Bank of Namibia

Illegal Financial Schemes

  • 2.  What are illegal financial schemes?

    Illegal financial schemes are business practices that contravene section 5 of or activities that are prohibited in terms of the section 55A of the Banking Institutions Act, 1998 (Act No. 2 of 1998), as amended. Illegal financial schemes are divided into two categories, namely, pyramid schemes and unauthorised financial activities such as ponzi schemes.

  • 3.  What is a pyramid scheme?

    As the name implies, a pyramid scheme has business activities with rewards or income received in the structure of a pyramid. It is an illegal financial scheme which typically starts with one person – the founder/owner – who initiates the business and is at the top of the pyramid. This person recruits one or more persons who are required to "invest" by paying a once off joining fee and/or a monthly subscription fee, to the initial recruiter. In order for the new recruits to earn an income and/or other money related benefits, they must recruit more people under them, each of whom will also have to invest in the scheme. Pyramid schemes are sometimes product-based to disguise the true nature of the business, that is, they may sell a product. However, these products usually have no intrinsic value or are overpriced.

  • 4.  How do I identify a pyramid scheme?

    The most common characteristics of a pyramid scheme are as follows:

    • You are offered a chance to join a group, scheme, program or team where you need to recruit new members in order to make money.
    • Income and/or other money-related benefits earned is based on the recruitment of new members, and not on the sale of a product or service.
    • If income or commission earned on the sale of product is lesser when compared to income earned for recruiting new members.
    • Income and/or other money-related benefits increase based on the increase in the number of new people you recruit. In other words, the more people you recruit, the more income and/or other money-related benefits you earn.
    • The main source of income for the business operation is from the joining fees and/or monthly subscription fees paid by new recruits. Therefore, if the recruitment of new members stops, the business will not be able to continue its operation and pay benefits to people who have joined at a later stage.
    • The owners of the scheme may claim that the business is a multi-level marketing company in order to convince members of the public that it is a legitimate business.
    • The scheme involves offering goods or services of little or doubtful value that serve only to promote the scheme and swindle people off their money, for example, online financial material, vitamins and/or supplements that can miraculously cure chronic illnesses etc.
    • The founders and promoters may claim that their business is not a pyramid scheme or an illegal business.

  • 5.  Why are pyramid schemes illegal?

    The conducting and/or involvement in pyramid scheme business is prohibited by section 55A of the Banking Institutions Act, (Act No. 2 of 1998) as amended. The problem with pyramid schemes is that they are not sustainable as the main source of income is dependent on the recruitment of new people, instead of the sale of products or services. Therefore, as soon as the recruitment of new members stops, existing members will not receive the promised income and other money-related benefits. People are deceived into believing that by giving money, they will make large sums of returns, however, no real or sustainable wealth is created, no product has been sold, no investment has been made, and no service has been provided. Pyramid schemes are fraudulent because it is impossible for the cycle of recruitment to sustain itself, so people will ultimately lose their money somewhere down the line. This is not a business model which makes use of the funds in legitimate business ventures and activities so as so generate future profits. Those who are most vulnerable are people at the bottom of the pyramid, where it becomes impossible to recruit the large number of people to sustain the business. This is the reason why pyramid schemes are illegal in Namibia and most countries throughout the world.

  • 6.  What are the risks of participating in a pyramid scheme?

    You will lose your money. The chances are very high that you will not be repaid the money you invested or earn the income and/or other money-related benefits promised by the founders and/or promoters of the scheme once the cycle of recruitment ceases.
    You may be convicted of a criminal offence. The Banking Institutions Act (Act No. 2 of 1998), as amended does not only prohibit the conduct of this type of business, but also the involvement therein. The Bank therefore strongly discourages any participation in a pyramid scheme or suspected pyramid scheme.

  • 7.  What is the difference between Pyramid schemes and Multi-Level Marketing businesses?

    Multi-Level Marketing (MLM) business is a business practice in which participants pay money to the business promoter in return for which the participants obtain the right to:

    • Recruit additional participants, or to have additional participants placed by the promoter or any other person into the program participant’s down-line, tree, co-operative, income centre, or other similar program grouping;
    • Sell goods or services; and
    • Receive payment or other compensation, provided that:
      - The rewards and benefits received by each participant are derived primarily from retail sales of goods or services, and not from recruiting additional participants nor having additional participants placed into the participant’s down-line, tree, cooperative, income centre, or other similar program grouping; and
      - The business has instituted and enforces rules to ensure that the marketing program is not a business model in which participants earn profits primarily by recruiting additional participants rather than retail sales.

    A pyramid scheme, however, will most likely sell a product with minimal value, or at an inflated price. In this kind of business, you would be required to recruit new members in order to earn money or money related benefits and in order keep the scheme operational. Unlike with MLM’s, the business of pyramid schemes cannot operate without the element of continuous recruitment of new members who must pay a fee to participate in the scheme.

    The following conditions must be met under the activities of multi-level marketing businesses in order for it to be exempt from the strict application of section 55A (1) of the Act:

    • The business practice should not be structured in such a way that members of the public are obligated to pay a participation fee, unless the payment is in exchange for samples or testing products;
    • The product or service being offered must have intrinsic value and there should be a market for such product;
    • If the product for sale is in a regulated industry, registration with the relevant governing body must be complied with;
    • The product for sale should be allowed to use in the country it is manufactured;
    • Compensation and rewards to be earned should not be through the recruitment of other participants, but rather through the sale of products, and therefore promoters should not be obligated to recruit members of the public in effort of receiving rewards;
    • The business practice must not knowingly, either by act or omission, make, or permit to be made, any representation or cause any conduct that is misleading or likely to mislead the public about the rewards and benefits.
    • The business practice should not mislead the public about the compensation plan, whereby participants are falsely promised a high return on investment which may not be realistic;
    • The promoters of the business practice should not make use of intimidation, harassment, unjustified enticement or any other dishonourable means to register new participants;
    • The business practice should have a return policy available that offer refunds if a member is not satisfied with the product or service. The return policy should be exercisable by every participant in the MLM on reasonable commercial terms and within a reasonable period from the date of receipt or distribution of the products or property to the participants. The responsibility is on the business practice to ensure that all participants are informed of the guarantee at the time of receipt or distribution of the products or property; and
    • The MLM must be registered in Namibia in terms of the applicable company legislation. Consequentially, the registered company must maintain audited financial statements in terms of established accounting standards which may at any relevant time be verified and subject to an independent audit.

  • 8.  What is an illegal banking business?

    Illegal banking business is a financial business which conducts or promotes banking business without authorisation by the Bank of Namibia in terms of section 5 of the Banking Institutions Act (Act No. 2 of 1998), as amended. Illegal banking business operations promote investment opportunities whereby members of the public are promised very high returns with a short maturity period by depositing a certain amount of money in the bank account of the person and/or company conducting such illegal banking business.

    Common characteristics of illegal banking businesses:

    • Promise very high returns with a short maturity period;
    • Investment opportunities which are often promoted on social media platforms such as Facebook and Instagram, or messenger applications such as WhatsApp;
    • Investment fraud that pays existing investors with money paid by new investors.
    • Investors are often encouraged to reinvest a certain percentage of their return at the end of the maturity period in order to sustain the business operation;
    • There is often no written contractual agreement between the investor and the business or with the person promoting the investment opportunity;
    • Very little or no detail is provided regarding the underlying business model of the venture and how the funds invested will be used within the business to generate long term sustainable returns.
    • Sometimes they are promoted as forex or crypto currency trading opportunities, whereby you are invited to pay your money in a bank account of a third party who will then trade on your behalf. Forex trading is not prohibited neither is trading in crypto currency. However, each person must trade for themselves or through a registered broker.

  • 9.  What are some of the red flags of illegal financial schemes?

    Promises of “extra income” within a very short period of time. Promoters of illegal financial businesses often sell the idea of a secret formula to become rich which is designed to attract innocent investors.
    Seems too good to be true. If an investment opportunity seems too good to be true, then probably it is. These investment opportunities are not authorised by the Bank of Namibia or other regulators such as the Namibia Financial Institutions Supervisory Authority (NAMFISA). As such, they do not conduct legitimate business activities. The main objective of illegal financial schemes is to create quick wealth for the founders of the scheme, with no care for people at the bottom who spend their hard-earned money.
    Secretive or complex strategies. Avoid investments you do not understand, or for which you cannot get complete information.
    Web-based or foreign business. Illegal financial schemes operating from foreign countries are a lot harder to locate and may not be prosecuted by Namibian authorities. Be sure to do your research before investing in an internet-based or foreign financial schemes.
    Social media-based businesses. In recent years there has been a significant increase in illegal financial schemes that emerge on social media platforms such as Facebook and Instagram, whereby members of the public are encouraged to join the business by sending a WhatsApp message to a specific cell phone number. The main challenge with social media-based businesses is that it is difficult to locate the founders and promotors, especially when you are looking for your returns or money-related benefits that has been promised to you, or when you want a refund of your initial investment.

  • 10.  I am considering making an investment with a company, but I am not sure if it is an illegal financial scheme. What should I do?

    If you are not sure whether a potential investment opportunity is an illegal financial scheme, be sure to ask for documentation from the business promoters to prove their legitimacy. Assess the business and its operations against the guidance provided by the Bank of Namibia in this FAQ document. Lastly, you may contact the Bank of Namibia to determine the legitimacy of the business before you invest any money.

  • 11.  I am a victim of an illegal financial scheme. What should I do?

    • Report the suspected illegal financial scheme to the Namibian Police Force, i.e., open a case against the suspect. At the same time, you may inform the Bank of Namibia on telephone: (061) 283 5114 or email: illegalschemes@bon.com.na.
    • If you think that you are actively participating in an illegal financial scheme, break off contact with the promoters immediately and don’t invest any more money.
    • Keep any written and/or cell phone communications you’ve received from the suspected illegal financial scheme. They may help you give evidence to the authorities.
    • Co-operate with the officials of the Namibian Police Force and the Bank of Namibia during any investigations.

  • 12.  If I suspect that I have been defrauded, how do I get my money back?

    • If you open a case with the Namibian Police Force, they will do their best to ensure that the matter is resolved in terms of the relevant legislation.
    • If you report the matter to the Bank of Namibia, the Bank will conduct an investigation as provided in terms of section 6 of the Banking Institutions Act, 1998 (Act No. 2 of 1998), as amended. Following the investigations, and in terms of section 7 of the same Act, the Bank will, if it is satisfied that a person has obtained any monies in contravention of section 5 or section 55A, in writing direct the person to repay all the monies so obtained by him or her, according to the specific requirements as set out by the Bank.
    • Whether you report the matter to the Namibian Police Force or to the Bank of Namibia, it is crucial to note that:
      - You are not guaranteed to receive any repayment of the money you invested, including any interest due to you. However, it is best to report the suspects so that their activities are stopped by the authorities;
      - The Bank of Namibia will not be responsible for any repayments of monies to victims of illegal financial schemes.

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