develop-
ing countries, due to three main reasons:
1) It oers protection from fiat currency fluctuations
and rising inflation, in most developing countries
(e.g. in Zimbabwe, where Bitcoin has become very
popular). Our focus countries are no exception: in-
flation rates are high and the exchange rates of the
ocial currency are not stable, thus it is believed
that using cryptocurrency and exchanging for
goods and services protects the user from govern-
ment induced inflation and from the central bank’s
monetary strategy;
2) It is proven easier to move cryptocurrency across
borders because its virtual nature. Trading abroad
and moving the profits into the country have no re-
strictions, nor are there taxes/fees associated with
importing foreign currency.
3) Anonymity and security: cryptocurrency isconsid-
ered secure, anonymous and untraceable. This makes
it a very lucrative venture for traders who wish to
conduct illegal activity such as crime and tax evasion
because trading in cryptocurrency is not regulated.
Unlicensed Digital Investment Schemes (UDIS) • 15
In February of 2018, the Indian finance minister
pronounced crypto currencies to not be legal ten-
der in India.
Similarly, in April of this year, the Reserve Bank
of India (RBI) published a statement that it will no
longer provide services to any person or business
dealing in crypto currencies, indicating in its ‘State-
ment on Development and Regulatory Policies,’
that virtual currencies raise concern of consumer
protection, market integrity and money launder-
ing among others.
India has had its fair share of high profile ICO
and crypto currency related UDIS. Most recently,
a noted crypto currency expert, author and pro-
moter of Bitcoin in India, Amit Bhardwaj was ar-
rested in Delhi for reportedly running a 300 billion
Indian Rupee UDIS called GainBitcoin which stole
from approximately 8,000 victims. The GainBit-
BOX 3
INDIAN REGULATORS SEND MIXED SIGNALS ON CRYPTO CURRENCIES
coin debacle comes only six months after the On-
eCoin UDIS was uncovered by Indian authorities
and multiple arrests were made of 23 promoters
in the midst of their informational session with po-
tential new investors/victims. It is alleged that 75
Crore Rupees were stolen by OneCoin which was a
multi-jurisdictional UDIS.
However, the Indian Government’s pronounce-
ment would seem that it is now impossible for cryp-
to currencies and account holders to use commer-
cial banks. This policy does not make sense (from
a consumer protection standpoint at least) when
one considers that the RBI’s ‘Statement on Devel-
opment and Regulatory Policies,’ which indicates
that it will be conducting a feasibility study related
to the development of its own state-backed crypto
currency.
In conclusion, the dark web and crypto currency pro-
vide a fertile ground for developing UDISs, and the lack
of regulation attracts criminal elements into this eco-
system. In fact, the consulting firm, Strategy India esti-
mates that there are over fifty ongoing crypto currency
related UDIS with more than USD 600 million invested
in India at present.
30
See Box 3 for recent happenings
in India.
The fact that governments do not acknowledge
crypto currency as an ocial currency and regulate its
value or exchange, in the hopes of deterring investors
and traders may not be achieving the desired result.
The financial underworld is evolving and the black mar-
ket makers have moved from cash to borderless virtual,
untraceable and anonymous cryptocurrency.
7.2.2 Social Network and other internet intermediaries
liability
Could social networks and other internet intermediar-
ies be liable for Aiding and Abetting Financial Fraud?
Previous US Federal Trade Commission (FTC) legal ac-
tions have established that payment providers will be
held liable for facilitating financial frauds on consum-
ers. In 2010, for example, the FTC won a USD 3.6 million
judgment against a payments processor and its subsid-
iary that were profiting from processing unauthorized
debits on behalf of Internet based scams and deceptive
telemarketers.
And, various US banks have been recently sued by
US Attorney Generals and the Ponzi victims for failing
to report suspicious transactions and lack of robust
money laundering detection protocols in place. For
example, US Attorney General Anne Tompkins, from
North Carolina, brought legal action against Com-
munityOne Bank for allowing a USD 40 million Ponzi
scheme to be operational out of one bank account.
However, CommunityOne never filed a single suspi-
cious transaction report, ignoring hundreds of suspi-
cious transactions.
The US Attorney Tompkins stated that “Banks asleep
at the switch need to wake up. The Banking Secrecy
Act applies to more than just drug and terrorist financ-
ing.” As part of a settlement with the State, Communi-
tyOne was required to pay USD 400,000 in restitution
to victims and prohibited from expansion in the state.
31
If banks and payment processors can be held lia-
ble for aiding and abetting Ponzi schemes, it is log-
ical to assume that internet service providers (ISPs),
social networks and messaging services may one day
be deemed liable for facilitation of unlicensed digital
investment schemes.
If a ‘but for’ test is applied for liability, or if the com-
pany has previously been put on notice that crimes
are being facilitated by the client or user (e.g. planning
terrorist acts or the sale of guns/drugs), then, it would
seem that there is a strong argument in favor of legal
liability for any company which facilitates, and is prof-
iting from UDIS, albeit indirectly.
For example, Facebook and Twitter are now subject
of Congressional inquiries, as well as the investigation
by Special Counsel Robert Mueller on their involve-
ment in any manipulation of US Presidential elections
in 2016. Facebook profited through the selling of USD
100,000 worth of advertisements to Russian entities
which allegedly sought to influence the 2016 US Elec-
tions.
32
Are payments processors similarly liable for
16 • Unlicensed Digital Investment Schemes (UDIS)
fraud facilitation in the focus countries, Kenya, Nige-
ria and India? And, would ISPs, social networks and
messaging companies that facilitate UDIS be subject
to liability?
These questions remain unanswered because we
have not found any related case law in the three juris-
dictions. However, legislation and pending legislation
on consumer protection, data privacy and communi-
cations issues seem to lean in the direction of a finding
of liability for Internet intermediaries which facilitate
fraud or the spread of false, or harmful information.
33
In India, for example, the Information Technology Act
of 2000, prescribes obligations for Internet intermediar-
ies with respect to data privacy, but it is unclear whether
these same standards of care should apply to the trans-
fer of funds. Payment processors and wallet issuers have
indeed been victimized by frauds recently.
34
8 NEW TECHNOLOGIES COULD BE USED TO
COMBAT UDIS
Recently, the background checking company Trooly
was acquired by client Airbnb to help root out bad be-
havior in its online home renting business.
35
Trooly and
like technology can be used to detect past bad conduct
by individuals, and thus assess the risk of future likeli-
hood to engage in risky or criminal behavior.
It is suggested that similar type of technology be
used to conduct due diligence on individuals who are
promoting UDIS, or as a know your customer (KYC)
measure by financial services providers for account
opening purposes.For example, US Trac Monsoon
fraudster Charles Scoville had previously been banned
by Paypal in the past for conduct which had violated
the company’s terms of use. Thus, if PayPal had done
a scan of account closures for bad behavior, they could
have prevented Mr. Scoville from being given a new ac-
count, or could take necessary measures to more close-
ly monitor his account and transactions.
Furthermore, social networks which are facilitating
UDIS have the ability to analyze big data and even the
technology to manipulate human emotions, and thus
behavior. This same technology could be engineered
to send messaging to potential investors who are dis-
cussing potential investments to beware of potentially
fraudulent oers. Just as advertising content is sent to
consumers whose psychometric states are deemed re-
ceptive in order to entice us to spend money, or to vote
in a certain manner, so too can public interest messag-
ing be sent to consumers to warn of potential frauds
which are thriving on social networks.
Additionally, when Internet services providers, mes-
saging services (e.g. WhatsApp, Facebook Messenger
and Telegram) and social networks are made aware of
existing UDIS, they should be obligated to shut down
accounts perpetrating frauds. This too is an important
role for the telecommunications regulator, and it implies
close collaboration and information sharing amongst
regulators, criminal investigators and the private sector.
In fact, a cursory review of social network terms and
conditions reveals that Facebook’s own terms and con-
ditions disallow the use of Facebook “to do anything
unlawful, misleading, malicious or discriminatory.”
36
And, recently, Facebook has announced a new advertis-
ing policy (also valid for aliate services like Messenger
and Instagram) which states that “ads must not pro-
mote financial products and services that are frequently
associated with misleading or deceptive promotional
practices, such as binary options, initial coin oerings or
cryptocurrencies.”
37
In the event that social networks, instant messag-
ing services and ISPs are reluctant to scan for criminals
that run fraudulent UDISs, external intelligence gath-
ering can and should be used to crawl the internet to
find online accounts advertising such UDIS’s. This type
of intelligence is called Open Source Intelligence, and
there are several companies in existence that provide
products and services for such intelligence gathering.
This technology is directed at finding criminal and ter-
rorist organizations but can certainly be redirected to
find fraudulent UDISs.
9 WHY DO VICTIMS CONTINUALLY FALL FOR
SUCH OBVIOUS FRAUDS?
There are many theories about what causes humans to
suspend rationality, causing them to fail to do any due
diligence on potential investments, but there have not
been concrete studies which explore the Ponzi victim
behavior to determine whether any warnings would
have been eective to dissuade them. A behavioral
economic approach which researches and develops
and the new educational methods and regulatory/ed-
ucational policies is certainly needed to combat UDIS.
It has also been argued by some that the lack of ap-
propriate investment vehicles for consumers in the for-
mal economy may be contributing to their investing in
these informal schemes. Thus, this too may be an inter-
esting area of research for legitimate financial services
providers.
There are of course victims who were not entirely in-
nocent, meaning that they may have invested knowing
that the scheme was a Ponzi and they hoped to cash out
in time to make a profit: that is before the scheme col-
lapsed and they may even have recruited others to join
for that purpose. Those individuals are not the focus of
this paper, but rather, we are concerned with consumers
who believed the scheme to be a legitimate investment.
Those are the individuals that regulators must seek to
better inform and protect.
Conducting research regarding how to better pro-
tect these consumers requires interviewing those vic-
tims of unlicensed investment schemes to better under-
stand whether and why they blindly trusted the scheme
perpetrators. However, these victims are often embar-
rassed and unwilling to talk about a traumatic experi-
Unlicensed Digital Investment Schemes (UDIS) • 17
ence which may still be adversely influencing their qual-
ity of life. Further, society can be cruel to victims, thus it
is no surprise that they seek anonymity.
As illustrated in Box 1, interviews were conduct-
ed with several hundred victims of the Caring for Or-
phans, Widows and the Elderly (COWE) Ponzi scheme
in Uganda in 2014, many of the COWE victims indicated
that when they disclosed that had been victimized by
a Ponzi scheme to a friend or trusted confidante, they
were subsequently ridiculed and told they deserved
what they got.
Additionally, in many instances authorities in the
countries at issue might be unable to assist the victims.
In fact, it is not uncommon for the crime victims to be
asked for bribes in order for authorities to pursue an
investigation. If Ponzi victims have lost their life savings
and also borrowed money to invest in that same fraud, it
is unlikely they will even have the funds required to pay
the police, or a lawyer, nor should they have to.
Another reason why consumers are persuaded to in-
vest is that the promoters use public personalities and
celebrities to endorse their brands similar to how legit-
imate businesses sell products and services. Therefore,
more research needs to be done to determine how this
messaging can be regulated perhaps through advertis-
ing registration for financial products and/or counter
veiled.
An interesting consumer diagnostic commissioned
by Financial Sector Deepening Kenya surveyed Kenyan
respondents nationwide and found that 44% of the re-
spondents had been approached to invest in an unli-
censed investment scheme. Eight percent admitted to
investing and losing money (each person loosing on
average USD 425). Extrapolating from their survey
data, the report concluded that 1 million Kenyans lost
money to such frauds for a total of 31 billion Kenyan
shillings lost.
38
Unfortunately, the Kenyan survey did not seek to un-
derstand consumers’ motivations for investing in the
schemes nor why specifically they trusted the promoters.
10 RECOMMENDATIONS FOR ADDRESSING
UDIS AT NATIONAL AND INTERNATIONAL
LEVEL
a) National level
i. Countries should designate one government body
with the primary responsibility for UDIS; including
developing a national strategy for combatting UDIS;
which includes proactive market monitoring, pre-
vention strategies, investigation/prosecution and
consumer education and outreach campaigns. The
primary implementing body can opt to outsource
and/or coordinate these activities, but should bear
the ultimate responsibility for UDIS.
ii. The designated authority should produce regular
reports available to the public on the volume of
UDIS, the impact on markets and consumers, and
the actions taken by government to prevent/inter-
rupt these schemes, seize assets/accounts and act
to compensate victims. This entity should operate at
the national and sub national levels.
iii. A protocol for information sharing on UDIS should
be developed between the public and private sec-
tor such that financial services providers, social net-
works, instant messaging, domain name registrars
can convene regularly to share data on suspected
UDIS with the appropriate government lead agency.
iv. Financial sector regulators should consider classify-
ing UDIS as a predicate oense to money launder-
ing, thus enabling national anti-money laundering
authorities to address the issue and to collaborate
fully with other institutions to investigate and prose-
cute UDIS.
v. Increased monitoring of the Internet and social
media is needed to identify and prevent UDIS, but
reliance on regulatory monitoring alone is insu-
cient. Appropriate incentives should be devised by
regulators, such the establishment of whistleblow-
er compensation policies, including oering mon-
etary rewards to whistleblowers and protection
of their identities and families. Incentives can be
oered to financial services employees and DFS
agents who spot suspicious transactions, which
turn out to be UDIS.
vi. There should be multiple channels established for
the public to submit complaints and information
regulators about suspected UDIS, including online,
free hotlines and SMS. The use of social networks
and messaging services should be used to con-
nect with consumers, in addition to oering walk
in services and accepting email and standard mail.
Regular reports should be generated on these tips/
complaints and what investigative or enforcement
action followed which should be made public.
vii. Regulators should consider the establishment of a
victims’ compensation scheme to provide redress
for the most vulnerable victims of UDIS.
viii. Regulators should establish penalties for individuals
and corporations which knowingly facilitate UDIS
with the availability of punitive damages that can be
allocated to victims’ compensation funds.
ix. Regulators should use new technologies such as ar-
tificial intelligence (AI) to proactively monitor social
networks, instant messaging and communication
services and the dark web for existence of UDIS.
b) International level
i. To enable the establishment of a global entity, or a
dedicated department within an existing intergov-
ernmental organization, such as the ITU, or any other
international body at the conjuncture of the financial,
investment and telecommunication sector, to ad-
dress the growing UDIS problem.
a) Terms of references for such an entity are to be
drafted by regulators and quasi-regulatory bodies
interested in taking an active and formative role
in such a body. The initial suggested activities of
such a body are as follows:
b) Aggregate and share data on the problem of UDIS
globally (including the establishment of an inter-
national UDIS watch list).
c) Conduct research on prevention, including con-
sumer education and financial literacy.
d) Conduct awareness raising for national regulators,
governments, law and policy makers on the scope
of the problem.
e) Advise on how to improve monitoring of markets
for UDIS and best practices in terms of closure and
prosecution, techniques to track and salvage as
much of the related assets as possible.
ii. This entity would also have the mandate to bring fi-
nancial services and telecom regulators together to
share information about such schemes and create an
international platform for knowledge sharing.
iii. This entity could also engage in public interest ad-
vocacy to protect consumers, and obtain redress for
victims of UDIS. Such work could be done in concert
with national consumer protection bodies as well as
with civil society.
iv. A membership structure for such an entity is pro-
posed which aggregates both national financial and
telecommunications regulatory bodies as members,
and could be funded by one or more of the following
mechanisms:
a) Payment of membership fees by States;
b) Private foundation donations.
c) Contributions from financial institutions’ corpo-
rate social responsibility (CSR) funds.
v. Contributions from national asset seizures from con-
victed UDIS criminals, as a result of the new entity’s
assistance or involvement, or a combination of the
above.
18 • Unlicensed Digital Investment Schemes (UDIS)
1) Which regulators have the legal authority to investigate, intervene and shut down unlicensed
investment schemes in the country?
2) What are the limitations of their mandate(s)?
3) What activities are consistently taken to monitor markets?
4) Is there a procedure to make government aware of an existing UDIS suspected to be a fraud?
5) What is government protocol when it is made aware of an existing UDIS?
6) Is any information being aggregated on these unlicensed schemes annually?
7) How does a typical fraudulent scheme behave?
8) Are DFS providers setting parameters to flag suspicious flows of funds which could be linked to UDIS?
Does the law require this?
9) Are consumer awareness campaigns conducted?
10) Do you believe this problem needs new solutions and if so, what could help in monitoring or prevention?
Questionnaire
ANNEX A
Unlicensed Digital Investment Schemes (UDIS) • 19
1. The Wizard of Lies, Henriques, Diana, St. Martin’s Press,
2011.
2. https://en.wikipedia.org/wiki/International_reply_coupon
3. Jarvis, Christopher, The Rise and Fall of Albania’s Ponzi
Schemes, IMF Working Paper, 99/98.
4. Carvajal, Ana, Monroe, H., Pattillo, C., Wynter, B., Ponzi
Schemes in the Caribbean, IMF Working Paper, WP/9/95 .
5. See https://www.theguardian.com/global-develop-
ment-professionals-network/2016/jan/13/ugandan-
victims-still-fighting-for-compensation-years-late-cowe;
See http://www.businessdailyafrica.com/26000-pyramid-
scheme-victims-sue-for-lost-cash/-/539546/2647582/-/
tbbjb1z/-/index.html
5. See https://www.bbc.com/news/business-29916178
6. See https://www.reuters.com/article/us-china-fraud/lead-
er-of-chinas-9-billion-ezubao-online-scam-gets-life-26-
jailed-idUSKCN1BN0J6
7. Reeves, Aaron, McKee, M., Stuckler, D., Economic Suicides
in the Great Recession in Europe and North America, The
British Journal of Psychiatry, June 12, 2014.
8. Gurun, U. Stoman, N. Younder, S., Trust Busting: the Eect
of Fraud on Economic Behavior, Cornell University, 12 July
2017.
9. According to the International Organization of Securities
Commission, regulators’ communication with consumers
is limited to anecdotal evidence of impact. Final Report,
IOSCO, May 2015 https://www.iosco.org/library/pubdocs/
pdf/IOSCOPD485.pdf
10. http://ifie.org/ifieasia/SCMalaysia_Fraud_Preso_only_
branded[1].pdf
11. World Bank, Global Findex Database, 2017, https://global-
findex.worldbank.org/sites/globalfindex/files/country-
book/Kenya.pdf
12. World Bank, Global Findex Database,2017 https://globalfin-
dex.worldbank.org/sites/globalfindex/files/countrybook/
Nigeria.pdf
13. MMM has subsequently restarted and its URL, Facebook
page, Twitter and Instagram accounts are still live as of 21
February 2018.
14. Report of the Taskforce on Pyramid Schemes, Ministry of
Co-Operative Development and Marketing https://www.
slideshare.net/guestd260ae/report-of-the-taskforce-on-
pyramid-schemes
15. Per the NPSVI’s post of September 6, 2019 at https://www.
facebook.com/NPSVI/
16. Ajao, Niyi, ITU Survey responses, September 2017
17. Kulkarni, Amol, ITU Survey Responses, September 2017
18. And, https://mmm-india.net/ remains live as of 12 Septem-
ber 2019.
19. In a Lok Sabha unstarred Question No. 2113, Answered
28th July, 2017 (SHRAVANA 6, 1939 (SAKA), the Minister
of State for Finance announced that the Serious Fraud
Endnotes
Investigation Oce is preparing a comprehensive digital
database of shell companies and their associates.
20. Strategy India Blog, https://www.strategyindia.com/blog/
scam-alerts/
21. Kulkarni, Amol, Survey Responses, September 2017, citing
data extracted from Government of India, Ministry of
Finance Department of Financial Services, Unstarred Ques-
tion No. 3880, March 24, 2017/CHAITRA 3, 1939 (SAKA).
22. From http://destiny-2000.com website still live as of 5
March 2018. The Company motto was ‘Together we
Build Our Dream.’
23. Destiny Groups Formidable Trap of Deceiving People,
Neazy, Sheikh Nahid, The Independent, 11 March, 2016,
available online at http://www.theindependentbd.com/
home/printnews/36788
24. See https://www.bb.org.bd/aboutus/regulationguideline/
lawsnacts.php
25. Tor is a free software for enabling anonymous communica-
tion. For more information : https://en.wikipedia.org/wiki/
Tor_(anonymity_network)
26. Google store, https://play.google.com/store/apps/de-
tails?id=info.guardianproject.orfox&hl=en
27. http://www.tokenschedule.com/news/zimbabwean-bit-
coin-price/
28. https://bitcoinist.com/voguepay-co-founder-bitcoin-will-
enable-online-commerce-nigeria/
29. Markets for counterfeit money, counterfeit passports, fake
US ID, and illicit drugs can be found on the TOR network
“.onion”.
30. https://the-ken.com/under-radar-regulation-crypto-con-
men-spin-brazen-Ponzi-schemes/
31. Meyerowitz, Steven, Bank to Pay $400,000 to Victims of
Ponzi Scheme it Failed to Detect and Report, 4-28-2011,
LexisNexis.com
32. https://www.nytimes.com/2017/09/21/technology/face-
book-russian-ads.html?mcubz=0
33. Munya, Grace Githaiga and Victor Kapiyo, ‘Intermediary
Liability in Kenya,’ Kenya ICT Action Network, 2012.
34. https://timesofindia.indiatimes.com/city/Noida/rs-5-5-
crore-frozen-in-Ponzi-case/articleshow/57135701.cms and
https:/www.mdianama.com/2017/09/223-mobikwik-
money-missing/
35. Fortune, http://fortune.com/2017/06/16/airbnb-troo-
ly-background-checks/
36. https://www.facebook.com/terms.php
37. https://www.facebook.com/business/news/new-
ads-policy-improving-integrity-and-security-of-financial-
product-and-services-ads
38. Available online at http://fsdkenya.org/publication/
consumer-protection-diagnostic-study-kenya-2/
20 •
Unlicensed Digital Investment Schemes (UDIS)
International Telecommunication Union
Place des Nations, CH-1211
Geneva 20, Switzerland
