Publication: Bhadas 4 Media

Date Of Publication: 02-5-13

New Delhi: In 1919, Carlo Ponzi started the scheme for which he became famous: he paid off early investors with money taken in by later investors by creating a consumer stampede with hype of phenomenal returns within a very short period of time.

Ponzi exploited the investor market by approaching people most likely to trust him — his family and friends, his Catholic priest, and some neighbors from whom he collected a total of about $1250. Ninety days later, he returned $750 in “interest”.

His ecstatic original investors unwittingly did his marketing for him — they told everyone they knew about this “bonanza,” and investments snowballed. The party did not last. Within a year, a suspicious Boston Post’s front page questioned the legitimacy of the enterprise. Investors panicked and demanded their money back. It’s a bit difficult to give it back once it’s spent! Without the false hype to induce new participants, Ponzi’s scheme folded. Most of his 40,000 investors lost everything they had invested.

Fast forward to 2013, the scene hasn’t changed much; only the operators, victims have new faces. Ponzi changed the name to MLM-Multi Level Marketing. Of course, the magnitude has undergone a sea-change, heading north. One of the most unsavory aspects of globalization and a growing economy is that this aspect of white-collar crime has gained wings. Fraudulent mass-marketers reach victims via all modes of communication—postal service, telephone, e-mail, Internet sites, television, radio, and even in person. Viable multi-level marketing fraud groups require a variety of resources to operate, including the means to target and communicate with prospective victims, obtain and launder illicit proceeds, and evade law enforcement detection and investigation. These include legitimate business services, communications tools, payment processors, fraudulent identification documents, and even counterfeit financial instruments.

As a whole, nowadays, fraudulent multi-level marketing operations are increasingly transnational, interconnected, and fluid, with groups shifting alliances according to the particular needs of a scheme. The results are unbearable, tragic. For some victims, the risks extend well beyond loss of personal savings or funds to include physical threats or risks, loss of their homes, depression, and even contemplated, attempted, or actual suicide.

Multi level marketing fraud has a substantial impact on economies and markets by undermining consumer trust and confidence in legitimate businesses. Operators of MLM fraud schemes are highly adaptive, rapidly changing their methods and techniques to reduce the risks of law
enforcement detection and investigation and to respond to consumer and business awareness of their current methods. But what all these scams, one after another, reveal is we haven’t learned any lesson from our previous outings. We make a huge hue & cry, play the blame game for a while, and very soon forget everything till the next attack! When the outrage is over ‘rape’ we blame the Police authorities who in turn fortify the roads for a few days, force shut the shops early and relax thereafter, till the next victim surfaces.

When it a financial scam, whoever pulls it, the easy way out is ‘blame it on Chit Fund’, with an attitude of who cares what is a chit fund?.

The authorities, even those hand-in-gloves with the unscrupulous, Politicians, and more importantly the media who in their pursuit to garner more TRPs/Readership and outwit competition turn their backs to the facts and hurry to find a scapegoat, which can sensationalize the whole issue for a while, till the next ‘breaking news’ . Unfortunately, more often than not, it’s is a financial scam and the scapegoat; always is ‘Chit Funds’. In the case in question the ‘Saradha Group’ it could be seen that they had varied business interests with around hundred and odd companies which were in Realty, Construction, Tours & Travels, Exports, Agro, Livestock, Foods, Multipurpose, Ad agency and of course,
presence in media with their 24 hour ‘channel 10’ and also newspapers and magazines. However, what is quite glaring is that they did not float any ‘Chit Fund’ company, yet their scam/failure is attributed to Chit Funds!

While doing it, we simply forget that

1. Chit Funds are not allowed to accept deposits from the public.

2. Chit Funds are perfectly legal, governed by the “Chit Funds Act, 1982, and administered by the State Governments

3. There is an office of ‘Registrar of Chit Funds ‘in every state who monitors their operations, rather minutely. The Kokotta

Registrar is in 3rd floor, Writers building, 1, K.S. Road.

4. The regulations over chit funds are more stringent, even compared to deposit accepting companies. Utilisation and

appropriation of subscribers’ money is strictly prohibited, and provide for capital adequacy and other prudential norms

5. Chit Funds, as of now, are not allowed to carry on other businesses without the permission of the Registrar/State

Governments and as of date no permission has been given.

6. Chit Funds have been there from time-immemorial, even before the advent of banking.Many of the companies having been

around for more than 100 years! And have been carrying on their business in an impeccable manner.

7. Though the buzzword ‘Financial Inclusion’ is recent, Chit Funds have been doing it since inception, catering to the

un-served population in remote areas and are one of the most popular & trusted form of informal finance.

8. Even the Bill & Melinda Foundation have chosen the channel of ‘Chit Funds’ for their poverty alleviation program, in India

and are working closely with them in rural as well as urban India

The fact remains that the Chit Fund is a time-tested tool and shall always remain so. However, what we need to think is


1. Will passing the buck to chit funds or for that matter anybody, help stem the rot.

2. Is it fair on our part to defame any individual or institution for no fault of theirs? More so, when the culprit is of a different breed/variety.

3. Is it not more important to find out the root-cause and weed it out, lest it springs up again?

4. Is it not our moral duty, be it Administrators, Regulators, Politicians, or the ever important fourth estate, Media to rather find the actual culprit and then pass the verdict!

To counter the threat of multi-level marketing fraud effectively, investigative, law enforcement, and regulatory authorities will need to work in close coordination. Their focus should be

(1) Expansion of their capability to gather and share intelligence on all aspects of MLM, Residuary and other deposit taking institutions and their key participants; and acting thereupon to initiate remedial measures, if required.

(2)  Increase public awareness and education programs to help individuals and businesses to more readily recognize solicitations by fraudulent companies and take action to avoid or minimize losses to such schemes;

(4) Development of effective measures to more promptly identify and support victims of MLM/other ponzi schemes through public- and private-sector resources like introducing Deposit insurance, as prevention is better than cure; and

(5) Look into investor protection measures, to enhance the participation of informal finance in the National Financial Inclusion Program, as suggested by the Key Advisory Group on Chit Funds, formed by the Department of Financial Services, Ministry of Finance, Government of India, etc. etc..

For the investors, a thought to chew, ‘to err is human, greed is inherent in most of us, but should we blame others for our plight?’

Our Concern While the recent incidents are definitely scary & tragic, attributing it to chit funds, will only further aggravate the whole issue, as it may create a run even in the established in the chit fund companies, who are playing a major role in the National Economy.

While our representatives will be more than glad to offer a solution and remove shortcomings if any, our immediate request is set the records straight, i.e. stop misuse of the word ‘Chit Fund’ in such reporting. Issued in the Interest of all

T.S Sivaramakrishnan

General Secretary

All India Association of Chit Funds (Regd.)