Anatomy of a Ponzi scheme

KARACHI: Located at a stone’s throw from the public beach in Clifton, the offices of For U Real Traders Ltd appeared swarmed with prospective clients looking to double their savings in a short time.

Beyond the reception area adorned with a portrait of the Quaid-i-Azam and many works of Islamic calligraphy was a bullpen where a large team of 20-something women worked the phone lines non-stop. Next to it was the meeting room where a “sale manager” would pitch the get-rich-quick scheme to the clients who showed serious interest in the first few phone calls.

“If you deposit Rs100,000 today, you’ll get eight to 10 per cent profit every month. You can withdraw the initial Rs100,000 a year later or reinvest it,” I was told.

In simpler words, the “investment scheme” promises a nominal rate of profit that ranges from 96pc to 120pc a year. For context, the annual profit rate on a typical savings account offered by conventional banks is hovering around 22pc these days. The apparently Ponzi scheme is elaborate in the sense that there’s a ready answer to every obvious question.

Are you registered with the Securities and Exchange Commission of Pakistan (SECP)? “Of course, we are. Here’s the proof of company registration. Feel free to look up our name and registration number on the SECP’s website.”

Are you registered with the Federal Board of Revenue? “Yes, here’s our national tax number.” How do you make so much money to pay up to 10pc profit every month? “We run a large cattle farm and supply milk to Nestle. Here’s the copy of our formal agreement with Nestle.”

Where’s your cattle farm? “We’ve got hundreds of cows in our farm located in Dunyapur tehsil of Lodhran. Look it up on Google.”

The company runs offices in Karachi and Lahore. The number of clients is north of 3,000, according to the sales representative. There’s no readily available accounting of total deposits, she said. But her estimate is that the company has collected more than Rs250 million since March 2022, which is when For U Real Traders Ltd registered with the SECP and FBR, according to the documents provided by the company. So why are the company’s dealings suspicious if it’s registered with the regulator, pays taxes, runs a legit farm business and maintains a valid supplier’s agreement with probably the largest seller of milk in the country?

The simple answer is that no entity, whether registered or unregistered, can accept investments and deposits from the general public and promise profits until and unless it receives a separate, stand-alone license from the SECP or the State Bank of Pakistan (SBP). In other words, registering a company with the SECP or the FBR doesn’t allow anyone to collect funds from people.

The spokesperson for the SECP told Dawn that For U Real Traders — a sole proprietorship owned by one Muhammad Sajid Hussain — is not allowed to offer such schemes. “Therefore, people should refrain from making investments with them,” he said.

Following a query by Dawn on the status of For U Real Traders, the apex regulator of the corporate sector tried taking up the matter with the company and its sponsors. “However, no response was received as the company and (its) sponsors were not traceable,” the spokesperson said, adding that the regulator has initiated proceedings for striking the name of the company from its register of companies.

The company’s name has also been added to the “List of Companies Suspected to be Engaged in Unauthorised Activities” on the SECP website to caution the general public.

On its part, Nestle Pakistan Ltd said the food company has “hundreds of suppliers” in its value chain but none of them is authorised to use the Nestle name, logo or any of its brands in its communication. “We are looking into the matter and will initiate action if anyone is found to be in violation of our contractual terms,” he said.

Duck test

Experts say people should be suspicious of every financial proposition that sounds too good to be true. In figurative expression, if something looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck.

“No legitimate and sustainable investment scheme can offer an annual rate of profit that’s 15-20pc higher than the risk-free interest rate,” said independent economist Ammar H. Khan while speaking to Dawn.

In other words, if the key interest rate is 22pc, the maximum rate of profit offered by a genuine business on a viable basis can’t possibly exceed 42pc as a rule of thumb. “Be suspicious if someone promises you otherwise,” he said.

Published in Dawn, August 17th, 2023

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