Should you invest in MMM?

Despite much speculation and argument over the credibility of MMM South Africa, which is described as a social financial network on its website, many people are still adamant about the benefits and profitability of using MMM. Justmoney speaks to experts to find out if you should invest in MMM South Africa.

The MMM South Africa website states in several places that there is no guarantee of a return, however, at the same time it emphasises that it is possible to earn 30% per month on your initial ‘donation’.

Last year MMM South Africa made the news with speculation that it was a pyramid or Ponzi scheme, and was investigated along with eight other companies by the National Consumer Commission (NCC).

If it’s too good to be true, it probably is

The notion of ‘if it sounds too good to be true, it probably is’ could apply to MMM South Africa. As previously mentioned, the website claims that you can make up to 30% per month, while at the same time stressing that there is no guarantee.

Last week it was announced that one of the MMM South Africa’s affiliates, MMM Republic of Bitcoin, was being shut down due to the inability to maintain a 100% pay-out to investors. Despite this failure, MMM South Africa informed Justmoney via Facebook that it was still going strong.

While MMM South Africa has not been confirmed as a Ponzi scheme or a pyramid scheme, many experts have come out warning people to be careful where they invest their money.

Karin Muller, the head of growth market solutions at Sanlam, stresses the importance of scrutinising advice that comes from unaccredited sources highlighting that anyone can fall victim to a scam. “There is no specific type of person who falls prey to these scams. Making bad investment choices is often a case of trusting the wrong people. These scamsters can really instil trust and give people hope. The key is to not buy into these promises without fully understanding how these operators achieve their alleged returns.”

Maya Fisher-French, finance writer for Maya on Money, points out: “I think unfortunately perhaps people don’t understand how investments work. And it is true, a lot of people who have put money in over time have received more money out than they put in. But what they are not realising is that this only works if new people enter the system all the time. So that money, that 30% that they got in that one month, has come from some new person funding that 30%, and that is fine as long as you continuously have new members.”

Muller adds: “There’s no investment that can promise 15% or 30% returns without risk. There is always a risk-return trade-off when you invest, especially in assets that can potentially have a higher return.”

Investing in MMM South Africa

When asked if people should invest in MMM South Africa, Trevor Hattingh, spokesperson for the National Consumer Commission (NCC), says: “The NCC would like comment from a factual basis once it is certain that indeed MMM is a pyramid scheme. At this stage it is not possible for us to do this because the SAPS is still busy with their investigative processes. However, if it is found that MMM is a pyramid scheme then consumers should refrain from investing or participating in it because participation in a pyramid scheme is outlawed by the Consumer Protection Act. Consumers who participate in pyramid schemes run the risk of being criminally charged, and could lose all their money. In addition, there is no recourse for a participant of a pyramid scheme. The NCC will treat complaints from aggrieved participants as tip-offs rather than complaints.”

The 30% return that MMM South Africa claims is attainable will not be so easily achieved if the number of new investors drops. Fisher-French notes: “They have grown at such a rate that they have continuously been able to bring in new money to fund those higher up the pyramid scheme, because this is a pyramid scheme, it is the basic definition of a pyramid scheme. And the problem is that at some point this momentum runs out, so you’re starting to struggle to get new people or people become concerned about it. And that of course is what is happening now, people are getting concerned so they are perhaps a little less likely to put money in and the market of new investors dries up.”

When no new members join MMM South Africa, or not enough to sustain the system, the funds needed to support those needing money from the network will not be available, eventually leading to the collapse of the system. “There are a lot of people who made money, and they are putting money back in again, and maybe they will lose the second round of money they put in, but they’re probably okay to take that risk because they’ve already made money, but what about all those new people coming in, what’s going to happen to them?” asks Fisher-French.

She adds: “What’s very concerning to me as well, that [this] is completely acknowledged by MMM. MMM have completely acknowledged that they need new investors in order to keep the cycle going, they are not pretending it is anything (other) than that.”

While the MMM South Africa website clearly states that the money put into the network is a donation, Fisher-French highlights that there is an understanding by many people that they will be getting money out of this system. Therefore they are not generously donating money with no expectation of return, but are expecting someone else to be as generous, if not more, when they are in need to a donation themselves.

Last year when Justmoney contacted MMM South Africa for clarification on the system, it explained that a person needs to make a donation to a member of MMM South Africa before they themselves can receive any money.

An alternative?

Rather than ‘investing’ your money in MMM South Africa where there are no guarantees try an alternative. Fisher-French explains that a stokvel (which MMM South Africa cannot be classified as) is a closed system where your money might be safer.

Unlike MMM South Africa where you do not know the other people involved in the network, with a stokvel it is a group of people that you know. A group of people agree to place money into a fund each month, and each month one person from the group gets the funds.

For example, 12 friends agree to put away R1, 000 each month over 12 months and draw a number allocating who will get the funds each month. Therefore each month each of the 12 friends takes a turn receiving the R12, 000 that has been collected by the stokvel.

A benefit of a stokvel is that you generally know the people in the group and therefore can confront them if they do not pay the money into the stokvel. However, with MMM South Africa there is no recourse if you do not receive any money.

Hattingh emphasises that there is no recourse if a person does not receive money from MMM South Africa, unlike a stokvel which is a legally monitored entity. Some are claiming that MMM South Africa could be classified as a stokvel, however, Hattingh says: “The outcomes of the SAPS’ investigation will advise whether MMM is a stokvel or an outlawed pyramid scheme. Stokvels are legitimate savings schemes that are regulated in South Africa by government, through the National Stokvel Association of South Africa (NASASA).”

According to Hattingh, the characteristics of a stokvel are as follows:

1. A stokvel is required to be a member of NASASA.
2. A stokvel has a central bank account.
3. A stokvel has a constitution that guides its activities. The constitution must be agreed to by all participants
4. Stokvels are formed amongst people who know one another, such as family, colleagues or neighbours.
5. Participants in a stokvel benefit equally from its proceeds.
6. A stokvel normally has between five and 15 members.
7. Participants in a stokvel can institute legal or criminal proceedings against a defaulting member.

Think before you invest

As a final message for those investing or thinking of investing in MMM South Africa, Fisher-French says: “I think you need to ask where you money is coming from. Be realistic, why do you think you got 30% back in the first month? Who do you think paid that money to you? It didn’t come out of thin air, it came from new investors, it came from other people. You got a 30% return this month, and you know that that 30% came from someone who donated it to you with the expectation of no return, do you honestly believe that? Do you honestly believe that someone gave you 30% return and expects nothing back?”

A pyramid scheme, which MMM South Africa is suspected of being, has a lifespan of one year to 18 months, according to Fisher-French. “We are definitely at the end of this one’s lifespan. It is being investigated as a pyramid scheme, and if it’s found to be a pyramid scheme, it will be illegal and that will bring it to its end anyway. And then the people who have been investing will blame the authorities. We have two lots of things happening. We have one set of people who are saying that the authorities are wrong and then you have another group of people saying why have the authorities done nothing.”