Blessing or A Curse? If You See Fraud and Do Not Say It Fraud!

By Theon Alleyne, CRCP, CCEP , USA Senior Managing Consultant, IBM

 

 

If you see Fraud and do not say Fraud, you are a Fraud.

~ Nassim Nicholas Taleb

 

I first heard about it three months ago. Someone asked me to look at an investment opportunity. I looked at it and said, “Sorry, that’s not for me”. The person tried to persuade me, pressing me about how much I could make with only my $500.00 investment.

 

“Look all you have to do is put in $500.00, and bring in two people you trust, and in four weeks you will get $4,000.00, and you only have to put $500.00 back in, so you will get $3,500. Then, you can walk away, or rejoin” they said.

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Questionable Deals

The above investment is a great deal if I ever saw one. 

Other than gambling, the only investment I know legally, that can give that multiple of a return in such a short time is penny stocks. And when it does, most often, it means you bought in before the Pump-n-Dump scheme started, and sold as its peak.  

Did you miss it?

I just described someone legitimately investing without being aware that fraud was about to occur, and unintentionally benefiting from it.

Ladies and Gentlemen, there is an affinity fraud that is sweeping through the globe, because of desperation and greed, maybe because of the Pandemic.

The Blessing Loom

Modern SouSou, The Blessing Loom, The Gift, Friends, and Family Savings Plan and others I have not heard are the names given to this Fraud.

 

I call it by its technical name, a Pyramid scheme!

The mechanism is similar to a Ponzi scheme, except that for it to be a Ponzi scheme, you have to give the funds to an investment manager like Bernie Madoff.

Please tell me you remember Bernie Madoff, who is credited with a $65 billion dollars global Ponzi scheme that caused countless people to be in a desperate situation.

That was 12 years ago, but for the people who lost money, the pain may still be lingering.

 

 

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For a Ponzi or pyramid to succeed you need to increase the number of participating members by 800% percent week after week. Over time, it is statistically impossible for it to survive.

 

1 person needs 8 new people to be paid;

2 people need 32 new people to be paid;

32 people need 256 new people to be paid;

256 people need 2048 new people to be paid;

2048 people need 16, 386 people to be paid;

followed by more than 100,000; 1 million, and 8 million at the next layers.

It will fail, and new people will not be able to bring in enough people to be paid.

Grandma’s SouSou

My great-grandmother’s SouSou had a fixed amount that was pooled weekly. The total amount was the weekly contribution times the number of people participating. Each member would take turns collecting the total contribution for his or her project but would continue to contribute until each member received the value of the total amount.

 

20 persons x $100.00 per week for 20 weeks = $40,000

Each person gets turn to take home $2,000.00

Under the model above, new members are not added after it starts. There is no ongoing recruitment drive. Most times this money never makes its way into the banking system, and there is no profit. This is an informal savings scheme. You get out, what you put in. No more, no less!

The Curse (Blessing) Loom

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As noted, the Blessing Loom or Modern SouSou, concurrent with joining, or shortly thereafter you must recruit two persons to join, and the cycle keeps going.

By contributing your investment, gift, or blessing once, you magically get 8-16 times more than what you put in. Is there a bank, thrift, credit union, or FinTech firm investing these funds for you and giving you a gargantuan return? Absolutely not!

This is just gifting, or blessings that somehow becomes profitable.

How in Carnations’ name is this possible?

Yet, otherwise, well-adjusted, smart, educated people from all walks of life are getting involved, and getting paid. Kudos to them!

 

The Legalities

What is a Pyramid Scheme?

According to Wikipedia, 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. 

Wikipedia, you say, how is that an authoritative source?

According to the office of the New York Attorney General:

A pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of “investors.” The initial promoters recruit investors, who in turn recruit more investors, and so on. The scheme is called a “pyramid” because at each level, the number of investors increases. The small group of initial promotors at the top require a large base of later investors to support the scheme by providing profits to the earlier investors.

But wait, there is more.

Pyramid schemes are illegal in New York State, as well as in many other states. Article 23A of the General Business Law of the State of New York §359-fff sets forth the criminality of initiating and participating in pyramid schemes (also known as chain distributor schemes).

Say what now?

Participating in pyramid schemes is illegal.

Wow! Who would know that?

Do we need to test the elements of the pyramid scheme against The Modern SouSou?

I think not. It is clear.

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Person-to-Person Transfer

Ladies and Gentlemen, it gets worse. Some organizers are using the benefit of person-to-person, as known as P2P transfer to conduct the blessing, gifting, or family savings.

In the event that you weren’t aware, P2P providers are registered financial institutions. 

Venmo is a service of PayPal and relies on PayPal’s banking licenses. Cash App relies on the banking license of Lincoln Savings Bank, an FDIC member.

The depositing and transferring funds are essentially being done by means of interstate commerce. That’s right, between your Bank, Venmo, Cash App accounts. The transactions you are making with a new person or with whom you had a prior banking relationship in amounts inconsistent with historical transitions, will raise red flags.

Cognitive Fraud Prevention Technology

If these payment institutions are using my favorite Cognitive Fraud Prevention technology, IBM Safer Payments, which is a leading solution, the accounts will be flagged and funds are frozen for potential fraud, until reasonable explanations are provided.  To the extent, the bank fraud investigators have Team Leads with my experience, the relationships and patterns will be quickly identified, and a bunch of accounts will be frozen.

Suspicious Activity Reports (SAR) 

The inevitable next step will be filing Suspicious Activity Reports (SAR) with FinCEN. Under the law, neither the Bank nor its employees can tell you they filed a SAR against you. So the next call you get may very well be from a federal or state law enforcement officials.

Yes, the Blessing or Gift could cause money laundering, and other violations because you didn’t think through your actions and trusted a relative or friend. Your blessing would now be a curse.

Friends don’t let friends lose their bank accounts.

There must be a better way to solve your financial situation that doesn’t involve a pyramid scheme!

 

Fraudsters are continually getting creative. They never relent.
You become their prey the moment you drop your guard.

Theon Alleyne
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