The economy of Iran has always been in turmoil due to the multitude of crises and insecurity in investment, which has its roots in the government’s misguided policies. There is almost no month that passes without news of embezzlement or large-scale economic fraud being reported in newspapers and social media networks.

In the latest case, the CEO of “Kourosh Company” which was active in the field of buying and selling mobile phones and repairing devices, fled the country with embezzling 2,000 billion tomans from its customers. Some experts use the term “Ponzi scheme” to describe the actions of Kourosh Company.

In recent years, “Ponzi scheme” has become a commonly used term in economic writings and speeches. Although this word is not new, there are always new reports about it in Iran and many people lose their investments due to this method of fraud.

In the issue of Kourosh Company, which has caused a large number of new bankruptcies, the name “Ponzi scheme” is widely seen. The majority of media have simply reduced this issue to Kourosh Company’s use of this scheme.

In the news, this company is accused of using the “Ponzi scheme”. The origin of this trick dates back more than a hundred years and is attributed to Charles Ponzi, an Italian immigrant. In 1920, he invented a method of investment, claiming that investors would receive a 50% profit after 45 days of patience, and if someone could continue the investment for 90 days, they would receive a 100% profit. (2) Ultimately, this formula caused many problems for investors and ultimately resulted in them losing their investments. Ponzi made $20 million in income without using his own capital or investing it in production.

In the Ponzi scheme, people’s capital is attracted by the claim of extraordinary profitability. The process of attracting capital continues and a portion of the profits is paid to some individuals, but some also remain unsuccessful in making a profit. In these circumstances, fraud occurs and ultimately the system collapses. After the Ponzi formula, his scheme remained for fraudsters and many took advantage of his tricks for their own exploitation. But the fundamental question here is whether all aspects of the Kourosh Company’s fraud are summarized in the use of the Ponzi scheme? In the midst of this, what role does the Iranian economy play? In other words, it seems that we should not simply reduce the issue of Kourosh Company’s fraud to the use of the Ponzi scheme, but we should consider the economic context of Iran. Because in order to use such schemes, there must be a necessary economic context.

Beds that make investments unsafe.

Capital is considered the most limited factor of production in less developed countries and therefore the main factor for economic growth and development in our country’s current conditions. However, this limited and valuable factor can easily be wasted or underutilized in an unstable economic environment. Without a doubt, one of the necessary foundations for investment insecurity in our country is government monopolies and the multi-tiered pricing system in the economy. In the 1960s and 1970s, government restrictions and monopolies created an insecure investment environment in the country’s monetary and financial institutions. In addition, significant differences in interest rates led some individuals to seek greater profits than the opportunity for exploitation.

After the victory of the Islamic Revolution and within the framework of the Islamic economy, two categories of financial institutions were formed outside of the government banking system: speculative companies and interest-free funds. These newly established monetary institutions, taking advantage of the monopoly that the government had created in the monetary and financial market, as well as the obvious differences in profitability of the banking monopoly, and the widespread corruption that had been rooted in this monetary system, were able to attract a large portion of people’s capital and monetary resources for their own profit. Some profit-seeking individuals, by offering tempting investment opportunities to the people in the form of speculative contracts, persuaded them to invest in various projects with very high profits, and in this way, they were able to take away people’s capital and savings. Although the roots of the formation of interest-free funds date back to the pre-revolutionary era, when they were mostly created with good intentions, some of these funds in the 1970s engaged in money laundering, tax

But the phenomenon of Qard al-Hasanah (interest-free loans) funds emerged in the 1980s and continued into the 1990s with the announcement of the establishment of private banking at the end of the period of parallel reforms. The story of financial and credit institutions at the beginning of the 1990s caused a lot of noise in the country’s financial markets. Institutions such as Caspian, Afzal Tous, Iranians, Samaan Al-Hujjaj, and others were among these financial and credit institutions. Some of these institutions, such as “Caspian”, had obtained a license from the Central Bank to operate, while others, such as “Afzal Tous”, had received permission from the Ministry of Cooperatives and were considered authorized institutions. (3) The crisis began when, in the middle of the 1990s, some credit institutions increased their deposit interest rates to compensate for their monthly liquidity shortfall. With the

One of the major financial events in recent years was the “Shandiz phenomenon”, which was accompanied by extensive television advertising and was in the sight of the government and other authorities. In the end, it resulted in the loss of a large number of compatriots’ wealth and the emergence of widespread problems in the country. The amount of government and ruling institutions’ support for the Shandiz phenomenon was to the extent that by offering its shares in the stock market, the value of each share increased from 200 tomans to 10,000 tomans, which also led to a general tendency to buy shares of this company in the market. However, the value of the company’s shares eventually plummeted and thousands of shareholders suffered losses. Mohsen Pahlavan, the CEO of Shandiz phenomenon, had said in an interview that his subsidiary company had a history of cooperation with Astan Quds Razavi. In this case, the untimely and inadequate response of the government

Rent-seeking and exploitation; a characteristic of state economy

Of course, the phenomenon of insecurity in investment in Iran cannot be attributed solely to the monetary and banking sector; rather, this issue has been repeated for years and in various sectors such as real estate, automobiles, currency, pyramid companies, etc. The “Goldquest” phenomenon is a famous example of such a structure that emerged in the 1970s in the Iranian economy and continued for a decade. Although its origin was in the Philippines and other East Asian countries, it quickly spread and developed in our country and was welcomed. Eventually, with the intervention of the Supreme National Security Council in 2009, the activities of pyramid companies, which had taken on a security aspect, were banned.

In addition to Kourosh Company, there have also been various other companies in recent years that have used Ponzi schemes to scam people. “Rezayat Khodro” was one of these companies based in Qazvin that, under the guise of pre-selling cars, swindled 50,000 people and earned 30 trillion tomans. (4)

Although it cannot be said that the issue of fraud and insecurity in investment is unique to the economy of Iran – as multi-billion dollar scams have occurred in advanced economies such as the United States – the conditions in Iran are more conducive to such activities. The lack of government control and the influence of unauthorized financial and credit institutions in various sectors of government have led people to collaborate with these institutions for years. From the beginning, experts believed that this structure would lead to bankruptcy, but no one could stop it. Sometimes, even the government and certain sectors of authority are directly involved in widespread embezzlement, meaning it cannot be attributed to negligence, but rather sometimes those in power have their own interests. This was evident in the events of 1399, which became known as the “Year of Deception” among the people and shareholders. In that year, the praise and support of the Islamic Republic’s leader and government officials for the stock market caused over 100 trillion tomans of people’s investments

Lack of transparency in money and capital markets has always been a key factor in the exploitation of some individuals for the purpose of profiting from informational rent and taking advantage of this space. In the Iranian stock market, it has always been alleged that some government-connected shareholders use informational rent to make profits. In early July of this year, a letter attributed to Mohammad Mokhber, the first deputy of the presidency, became public, showing a sudden 60% increase in the feedstock rates of petrochemical companies, although not definitively (according to the government’s explanation), had its roots in 50 days prior (i.e. May 7). (5) Since the stock market index has declined since then without the majority of the market knowing the reason, it is believed that some influential individuals were immediately informed of the contents of this letter and began heavily selling their shares.

Capital that goes to waste

Three main sources of capital for Iran’s economy include banking resources, foreign capital, and people’s savings. However, in the current situation, banking resources are facing a shortage of liquidity and bank balances are in deficit. The use of foreign capital is also eliminated due to US sanctions. In the meantime, idle resources and cash in the hands of the people have entered the intermediary market due to the lack of profitability of production and unreliable markets. This has led to these markets facing bubbles and crises as these resources are directed towards currency, real estate, cars, chicken, meat, dairy products, etc. The role and importance of investment in the process of growth and development of societies has been emphasized in most theories of economic growth and development. However, the key point is that the growth of investment is dependent on the factor of “investment security”. When making a decision to invest, the holder of capital needs two assurances: first, assurance of no harm to their capital, and second, assurance of profitability.

The investment environment in Iran has always been one of the factors that have led to the risk of capital. Some of these factors are fundamental and rooted in the culture or political structure of the country, while others are related to the economic approach of governments, external factors, and the performance of economic agents. From the perspective of economic experts, the factors that are effective in creating investment security include: emphasis on stability of laws and regulations, rule of law, respect for contracts, and non-interference in private sector investments, administrative reform, reduction of bureaucracy, and oversight of the performance of executive bodies in order to reduce financial corruption. Legal, hardware, and software preparation and the creation of a platform for free competition in the economy require a fundamental review of macro policies. Until there is a strong belief in the private sector, a free economy, and stable interaction with the global community with the approach of “creating investment security for investment growth”, we cannot hope for a better future than today. (6)

Buttocks

In a healthy economy, people’s savings are directed towards investment in productive sectors of the economy. It can be confidently said that the fastest and most practical way to exit the current crisis and achieve sustainable development is to choose an investment approach in the economy; in a way that all policies are aimed at attracting and supporting domestic and foreign private sector investment.

In the absence of necessary platforms for investment security, such as economic stability and integrated markets for goods and currency, the private sector takes action to speculate in markets such as foreign exchange, housing, and automobiles in order to maintain the purchasing power of their capital. The government’s monopoly in the markets for goods and currency, and the multi-tiered pricing system, provide the necessary grounds for some opportunistic individuals to take advantage and engage in fraudulent activities, known as “Ponzi schemes”, to deceive resources from the private sector. Since the victory of the revolution, due to the lack of necessary platforms for investment security, we have regularly witnessed such abuses.

Therefore, in order to create investment security and maintain the purchasing power of private sector assets, it is necessary to review the overall policies of the system and establish the foundations of a competitive and free economy in the country to prevent speculation and market manipulation and prevent individuals from taking advantage of opportunities.

Notes:

1- How many victims and the amount of fraud in Kourosh Company? Fararu website, 28 Bahman 1402.

2- Cyrus Company; the trap that deceived people, Tabnak website, 11 Esfand 1402.

3- Unreliable institutions, Law newspaper, 23 Khordad 1396.

4- The invisible hand deceiving consumers, Iran Economist, 15 Esfand 1402.

5- 21 suspects in the 2700 billion stock market embezzlement case, Khorasan newspaper, 31 Tir month 1402.

6- The remarkable impact of stabilization policy on improving investment security, November 20th, 1402.