Ponzi Schemes Exposed | The Truth Behind the Famous Investment Scams

Think of doubling your money in 90 days with investments that require no work. Well, it sounds too good to be true because it was.

Wait! Did you think about Ponzi schemes? Do you know who Charles Ponzi is?

Charles Ponzi was an Italian immigrant and a financial fraudster who became rich and infamous with his Ponzi scam in 1919. He claimed people could gain wealth quickly through International Reply Coupons (IRCs) arbitrage.

Ponzi promised very high returns to investors, and soon, millions of dollars were being invested by those looking to become rich as fast as possible.

There was a time when the financial world marveled at the financial genius of Charles Ponzi, the man who was in charge of one of the most successful business investments in America. He had millions of dollars at his disposal and crowds of people lined up, literally begging him to take their money.

Little did everyone know that Ponzi’s business was built on nothing but lies.

The whole thing was an outrageous scam, one which turned Ponzi into a very rich man but ruined the lives of thousands of innocent people.  Ponzi’s deception was so shocking and infamous that even now, a hundred years later, such financial scams still share his name – “The Ponzi Scheme.”

Now the Ponzi scheme is not solely associated with Charles’ financial frauds but every other fraudster utilizes this scheme to lure people into fake investments, promising high returns and quick profits.

Curious to read more about such scams, we have covered here what the Ponzi scheme is, how it works and what are its potential consequences.

Before exploring the Ponzi scheme, it’s essential to clarify the difference between the Ponzi scheme and legal investment.

What is a Ponzi Scheme?

The Ponzi scheme is an investment fraud in which the scammer pays early investors an amount taken from new customers and makes an artificial process to pay back. Scammers attract new investors by promising them that they will return a good amount with little or no risk.

This fake business requires no prominent advertisement because it usually spreads through word-of-mouth. New investors, after hearing good returns from previous investors, invest in this scheme in the blink of an eye.

However, the fake scheme opens up when the scammer has no funds to pay back to previous investors because he doesn’t have new investors.

Do you know Another illegal and similar scam that is related to the Ponzi scheme is the “pyramid scheme”? Curious to know about it too. Let’s compare both of these scams to understand better.

Ponzi Scheme vs. Pyramid Scheme – A Game of Deception

Ponzi and pyramid schemes depend on a continuous influx of new investors to continue their fraudulent operations. However, there are subtle differences in how they work:

So, a Ponzi scheme is a financial scam, but a pyramid scheme is multi-level direct marketing to generate revenue that has become fraudulent because it emphasizes recruitment over selling products.  Both of these schemes have no long-term scope and quickly collapse when the flow of new investors or new members dwindles.

Fact

In 2014 and 2015, a Ponzi scheme operated in China known as “Ezubao” caused an estimated ¥59.8 billion loss to investors.

How do Ponzi Schemes Work?

As we know, scammers take money from new investors to return to earlier investors to create an illusion of successful business.

For example, a scammer takes $1000 from one investor and promises him to return $1100 after a certain time period. In the meantime, he attracts more investors and takes double this amount so that he can quickly return to earlier investors. That’s how the Ponzi pyramid works:

Through this diagram, you can easily understand how the Ponzi scheme really works:

Role of SEC and FINRA in Preventing Ponzi Schemes

The Financial Industry Regulatory Authority (FINRA), a private or self-regulatory organization, was created in 2007. It has congressional authority because it can intervene quickly if investors file complaints or claim any suspected security fraud.

The U.S. Securities and Exchange Commission (SEC) was created many years ago with the Securities Exchange Act of 1934 to monitor and regulate FINRA. SEC is a federal government. agency that enforces and investigates any violation of federal securities laws, including the Ponzi scheme. SEC secures investors by promoting orderly, efficient, and fair markets. Not only this, but it also creates and implements rules to govern the security industry.

Both these agencies work in the US to secure investors and are quite similar to the FTC, Federal Trade Commission, which works to protect organizations and firms from deceptive tactics and unfair business practices.

At this point, one must be surprised at why people fall for such schemes, and why they continue to invest even with clear warning signs. This article has addressed all these concerns.

Discover the insight ahead!

How do Ponzi Scam Allure Investors?

Ponzi schemes are incredibly attractive to many people because scammers promise them risk-free and extraordinary returns. Investors easily get attracted to them due to the following main reasons:

Through Gaining Trust and Social Proof

Ponzi schemes are usually created by trusted influencers or charismatic leaders by using religious practices, anecdotes, and personal stories to allure investors. Most of these schemes rely on social proofs and testimonials from satisfied investors that create a sense of trustworthiness and legitimacy.

Creating Temptations of High Return

Ponzi schemes usually promise high return rates, so it’s obviously tempting for investors who want to double their income or have financial independence. By putting in minimal effort, they can effortlessly generate revenue.

Utilizing Psychological Factors

People want quick investment outcomes, and scammers benefit from this psychological factor. So, the promise of easy and quick wealth lures investors, and that’s why they ignore the signs or warnings of a Ponzi scheme.

Another factor is economic uncertainty; people are trapped because they want to become rich in no time, so they search for schemes that can give them financial independence and boost their confidence.

Creating Fear of Missing Out (FOMO)

Ponzi schemes create a sense of urgency by advertising that time is running out and that there will be fewer investment opportunities, which leads to fear of missing out. This sense of urgency pushes investors to make wrong decisions without conducting a due diligence process.

For all these reasons we are clear that the Ponzi scheme is quite attractive for investors but it results in heavy losses due to its risky or fraudulent nature.

Why not explore here which factors made them risky and why?

The Risks and Consequences of the Ponzi Scheme

Ponzi schemes lure investors by showing a high rate of return to their investors, and we know that these returns aren’t generated through any legal work. So, it’s very risky, and investors can face the inevitable consequences of this unsustainable model.

The Inevitability of Collapse

Scammers have a limited pool of investors because as the Ponzi scam grows, the chances of return become limited. So, scammers can’t fulfill their promise to return the promised amount of money, and they start to withdraw their funds.

The Financial Devastation for Investors

Investors lose their complete investment when the Ponzi scheme crashes and this financial loss leads them to emotional distress. Investors can even go into depression and anxiety because many of them have invested their retirement savings.

Legal Consequences for the Perpetrators

Investors face serious criminal charges such as money laundering, theft, and fraud, according to the severity of the offense, so perpetrators face severe allegations and fines.

4 Essential Steps to Avoid the Ponzi Scheme

Ponzi scams are created to deceive investors, so the following are the best ways for investors to secure themselves. Let’s check out them:

Be Suspicious about Unsolicited Offers

If someone is contacting you out of nowhere and inviting you to any event or seminar, then it’s a clear red flag because Ponzi scheme preparators usually target those who are at their retirement age or have enough savings.

Little or No Risk Plan

Properly investigate if someone is trying to sell you an investment scheme with no or little risk. Just like Bernie Madoff gained his customer’s trust by promising them to return 1.5% every month for the next 10 years.

Investigate the Seller’s Background

A Ponzi scam is built upon unregistered investments, so it’s better to completely investigate the seller’s background to secure your investment. Question them if they are registered and if they say that it’s registered. Confirm this from FINRA and will check the SEC’s EDGAR database and their market data.

Report Unlicensed Fraudsters

If you identify through any of the scammer’s actions that he is trying to deceive or trap you. Quickly file a report to the SEC or FINRA. By doing so, they will start an investigation, and you will be in safe hands.

Fact

In a recent case of SEC vs. Shaver, the scammer tried to create a Ponzi scheme through Bitcoin by promising a 7% weekly interest rate.

AML Watcher provides efficient AML screening solutions incorporating 100000+ sanction lists, watchlists, PEP data, adverse media screening, and international leak databases that help in detecting early warnings of any possible Ponzi fraud.

Investors and financial firms can completely investigate a third party or broker quickly with reliable outcomes. AML Watcher assures you to manage your investment risk by:

• Real-time screening that regularly updates data to ensure that individuals engaged in Ponzi schemes are flagged through sanctions, watchlists, and adverse media.
• Adverse Media Alerts detect mentions of individuals or companies in media linked to fraudulent activities, keeping you informed of potential risks.

PEP & High-Risk Monitoring ensure that you’re not doing business with possible scammers by screening politically exposed individuals and other high-risk clients.