Nepali Times Asian Paints
Nation
Scheme/scam


MANISH ARYAL


A glossy brochure is turning up everywhere. The cover shows a red mud house with an intricately carved wooden window, a little girl carrying her brother smiling shyly out.

The vibrant colours, the innocence of childhood, the allure of poverty-the pamphlet could be from any NGO, INGO or aid agency promising to eradicate poverty and develop Nepal.

It isn't. It is for a "pyramid scheme," introduced into Nepal by notable members of Kathmandu's economic elite.

A year ago, an Italian scheme, called Pentagono, started doing the rounds of Kathmandu NGOs, INGOs and business houses. It promised easy money-all you had to do was buy a Pentagono certificate for $120 and sell it to three more people for the same amount. You sent a third of the money to Italy, deposited another third into a Pentagono member's account, and kept the rest for yourself.

One early recruit was Archana Karki, an editor at ICIMOD, and part-time activist trying to stop the Godavari Marble Quarry. Karki was amazed at the number of people participating and says she sat down to do the sums. "The monetary benefit of such schemes to the individual is great, but the collective outflow of money from the country was really high," Karki says. "And global monetary schemes primarily benefit the country of origin." Karki didn't like the fact that Nepalis' hard-earned money was going out of the country and decided she had better do something about it.

And she did. But not what you'd expect from an activist-raising a big fuss, writing to newspapers, petitioning the government to declare such schemes illegal.

Karki got together with six other prominent people:

Arzu Deuba, psychologist, gender trainer and wife of Prime Minister Sher Bahadur Deuba,


Basanta Chaudhari, of the Chaudhari group, also member-secretary of the Pashupati Area Development Trust,


RK Manandhar, a businessman who runs the Image Channel, K.A.T.H. 97 FM and Motorola's Nepal office,


Komal Prasad Ghimire, legal advisor for Soaltee Hotel,


Shanta Bahadur Malla, who owns a printing house and Lazana restaurant, and


Krishna Prasad Sigdel, an environmental journalist and owner of Nepal Cable.

Together, they registered a business modelled after the original Pentagono. They called it Samrakchhan-as in, an organisation that would look after your savings, and set up a posh office in Jawalakhel.

Samrakchhan works just like Pentagono. You shell out Rs 9,000 and are given three certificates with your name in seventh position. This gives you the right to sell three certificates yourself, for Rs 9,000. Of the money you get from each new recruit, you need to deposit Rs 3,000 into Samrakchhan's account, another Rs 3,000 into the account of the first person on the list, and you get to keep the remaining one-third. If you sell all three certificates, you recover your initial investment and move up to sixth position on your recruits' certificates. As this scheme progresses, you are told, more people buy, sell, and move your name up. And when you reach the top of the list, you could get up to Rs 6.56 million. And you can check your position and how much money is due to you on Samrakchhan's website (www.samrakchhan.org.np)

Simple, really. All you have to do is get more people to buy into the scheme.

The United States Federal Trade Commission (a US government body that evaluates and warns the US public about quick-money-making schemes) and the Internet-based pyramidschemealert.org define as a "pyramid scheme" any organisation in which members obtain monetary benefits primarily by recruiting new members-rather than by selling goods and services to the public. By this definition, Samrakchhan is a pyramid scheme-a get-rich-quick fantasy.

When a new recruit is sold a certificate for a pyramid scheme, he is sold a Rs 6.56 million dream. As news about easy money and high returns spreads, and as members realise they have to sell to get their money back, more recruits are drawn in. Except for administrative expenses, the organisation does not have to invest a single paisa. The returns to investors are paid out of the money received from those who invest later.

For Samrakchhan to deliver, there has to be a never-ending supply of new investors. Let's do the numbers and play this to the final, seventh level. Once you've sold the idea to three people and collected from them, you're safe and can just wait for your name to move to the top of the pyramid. At best, the three people you sold the certificates to will sell to nine more, the nine will sell it to 27 more, and the numbers will grow exponentially. The chain ends for you when the 2,187th person sells his certificate, and you will get up to Rs 6.56 million. Add it up, and you see that for one person to get to first place, 3,280 people must be involved in the scheme.

Each of these chain-completing 2,187 people has been told that if they continue the chain, they will each get Rs 6.5 million. If 2,187 people are to receive the jackpot, nearly 7.2 million people will have to be involved in the scheme. For 6,500 people to win, Nepal's entire population would have to play.

And Samrakchhan will make Rs 9.8 million from just one completed chain, at Rs 3,000 for every person playing. At any given time, there are as many possible chains as people playing. The company claims it currently has 5,000 members, which means it has already collected roughly Rs 15 million. There are almost 300 members at the top level right now, collecting money. When they graduate with their huge "earnings", Samrakshayn will have collected close to Rs 2 billion-just for organising the scheme.

Say the government decides the scheme is illegal and shuts it down, then of the 3,280 players enrolled now, 1,092 people (33 percent) have bought and sold their certificates and broken even, but 2,187 (66.97 percent) will lose Rs 9,000 each. And at this point only 0.03 percent (one person, if you are lucky) can hope to get that promised Rs 6.5 million.

Until you do the maths-which few do-pyramid schemes seem infallible. The reason they do not fail dramatically is because most people who drop out-and pay the price of the collapse-are those who join later and realise after some time that they have fewer people to recruit. Your chances of hitting the big time, are realistic only if you join early-very early. And organisers never lose. The collapse does not occur suddenly, but one person at a time, over long periods of time. Thousands will join and thousands will drop out, and each, individually and unwarned, will bear the cost of the collapse.

Archana Karki, who has been the front person for the organisation, including in a harrowing (for her) talk program on Radio Sagarmatha, does not see anything wrong with the scheme. "We've always relied on aid and grants for our development. This is different," she explains. "It is a great way of mobilising internal resources and creating a social development fund."

Like much of Kathmandu's professional elite, Karki can masterfully play two roles-development worker and development sceptic. Samrakchhan's brochure says its mission is to develop Nepal, while providing an opportunity for individual gain. The whole scheme is couched in the language of development aid, strewn with phrases like "community development action" and "injecting a sense of pride and ownership in nation building among Nepalese citizens."

Samrakchhan is registered as a profit-making company with the Company Registrar's office in Tripureswor. However, Karki is quick to explain that the company has been set up purely with social service in mind and that the seven members of the team agreed right at their first meeting that they would not receive salaries or dividends-they would use their profits to contribute to society. Samrakchhan's registration papers state just that it is a "social marketing" company. The only government office that seems to understand what Samrakchhan does is the Lalitpur Tax Office. The taxman's evaluation papers, photocopied and posted on Samrakchhan's notice board, say clearly that the scheme is a "lottery" and members are taxed as such on their returns. The Samrakchhan brochure proudly claims it is a tax-paying body. It just forgets to mention that it is a lottery winners' tax.

Samrachaan's significant financial contribution to society so far, besides deducting taxes from its members' winnings, has been a total of Rs 830,000 put into community development activities and Pashupati clean-up. And it gives each new member a gift hamper with locally produced pickles and snacks worth Rs 300.

Should any organisation, public or private, be allowed to operate a scheme that takes money from some people and distributes it to others, on the side raking in millions for itself to spend on philanthropic purposes? Social workers, financial and legal experts say no, but Karki argues: "Nepal does not have a social welfare fund, and as long as whoever is running the scheme is not doing it for commercial gain, society wins, and the scheme is justified."

Few pyramids schemes say outright that they are fundraising for development, but the justification for operations like Samrakchhan sounds similar across continents. People running pyramid schemes in Albania in the mid- and late-1990s, and more recently in South Africa, said they were helping lift people out of poverty, creating new employment opportunities and teaching people to prosper and be proud of themselves. In Albania the economy was brought to ruin by pyramid schemes in the late-1990s. There, and in South Africa, the authorities declared the schemes illegal. Read about it on www.pyramidschemealert.org.

Samrakchhan has become increasingly popular in the last two months and if the government does not wise up, more copycat organisations like 1Uno, Smartcash, Magicman, Sambandha, PC City, Skybiz.com, and Goldcoin, to name but a few, will jump in to fleece the public. People are starting to borrow money to play. And many in the chain argued with this writer that something in which luminaries like Arzu Deuba are involved in could never be fraudulent. Samrakchhan at least has the "cover" of development work, others are going to appeal directly to greed. If unchecked, pyramids will grow exponentially, eating into the meagre savings of more and more people as the scheme moves out of business and aid circles to campuses and schools, and keeps moving down the economic ladder to the middle and poorer class. Eventually, it will have an impact on the national economy.

Samrakchhan's promoters ignore the fact that the people furthest down the ladder, ie, the poorest, will bear the brunt of their badly thought-through exercise. This is like stealing from the poor to develop the poor. At best, its promoters were na?ve about their scheme. Or, they deliberately ignored the fact that it is a risky venture for the economy, and one that distorts social values like independence, initiative and entrepreneurship. Those who know economics, or do business, are aware that "something can never come from nothing." Samrakchhan's promoters, and others like them, need to recognise the questionable ethics of their ventures.

Pyramid schemes like Pentagono and Samrakchhan are inherently fraudulent. The schemes are designed so only a lucky few receive rewards. And, unlike the random pick of a lottery, only those who bought in very early can ever hope to win. All others lose. And their loss is the source of rewards to those above them in the chain. Without governmental and legislative checks, we are in danger of institutionalising pyramid schemes as legitimate free-market operations. If the government declares them illegal immediately, as it should, there will be at most 10,000 angry people. If it tarries, there may be tens of thousands of poor people affected, and they will be rioting in the streets because they have lost their money.

This is what happened in Albania, when the government waited three long years to declare pyramid schemes illegal. When it finally did, large-scale rioting broke out, there was arson all over Tirana. By the end of it, more than 2,000 were dead.

This is the evil genie Samrakchhan has thoughtlessly let loose in Nepal.

(Manisha Aryal lives in Kathmandu and reports on the business and economy of South Asia.)


LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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