Protecting your finances: How to spot a Ponzi scheme

Fraudsters are everywhere and in this digital age, the public is continually reminded to look out for scams. If you were to believe the media, you would assume it is almost exclusively the elderly and vulnerable who are targeted by financial fraud. The truth, however, is that being scammed can happen to anyone. So how does one spot a Ponzi scheme?

What is a Ponzi scheme?

A Ponzi scheme is an investment scam where the intention is to separate investors from their money. It gets its name from Charles Ponzi, the architect of one such investment scam way back at the beginning of the twentieth century. He did not invent the idea, however, merely refined it. Since Ponzi’s time there has been a long line of unscrupulous people looking to take advantage of the public’s desire to make easy money.


Image by Steven Depolo

Perhaps the biggest scammer of them all was Bernie Madoff, whose scheme was discovered in 2008. His scam involved stocks and securities and he fraudulently separated his investors from around $64.8 billion of their money. It has been the largest Ponzi scheme to date. The scam had far-reaching effects and not just in financial terms. Many of the corporations involved issued lawsuits, while some individuals felt that suicide was the only way out of the situation. Madoff’s own family have suffered too. Madoff’s sons were subject to a trial by media, and even Andrew Madoff’s fiancé, Catherine Hooper, was thrust into the limelight. Hooper has now rebuilt her life since the crisis, founding a disaster recovery business. You can read more about her story in the article ‘Stand by your Madoff’.

How Ponzi schemes work

A Ponzi scheme is deceptively simple. The first step is for the fraudster to convince a few investors to put their money into the scheme. After an agreed period, the invested money plus the return is given to the investors who are pleased with the results. The fraudster then convinces the investors to re-invest, and perhaps to bring a few more investors on board. The cycle of invest and re-invest continues until one day the fraudster does not give the investors any money at all, breaks off all contact and runs off with all the money he has accumulated.

To avoid falling prey to a Ponzi scheme, it is vital that anyone thinking of investing does their due diligence and researches the salesperson offering the scheme as well as the company. Use the internet to obtain a photograph of the salesperson to check whether he is who he says he is. Contact the relevant regulatory board to determine whether any complaints or investigations have been conducted against the company or salesperson. Ask questions. Find out what the collateral will be, who the payments will be made out to and who will be handling the closing of the investment. If any of this information is obscured or difficult to come by, that may be a sign that the salesman has something to hide.

Research can only take a person so far when it comes to determining whether an investment is a Ponzi scheme or not, but perhaps the best determiner is the old adage: if it seems too good to be true, then it probably is.

About the author

Anees Saddiq

I love to share business and lifestyle content with all related communities. With a focus on content marketing and branding, I hope to inspire you to improve the performance of your online business. Follow me at Twitter @built4kill2004

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