West Bengal: Ponzi Schemes Flourishing in New Avatar, Warns Study

“There is a whole new bunch of Ponzi schemes running in West Bengal right now,” said Shouvik Kumar Guha, associate professor of law at National University of Juridical Sciences (NUJS), Kolkata. He was participating in a recent discussion on a year-long-research, funded by NUJS and University of Leicester, titled, ‘Preventing Ponzi scams in West Bengal: Profiling the victims and Proposing the Socio-Legal Antidote.’

The researchers warn that in the next five years, there could be another financial tragedy unless some immediate measures are taken.

According to them, this time round, the schemes were being camouflaged as non-banking investment companies and crypto currency investments.

These companies are very difficult to track as they do not fall within the core provisions of the banking regulatory norms, like registration or maintaining liquid assets, making them highly mobile and difficult to trace, Guha added.

Ponzi schemes, often erroneously called chit funds, are investment schemes where scammers tempt people with impossible returns. They use the money they get from the later investors to pay the first few. And eventually, when the system collapses, the companies disappear.

The revelation from the researchers is particularly alarming for West Bengal as the last such major scam that unfolded between 2010 and 2013 had a devastating impact on the state with an estimated 30 lakh depositors impacted.

This was a cluster of scams, the biggest among which was the Sarada scam, which was a Ponzi corporation with 200 private players. When the scam was unearthed in 2013, it was evaluated at Rs 10,000 crore.

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When the organisation collapsed, names of multiple leaders in the state government came up during the investigation but the victims are yet to get justice.

The researchers, however, point out that the history of such schemes in the state is a much longer one. They trace the birth of dubious money-making schemes in West Bengal from the period between 1947 and 1966 when the economy of the state nosedived post-Partition. Bengal slipped from the first position in per capita income to the eighth, and there was large-scale unemployment. People who were unemployed or in a difficult financial condition started investing in these schemes in the hope of escaping their situation.

This is when scams like Sanchayita, which were unearthed in the 80s, started. This led to lakhs of victims. But the culture of such schemes never really died out.

In fact, in the 1990s and 2000s two large corporations, Verona and Overland, again managed to dupe thousands of people. But this time it wasn’t economic distress like in the 1970s.

Rather, there was economic growth with per capita income growing substantially above the national average. And this was chiefly due to the growth in agriculture that was way above the national average.  

“This created a very conducive environment for such scams where people in rural areas want to invest the surplus money they had earned but had very low financial literacy or access to banks,” explained Navajyoti Samanta, associate professor, University of Leicester, and a co-author of the report.

This combination of some money in hand and lack of financial literacy remains an important reason for such scams to flourish, said Samanta.

The baffling success of these scams merits the question if people have forgotten the tragic outcome of Sarada and what makes them keep investing in these traps?

This was also one of the primary investigations of the research study. It found that it is not greed for high returns that was the main driving force; rather it was the trust in the people who had become agents. Someone, say, like a respected local teacher or a doctor was targeted to become an agent. These are people who villagers approach when they have to do any paperwork or make financial decisions, so it is only natural they would trust them with bank work. 

In fact, many victims also had bank accounts but were still willing to invest some money as they trusted their local agent. “This wide network of thousands of agents is the bedrock of Ponzi scams in the state,” said Samanta. 

People in rural Bengal are also culturally inclined to save money even when they earn a little. In fact, the state is the highest in small savings. It is cumbersome for a daily wage earner to go all the way to a bank to invest Rs 1,000. On the other hand, the Ponzi agents come home to collect the money and there is no complicated paperwork.

“In fact, we have suggested that such a network is something that our formal banking system needs to learn from. Banks have tried something like this with banking correspondents but this is a far better channel, with a much better understanding of local realities,” said Guha.

This format can be seen even now as the modus operandi of the organisations has not changed. Trustworthy people are recruited as agents and then they are tasked to convince the investors, promising them astronomical returns, sometimes as high as 48%.

Incidentally, the agents are victims, too. Many of them had themselves invested money and lost lakhs. “If we look at how the agents get paid, it is clear that they are duped as well. There are about 15 stages of agents and by the end of the chain, 50-60% of the money goes for agent payment. It is impossible for any company to return the principal, leave alone interest, in this kind of structure,” added Guha.

The study shows that every time these scams have returned, they have also been modified to become more convincing. If the Sarada scam was about investments in infrastructure and industries, the scams now talk about digital wallets and crypto currency. “This has made it even more convenient for them, as there is no need for a building or office to show,” said Guha.

As things stand, there is no way these scams can really be stopped. The Reserve Bank of India can’t act like police and the economic offences wing cannot act until there is a complaint of fraud, the researchers said.

Apart from this, there is also the space for regulatory arbitrage. In many cases, if the Union Ministry of Corporate Affairs lists certain companies as invalid on its website, they do not have the capacity to act on them. Moreover, given that one can register a company online in 15 minutes now, it has become even more difficult to monitor these.

“It is thus important to have a law that creates a proactive body to take care of such offences. In 2019, the Banning of Unregulated Deposit Schemes Act was introduced to this effect but so far it has barely been implemented in the different states of India (two states and one Union territory), nor has any study been conducted about its efficacy at the ground level. Though there is a lot to be desired in the Act, some provisions like building an intelligence team to track offences like these can be useful,” says Guha.

The writer is a freelance journalist based in Kolkata.