Only the Department of Justice and the police should be involved in protecting citizens. Entrepreneurs (risk-takers) should be left in peace provided they do not deceive anyone  into ‘believing that making money is guaranteed or that participants can earn mathematically impossible returns’.

This is what Leon Louw argued in his weekly column first published in Business Day on 28 November – Not all Ponzi schemes are actually fraudulent.

PONZI schemes are news again.   But what are they and how should they be regulated, if at all?   What about network marketing, pyramid schemes, multilevel marketing, referral selling, scams and chain letters?   What’s illegal, what’s not, and what should be?

It is characteristic of the misguided policies and befuddled discourse over the years that no one thinks of the only department and agency that should be involved — the Department of Justice and the police.

The Financial Services Board told the committee Ponzis are a “fraudulent operation that pays returns to ‘investors’ from their own money or money paid by subsequent ‘investors’”.   This is a rare accurate definition, the keyword being “fraudulent”.   Whenever a scam collapses, confused busybodies beat their breasts demanding more laws and policing.

One of the tenacious Ponzi problems is the failure to distinguish consumerism from entrepreneurship.   The architects of the Consumer Protection Act, for instance, misguidedly banned business ventures as if entrepreneurs in referral selling and network marketing are consumers, and is if legitimate businesses are scams.   The kind of thing they banned, hopefully not deliberately, is a gym offering free months to customers who introduce new members.

It’s important to understand why prolific measures and multiple agencies are doomed to failure.

  • First, a failure of law enforcement needs law enforcement, not repetitive prohibitions of the same thing.
  • Second, extended definitions of what’s banned outlaw what should be allowed.
  • Third, new and expanding bureaucratic empires burden us with counterproductive costs and red tape.

In short, only police should police.   And, as the Financial Services Board implies, nonfraudulent schemes should be allowed.

Ponzis are not inherently fraudulent.   As long as no one is deceived into believing that making money is guaranteed or that participants can earn mathematically impossible returns, enterprising people should be left in peace.   Schemes rarely “saturate” or “implode”, except when banned.   Pyramid math of the kind generated when schemes are investigated is as seductive as it is flawed.   In the real world, as in all businesses, some participants succeed and others fail.   Regulators and observers should remember that “entrepreneur” is French for risk-taker.   A dynamic economy needs entrepreneurs, failures included.   Economies are Darwinian processes where failure is as essential as success.   Laws trying to protect people from failure curtail liberty and prosperity.