Efforts to achieve financial inclusion for the poor will never succeed until regulators better monitor and control financial markets, and take action to prevent fraud that preys on the poor and desperate.

A 2010 survey found that Kenyans had lost more than US$30 million to pyramid schemes. This loss not only harms poor people, but also diverts funds which could spur economic growth.

The situation is equally dire in neighboring Uganda, where the Global Alliance for Legal Aid, with pro bono legal support from Simmons & Simmons law firm, is representing more than 3,000 victims of a pyramid scheme, innocuously named Caring for Orphans, Widows and the Elderly (COWE). The victims lost millions of dollars to this scheme.

In Uganda, there are thousands of unregulated financial services providers. Semi-literate consumers are on their own to determine whether a financial services provider is legitimate or a criminal. Even legitimate financial sector gatekeepers played hot potato with the COWE pyramid scheme, to the detriment of thousands of poor people.

The Bank of Uganda and the Ministry of Internal Affairs were also aware that COWE was taking deposits from the public in violation of the Financial Institutions and the Micro Finance Deposit-Taking Institutions Acts.

COWE operated for years, collapsing in 2007. After its collapse, Ugandan parliamentarians questioned the source of COWE’s funds, but didn’t investigate further.

Victims attempted a collective legal action, which was filed and shelved. Some eight years later, no one affiliated with COWE has been punished for this crime. Quite possibly they are still plying their trade.

The victims of the fraud, however, continue to suffer. There have been at least 11 suicides connected to the case. Divorce became common, and hypertension and diabetes increased significantly amongst the victims.

When the scheme collapsed, victims lost their life savings, and many are still mired in debt, in connection with loans they took out to invest in COWE. By law in Uganda, if a debtor defaults, their creditors can send them to jail. I interviewed one mother of three incarcerated in the border town of Kabale due to her inability to repay COWE-related loans; she has at least six loans outstanding.

The COWE fraudsters were skilled con artists. They preyed on the desperate and they imitated microfinance operations, pretending to have foreign donors who wanted to alleviate Ugandan poverty. They also hired from within the community; often retaining preachers’ wives and other respected members of the community to help attract new victims. These low-level staff were not aware of COWE’s criminal nature.

COWE took deposits and promised high returns. An investment of 65,000 Ugandan shillings would pay 100,000 shillings (about US$28) at the end of the month. The first repayment was generally made as promised, convincing victims to invest more; to tell their friends and family; and worse, to seek out loans from banks, microfinance institutions, savings and credit co-operatives, and money lenders.

Other financial institutions were very willing to issue loans, rarely inquiring about why the borrower needed the money. Their profits also soared thanks to COWE.

In fact, a leading Ugandan microfinance institution came up often in our interviews with COWE victims. Many victims received loans from this institution to invest in COWE, and its profits rose from 30 percent to 70 percent in 2007. COWE’s own directors even banked there.

Ugandan lenders are continuing to refinance the victims’ debts, digging the hole deeper. Other lenders have elected to jail defaulting COWE victims.

For eight years, the financial institutions have continued to profit from the COWE fraud. It is time for the regulators to intervene and help the victims.

Existing loans related to the COWE fraud should be forgiven and a victims compensation fund should be established. This initiative could be funded in part by the Ugandan deposit protection scheme.

The international community should also support debt forgiveness for the victims – recognizing that there can’t be financial inclusion without consumer protection and market regulation.