Ponzi Scams In West Bengal: NUJS Kolkata Prepares Research Report In Collaboration With University Of Leicester

The West Bengal National University of Juridical Sciences (NUJS, Kolkata) on Wednesday, 19^th July, 2023, hosted the inauguration of a research report on “Preventing Ponzi scams in West Bengal: Profiling the victims and proposing the legal antidote”, a collaborative research project between NUJS Kolkata, and the University of Leicester, UK.

The inaugural session was presided over by Justice (Retd.) Ranjit Kr Bag, Calcutta High Court, and Prof (Dr) Nirmal Kanti Chakrabarti, Vice-Chancellor, NUJS, and was followed by a question-and-answer session with the members of the audience, and media personnel.

This study, which delved into the psycho-social traits of those who invest in Ponzi schemes, as well as into the mechanisms of these schemes, was funded by NUJS, Kolkata, University of Sheffield, UK, and University of Leicester, UK. It was undertaken by a team of researchers comprising of Dr. Navajyoti Samanta, Dr. Shouvik Kumar Guha, Somabha Bandopadhay, Kanchan Yadav, Atish Chakraborty, Arjita Mukherjee, and Srinjoy Das.

Ponzi scams are a type of financial fraud where a scammer lures in investors with a promise of high return. However, rather than generating profits through legitimate means, the scammer uses the funds from new investors to pay off earlier investors. The scam is named after Charles Ponzi, an Italian-born swindler who became notorious for running such a scheme in the early 20th century in the USA where he would promise exorbitant returns, but in reality, was trying to repay earlier investors with money raised from subsequent investors.

Even though Ponzi scams have been found in almost all countries around the world, the mechanisms vary greatly between developed and developing nations. Usually, these scams happen in clusters in both time and space, and enormous amounts are spent on advertising and endorsements.

West Bengal has been affected by Ponzi scams (incorrectly referred to as ‘Chit fund scams’), recurring in a cyclical form, from the 1970s. In the last cluster of these scams between 2000-2013 over 30 lakh depositors have been severely impacted. This report finds that the main driver of the scam is the local agent of these schemes, who works on hefty commissions and collects money from the depositor.

The report also conducted an in-depth psychometric test on over 500 victims and found that the depositors are more trusting, have less financial self-regulation and lower delayed gratification, than the control group. Which means that they are decisionally vulnerable to predatory tactics by the local agents of these unregulated collective deposit schemes. They tend to invest in the agent rather than through the agent.

The researchers, in compiling this report have collected on-field data from hundreds of respondents who have invested, and lost their money in Ponzi schemes. Interactions with victims of the schemes have added further perspective to this report, pertaining to the on-ground reality of those who lost all their life’s savings in Ponzi schemes. Such discussions, and experiences have helped shape the recommendations.

Although Governments have brought in several legislations in the aftermath of the recent cluster of scams like the West Bengal Protection of Interest of Depositors in Financial Establishments Act, 2013, (“WB Act”) and Banning of Unregulated Deposit Schemes Act, 2019, (“BUDS Act”) as well as the related rules in 2020, to take a strict approach in curbing the Ponzi schemes, they however, fail to clearly articulate that the pyramid of agents and not just those who have direct contact with the depositor would be held liable.

The major criticism of both the aforementioned legislations in the report is that they merely reiterated the traditional position of s420 IPC and add little value in tackling the core issues of the scams - holding the entire agent pyramid responsible.

This report thus suggests that to prevent future Ponzi scams from devastating the economy the special legislations should be suitably amended to strike at the entire agent chain and not just break the relationship between the lowest level agent and the vulnerable depositor. This can only be achieved if the legislation directly mentions that all persons who knowingly profit from the money raised from the depositor will also be held under strict liability.

The report also finds that almost all the depositors had access to the formal banking sector, however, had low financial literacy. So, in the next phase of Jan Dhan mission focus should be on highlighting how to detect a scam.

It is also suggested that an intelligence network formed of commercial retail banks should take a more active role in monitoring spread of unregulated depositories and should be established as envisaged under the 2019 Act, and that the Central and State governments should set up a joint action committee with ground level NGOs, universities, and colleges to monitor implementation of BUDS Rules and coordinate with the bank-led network.