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Pyramid Scheme, or How Did Kazakhstani Tricksters Manage to Defraud $80 Million From Country’s Citizens?

In 2020, the number of investment pyramid schemes sharply increased in Kazakhstan. The losses from such activities of “fundraising business” increased tenfold during the past year. Despite the widespread informational propaganda of financial literacy, Kazakhstan residents continue to give their savings to fraudsters of all kinds.

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Over the past year, the number of crimes under the Article 217 of the Penal Code of the Republic of Kazakhstan “Creation and management of financial (investment) pyramid” increased sevenfold in Kazakhstan. In 2020, their number exceeded 176, of which 136 criminal cases were sent to court. There are even more victims.

According to the official statistics of the General Prosecutor’s Office of the Republic of Kazakhstan, during the past five years, Kazakhstanis lost over 14 billion tenge in financial pyramid schemes ($46.5 million – by the rate of the National Bank for each corresponding year). The largest amount was in 2017 – more than 7.1 billion tenge ($21.6 million).

The losses of investors are almost irrecoverable. According to calculations, compensation of losses to victims annually varied from 1% to 6%.

The official statistics on the Article 127 of the Penal Code is collected since 2015, and shows the scale of the problem only partially. Many criminal cases with the signs of the pyramid schemes were opened and registered under other Articles: “Fraud”, “Infliction of property damage by deception or abuse of trust”, “Creation of transnational criminal organisation”, etc. It is not possible to extract them from the array of all crimes under these Articles from the register of pre-trial investigations of the General Prosecutor’s Office.

It is confirmed by the numerous court decisions against the founders of the pyramid schemes under other Articles of the Penal Code of the Republic of Kazakhstan. In addition, the official information of the Ministry of Internal Affairs of the Republic of Kazakhstan cannot be ignored.

At the media briefing, the Head of the Investigation Department of the Ministry of Internal Affairs Sanzhar Abilov told that during three quarters of 2020, the officers from the ministry’s departments investigated 250 criminal cases with the signs of investment pyramid schemes.

“The total number of victims in ongoing criminal cases is over 25 thousand people. The total amount of losses exceeds 33 billion 250 million tenge ($80 million),” Sanzhar Abilov said.

Shynar Elubaeva. Personal photo

Despite the active state propaganda of financial literacy in the past few years and regular warnings from experts about the dangers of dubious investments, Kazakhstan residents continue falling for scams. The expert of the Public Fund “International Centre for Economic Literacy of Kazakhstan” Shynar Elubaeva explains the reasons and factors of this phenomenon.

Factor 1. Uncontrolled Aggressive Online Advertising

“How are the pyramid schemes during the last two years different from the previous ones? They are online now. People are tricked in the messengers, where information spreads very quickly. This process is often uncontrolled. The coverage increases, the losses grow. In addition, the famous bloggers with large audience are involved in online advertising,” Shynar Elubaeva notes.

In the beginning of 2020, the process of large and small pyramid schemes entering social media was very active in Instagram groups. A screenshot of the main text message from one of such group chats shows how simple it is offered to people to contribute without any documents or guarantees, and receive five times more.

A small amount (2 thousand tenge or about $5) attracts investors psychologically. After all, the loss would be as small. After a few days in the group chat, participants are invited to join new groups with larger contributions. As soon as the pyramid scheme begins to collapse, new investors do not receive their money, and the founders leave the group or block all participants of the group chat.

During the preparation of this material, the author investigated several similar group chats. Each of them had over 200 participants who transferred the initial minimum amount. This information was passed to the law enforcement agencies.

The Investigation Division of the Department of Internal Affairs of East Kazakhstan region explained that a criminal case could only be opened if the claimant was a victim. However, not every victim is willing to spend time on proceedings caused by $5 loss.

However, it is not quite so, when the losses are many times greater, for example, as in the case of two sisters from Almaty region, who defrauded at least 76 Kazakhstanis in a similar ‘pyramid’ chat: that many citizens addressed the police. Each of them invested 100 thousand tenge ($230) or more. The official website of the Ministry of Internal Affairs of the Republic of Kazakhstan Polisia.kz reported this. The criminal case was initiated under the Article “Fraud”.

Factor 2. Economic Difficulties

Among the possible reasons for the increase in the number of investment pyramid schemes, Shynar Elubaeva also names the deterioration of the economic situation. People, who lost income and found themselves in a difficult situation, search for any option to earn money and take the risks.

A strong example of this is the story of a single network of large pyramid schemes in 2019-2020: “Garant 24 Lombard”, “Estate Lombard”, and “Profitable Loan”, which defrauded more than 26 thousand Kazakhstan residents. According to Sanzhar Abilov, the amount of losses of their victims exceeded 22 billion tenge ($52 million).

The main trick the founders of this pyramid scheme used was a promise to sell the investors’ property (cars, apartments, houses, equipment) at higher prices. At the same time, they promised to repay the invested money within six months. In fact, the property was sold quickly at minimal prices, and the investors did not receive their money. Another option was the promise to return the invested money at double rate within six months.

“Among the victims of this scheme, there are many pensioners, disabled people, large families who lost their homes and their last savings. I know a girl from Uralsk sick with blood cancer, who signed documents on the sale of her apartment in this “Lombard” hoping to get a good reward and spend it on a surgery in Europe. Now, she has no housing and no hope for the future. There were so many deaths after the collapse of the scheme, so many heart attacks, strokes, and suicides,” the editor of the “Region EurAsia” newspaper in Uralsk Zhanar Davletova told CABAR.asia.

Zhanar Davletova. Photo: exclusive.kz

Zhanar is a journalist and editor from the West Kazakhstan region. She also lost her savings after investing them in this pyramid scheme. After its collapse, she initiated the creation of the Committee for the Protection of Investors’ Rights. Since there were many victims in different regions of Kazakhstan, the branches of this organisation were opened in 14 more regions of the country. The first thing that organisation’s volunteers did was conducting a survey among the victims. It showed that the number of victims of “Garant 24 Lombard” and other organisations of the network exceeded 42 thousand people, the losses – more than 26 billion tenge ($62.9 million).

“We think that this is only 30-40% of all victims. We know that many investors did not address the police and did not answer survey’s questions so as not to reveal that they are civil servants, law enforcement officers. They would have to explain where they found money for investments,” Zhanar Davletova continues.

Zhanar is convinced that the fact that the investors in the scheme were police officers, the civil servants, and that famous athletes and artists advertised it, aroused the confidence of everyone wishing to increase their savings. In her article “Kazakhstan is a paradise for fraudsters”, Zhanar says that the authorities supported and granted certificates and letters of appreciation to one of the founders of the scheme Zhanbolat Esirkepov, 29. According to the journalist, such facts raise suspicions of corruption.

Several times, Zhanar Davletova and a number of victims addressed the President of the country and the Ministry of Internal Affairs with a request to investigate this criminal case objectively.

“I know that the maximum sentence under Article 217 is imprisonment for 10 years, but if we observe the court hearings, we can see that criminals receive such a long sentence very rarely. Often, they are imprisoned for several years, and after half of the term, they are released under an amnesty or parole,” Davletova said.

Investigation on the criminal case of these “Lombards” network is finished; 56 people were detained, many of them were arrested in other countries and deported to Kazakhstan. The legal proceedings did not begin yet. The established practice shows that the consideration of cases of investment pyramid schemes in courts can last from six months to a year, due to the need to hear the testimony of all the victims, and there are tens of thousands of them.

Factor 3. An Attempt to Earn Money in the Pyramid Scheme

Shynar Elubaeva is researching the nature of the investment pyramid schemes for many years and divides all the victims into two groups. The first group consists of people with a low level of financial literacy. The second group consists of citizens who perfectly understand what kind of risk they take, but hope that they are at the top of the pyramid and will have time to earn money before it collapses. After all, the basic features of the illegal investment activities of such companies is the obligation to recruit several more investors, whose contributions become, in fact, the basis for payments to the previously registered investors.

The Kazakh judicial system witnessed many criminal cases, when the heads of the branches of illegal investment companies – deputies, office workers – were investors initially.

One of the examples is the widely discussed story of the Questra World international financial pyramid scheme. Its official representative in Kazakhstan Kenesary Karamaev, who attracted about 100 million euros to the network (data from the verdict of the District Court No. 2 of the Almaty district of Nur-Sultan on December 23, 2019), said in court that he was a victim himself. The argument in his defense was the absence of accounting documents proving the facts of investments. All reports were digital, and when the pyramid scheme collapsed, its website was immediately blocked. The line of defense did not work. Karamaev was found guilty under several Articles of the Penal Code of the Republic of Kazakhstan, and sentenced to 10 years of imprisonment.

Factor 4. Financial Illiteracy

Both in their addresses to the police and in the numerous complaints published on the government’s Open Dialog E-gov website, people admit that the fraudsters took advantage of their ignorance.

In the most cases, the victims made gross mistakes in the investment rules: they signed documents without reading them first, bought non-existent digital currency via the digital services, transferred money to the offshore accounts of foreign companies, etc.

According to the research by the Standart & Poor’s Agency in 2014, the level of financial literacy in Kazakhstan was 40%, while in developed European countries the percentage of the population with high skills in financial management exceeded 50-55%.

Zhanar Davletova notes that even people who have both critical thinking skills and knowledge of the basics of law fall for scams of financial pyramid schemes. It happened in the case of the network of false “Lomards”. The offices of the companies looked credible, the contracts were legally correct, the terms of guarantees were identified. However, the main thing – the return of the investments – was not specified.

“After such a negative experience, I would recommend people who want to invest money to not get involved with Kazakh investment companies. This is a big risk. The best thing that you can do to protect yourself is to consult with an expert, a lawyer,” says Zhanar Davletova.

Factor 5. Convincing Investment Tools

The fraudsters invent all kinds of legends to defraud savings from Kazakhstan residents. Many of the methods were not previously used, and looked like convincing investment tools during the initial campaign.

These include the story of the Almaty pyramid scheme “QI Trade Kazakhstan”, which defrauded over four thousand Kazakhstanis in 2020 by obtaining their savings in the amount of several billion tenge. The founders of the company offered clients to invest in a “trade project”. Allegedly, the investments were spent on the purchase of goods in China and their further sale in the USA on the Amazon website.

The company was licensed, officially registered, and paid taxes. At first, the investors received dividends partially, but then, after a few months, the payments stopped. The law enforcement agencies opened a criminal case under Article 217 of the Penal Code of the Republic of Kazakhstan. At the end of December 2020, two founders of QI Trade Kazakhstan were arrested in Almaty.

Another interesting story is of Yaver Mamedov from Nur-Sultan, who promised an interest-free mortgage to people who did not have housing. According to data from the court documents published in the directory of court cases of the Supreme Court, the man founded the consumer cooperative “Common Home” and the company “Dream Life”, and invited investors to the program of the social accumulation system “Home”.

In 2015-2017, people invested money and received the right to rent an apartment, which, with regular payments during a few years, Yaver promised to transfer into their private ownership. With the new investments, the founder allegedly purchased new apartments. 357 people invested in the project; they contributed over 807 million tenge (about $2.2 million), but no one received the apartment.

By the decision of the district court No. 2 of the Almaty district of Nur-Sultan on June 27, 2018, Yaver Mamedov was found guilty of organising a financial pyramid scheme and received a suspended sentence of three years of freedom restriction. He was released under the amnesty later.

The expert of the Public Fund “International Centre for Economic Literacy of Kazakhstan” Shynar Elubaeva recommends all Kazakhstan residents planning investments to subscribe to the official accounts of the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market (fingramota.kz). They regularly publish important information about the illegal investment methods and factors worth paying attention to.

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