PONZI SCAM: INDIAN MUSLIMS DUPED IN THEIR QUEST FOR ISLAMIC INVESTMENTS

Fatima Farooqi (not her real name) mortgaged her house in Mumbai to borrow and invest 500,000 Indian rupees ($7,180) into a scheme run by Heera Gold last year. She was thrilled at the prospect of paying her daughter’s college fees with the 15,000 rupees monthly return she was promised from this ‘halal’ investment.

Today, the promoter of the Ponzi scheme, Nowhera Shaikh, is in jail pending trial after dozens of cases of cheating and fraud were filed against her for payment default. And Fatima has little hope of getting her money back.

A homemaker and mother of two, Fatima said she first invested 200,000 rupees in 2016 and was receiving 6,600 rupees every month into her account as a profit for almost a year.

“They said I will continue to earn that profit every month as long as I stay invested with them. That gave me the confidence to make another round of investment of 500,000 rupees,” she told Salaam Gateway, with a request that her true identity not be revealed.

Fatima said she didn’t realise the company would default on payment as “it has been running these schemes for many years”.

“Now, I have been running pillar to post to get my money back. It has ruined my family and I am now somehow trying to pay off my bank debt every month in order to save my house,” she said.   

Fatima is one of many investors, mainly Muslims, who invested anything from 100,000 to millions of rupees in Heera Gold over the past 10 years.

The Hyderabad-based company, which boasts the tagline ‘Towards an interest-free world’, claims to be in the Shariah-compliant business of trading gold bullion. It targeted mainly Muslim customers, promising them an annual profit rate of 36 per cent to 42 per cent.

Fatima said she consulted with a number of old investors and local marketing executives before investing. They assured her the investment was safe; that they were receiving payments every month.

“I also got influenced after watching some YouTube videos of maulanas (clerics) calling this a halal or Shariah-compliant investment,” she said.

Mubin Solkar, a Mumbai-based criminal lawyer who had unsuccessfully appealed for anticipatory bail for one of the marketing executives of Heera Gold, said many of the employees themselves had invested their own money into the company.

“I have dealt with one of the marketing executives, but there are more than 200 such people in Maharashtra state alone. Since they invested their own money in that company, we cannot say that all these people had the intention to cheat the investors,” Solkar told Salaam Gateway.

The Heera Gold Ponzi scheme, which is reported to run to more than 5 billion rupees, is not the only such case in India.

SERIES OF PONZI SCAMS

Last year, another Ponzi scheme, Ambidant Marketing, run by Syed Ahmed Fareed and his son Syed Afaq Ahmed as a halal investment, was busted after the company defaulted on paying thousands of its customers, mostly Muslims, in the southern state of Karnataka. It promised to give 12 per cent profit every month.  

While legal proceedings are continuing against Heera Gold and Ambidant Marketing, one thing common between them and many other Ponzi schemes operating in India is: they all promise high returns; and if it’s run by Muslim management, it promises a halal or Shariah-compliant income. 

“Ponzi schemes thrive due to the regulatory vacuum, strong distribution network and promise of high returns. They could attract gullible investors in the name of high returns made possible by high ethical standards,” said Dr. Shariq Nisar, a Mumbai-based Islamic finance academic and professional.

“People were also much attracted by the Islamic attire of the promoters and marketers.”

He explained that many such firms create a web of companies sharing staff and management.

“Mostly, they show public money as equity and loan in these companies. Once they reach a certain number they float another company with similar modus operandi. It is basically a web of companies through devious financial instruments,” Dr. Nisar told Salaam Gateway.

Naveed Mulla, a chartered accountant with offices in Mumbai and Dubai, said the clients or the investors who fall prey to such schemes are mostly the conservative Muslims looking to put their money into a halal investment.

“So the first catchy phrase for them is ‘halal investment’ and if it is Muslim ownership or management, then they tend to believe them even more,” he said.

Mulla said he had advised many of his Muslim clients to “not invest in such schemes, but people would still do that because it promises very high returns”.

“Normally, large or mid-cap companies give you yields between 15 per cent and 25 per cent on corporate deposits and the bank deposits give you between 6 per cent and 8 per cent interest. Schemes like Heera Gold promise you 35 per cent to 40 per cent; the only catch is you have to wait a year before your first payment comes through,” Mulla told Salaam Gateway.

“The lock-in period of one year in such schemes is the giveaway. That means the money you are investing this year is going to be utilised to pay last year’s investors. Similarly, you will be paid next year from the money that will come from the new investors joining the company in that year,” he explained.

Once people start getting the returns on their investment every month, they tend to get more investments from their relatives and friends, said Mulla.

“So the word-of-mouth becomes a big advertisement for such companies, and people fall prey to them as they are getting high returns, and that too from a ‘halal’ company,” he said.

Mulla reckons there are hundreds of such schemes operating in India at any given time. “As long as they can continue to make payments by entrapping new investors, no one will complain.”

ISLAMIC FINANCE OPTIONS

With a population of some 172 million Muslims, there is a huge demand for Shariah-compliant financial products. The Indian central bank’s proposal to try out some form of interest-free banking products within the conventional banking structure has been turned down by the government.

“There is definitely a high desire for a Shariah-compliant financial system. Those who do not understand it also desire it. Financial literacy, especially among Muslims, is quite low. They are part of the mainly informal economy of the country and their desire to stay away from the formal financial sector (which operates on riba) drives them to such Ponzi schemes,” said Dr. Nisar.

While there are a number of microfinance institutions, cooperative credit societies and Non-Bank Financial Companies (NBFCs) that provide many Shariah-compliant financial instruments, the reach and scale of such schemes are limited.

The Indian capital market regulator, the Securities and Exchange Board of India, has also approved a couple of Shariah-compliant mutual funds such as Tata Ethical Fund that has given more than 15 per cent annualised returns.

“These schemes are good for the retail investors and are quite safe. But in the short-run, they may not match the returns given by unregulated schemes. The community’s abhorrence of the formal financial system has not allowed these schemes to become popular among Muslims,” said Dr. Nisar, adding that higher KYC (know your customer) norms are also a hindrance.

REGULATORY SCENARIO

Central bank regulations prohibit individuals or entities from accepting public deposits without authorisation. But those with fraudulent intentions devise various mechanism and structures to overcome this prohibition.

“They may call it ‘investments’ or ‘equity’ or by any other name. Since the public is not much aware of these terms, or the distinctions between them, they get fooled by such companies,” said Dr. Nisar.

He urged the Reserve Bank of India (RBI) and other regulatory bodies to acknowledge that not permitting a regulated Islamic finance economy would continue to result in ‘unofficial’ schemes.

“In fact, the absence of regulation leads to more exploitation of the consumer, which also leads to more distrust among people about the overall financial system and its regulators,” he said.

Once the investor’s money has been taken by such schemes, recovering it is almost impossible. Since cheats insist on cash terms, investors would find themselves unable to file a complaint with any form of proof with police or other authorities.

“Those who are not uncomfortable disclosing their source of income may approach the authorities. Even then, there is very little hope of investors getting any justice,” said Dr. Nisar.

Duped investors have some recourse under a special law, The Maharashtra Protection of Interest of Depositors (MPID) Act.

Many other states also have similar laws to protect investors’ interest. “Under the Act, the assets of companies involved in such activities can be seized. The money recovered from the sale of such assets can be distributed to investors,” said advocate Solkar.

Dedicated courts under the MPID Act are unable to deal with “the enormity of the scams that are taking place”, he added, and it takes time for “the legal procedure and the judicial proceedings to reach their logical end”.

In the end, the assets seized from the companies are usually insufficient to return even the capital amounts invested by those who were duped.

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