Make Money Fast
*This article was originally published on May 2020 and has been kept in its original form
During this time of crisis, when South Africans are invariably struggling to make due, some losing jobs and others’ income is put on hold for multiple months, there has been a massive surge in the following types of invitations: “This really works people, get in touch and I’ll show you…easy money!” – or, “This stokvel works – pay R200 to get R1000…”, or any iteration of this. Also the feeling that should come to mind when you’re invited to “sign up multiple friends/family” before you get your slice of pie is “loss” and “despair”. So as a public service announcement we thought it to be wise to explain what to look out for when confronted with easy money.
A few buzzwords have been doing the rounds recently, one of them, stokvel. So the first question that comes to mind is what is a Stokvel? Stokvel is an invitation-only club of twelve or more people serving as rotating saving schemes where members contribute fixed sums of money to a central fund on a weekly, fortnightly or monthly basis. Stokvels generally have a set of rules which dictates the size of the contributions, when the accumulated money is to be paid out and the roles and responsibilities of the members. Each month a different member receives the money in the fund, which was collected during that period. Defaults on contribution are quite rare as other members will know if you haven’t paid your contribution, and also because the regular meetings are a reminder of what you will gain when it is your turn. Depending on the type of stokvels, the members can use the collected fund for their own use, for payment or investment purposes. It is estimated that one in every two adult South Africans is a member of at least one of 800 000 stokvels. South Africans invest approximately, wait for it…R50 billion in stokvels a year. A Stokvel is a traditional way in which a group of people essentially go into a savings structure together. So let’s say you have 11 friends, and all 12 of you decide to contribute R 200 each month, then when your month comes up you get a payout of R2400. But for the remainder of the 11 months you just contribute.
Benefits of Stokvels • The peer pressure will force you to save. • Pooled money can earn better returns, at a lower cost. • Some of the added benefits are a sense of community and socialising. Stokvel members traditionally meet regularly and make an occasion of the meetings. • Knowing when you will receive a windfall amount makes it easier to plan your finances. A Stokvel in itself is not a bad idea or a horrible structure, if it is a true stokvel.
The recent upswing of stokvel invitations are not true stokvels for the following reasons: Your stokvel partners are unknowns, so non-payment is impossible to track, and dilution of proceeds are inevitable. With most, you need to sign up more than what your share of the winnings is, thus making it a perfect storm for fraudulent practices. The problem with the “stokvel” invitations that have been doing the rounds is that it is not a true stokvel, but a Ponzi Scheme.
Ponzi Schemes are not new (the first recorded one dates back to 1869), they may, however, have a modern flavour. A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. Initially, the operator pays high returns to attract investors and entice current investors to invest more money. When other investors begin to participate, a cascade effect begins. The schemer pays a “return” to initial investors from the investments of new participants, rather than from genuine profits. A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.
The basic premise of a Ponzi scheme is to rob Peter to pay Paul. People’s deep-rooted psychological needs motivate them to participate in Ponzi schemes. They purchase a dream to escape from their circumstances. They buy hope and sanity. It is a coping mechanism problem is though they are shopping at the wrong place. The second for the lack of a better word, scam doing the rounds, although they will kick up a fuss if you mention it, is strangely similar to a Pyramid Scheme.
What is a Pyramid Scheme : A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal. Pyramid schemes have existed for at least a century in different guises. Multi-level marketing has a tarnished name already and the likes of Avon, Herbalife with many being duped out of a lot of money and sitting with rooms full of products that no one wants, and their only option is to kick the can down the road and make it some else’s problem by signing them up for “a once in a lifetime opportunity” to “make money fast”. Under South African law, network marketing, which is a form of tiered selling, is legal. However, pyramid schemes, where the business model is based on getting existing members to sign up new members, are illegal. This is where a “company” like Crowd1 comes to mind. For a pyramid scheme to not be marked with the name, they have to have revenue coming from a product or service and not from signing up new members. Although Crowd1 claims to have a business model that “everyone will understand” – speaking to representatives you find out quickly that this is not the case explanations range from education software development to online gaming to sports betting to actual brick and mortar casinos, although it insists on its website that it is not a gambling company. As far as we can figure out the only revenue currently generated is from signing up new members (These “education” packages are as follows: Bronze, Silver, Gold, and Platinum. Prices can range from €99 to €2499.) , and this is the actual problem, which in our opinion blatantly makes it a Pyramid scheme. The scheme has already been banned in multiple countries, Namibia being the latest, with Bank of Namibia stating: “Crowd1 does not sell tangible products or render any service of essential value, but the primary source of income for Crowd1 is the sale of membership packages to new members,” – describing, without ever using the words a classic pyramid or Ponzi scheme. In January 2020, in Burundi’s largest city Bujumbura, Crowd1 was raided and over 300 people arrested, 17 of whom were placed in custody for promoting Crowd1, described as a Ponzi scheme. Crowd1 is under investigation for securities fraud in Norway which is predictable. This is usually the first step in a series of events that leads to a crash. Securities and Exchange Commission of Davao Extension Office (SEC-DEO) has advised the public not to invest or stop investing in Crowd1 Asia Pacific Inc. (Crowd1) for it is not authorised to solicit investments.
Financial Scams are not always clear cut and will have some elements of Ponzi Schemes, Pyramid Schemes and use buzzwords that are already familiar to consumers like stokvel. We believe that the general rule of thumb should help you see through the BS:
If it sounds too good to be true, it probably is. The structures that do the rounds at the moment are clever and complicated, if you are confronted with an “opportunity”, feel free to reach out to us or any trusted advisor, if only just as a soundboard, this could make all the difference. Getting out of a financial struggle can be really difficult, and there are wolves out there that prey on this exact fear, be vigilant with your money and your time.
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