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What is a Ponzi scheme and how to spot, avoid and report one.

What is a Ponzi scheme and is it a scam?

Ponzi schemes are one of the most famous, and arguably first, scam. At its heart, it’s a get rich quick, or pyramid scheme. The difficulty is, it can be hard to spot until it’s too late.

So, what are the tell-tale signs of a Ponzi scheme and what should you do if you’re a victim?

What is a Ponzi scheme?

Investors are promised high returns and, at first, it appears to be successful and profitable. This attracts new investors. The money from the new investors is then used to pay off the original investors and the cycle continues.

The company or investment never makes a real profit. It just redistributes the money and claims it’s profitable. So, as long as there is a stream of new investors, it at least appears as if everything is going well.

But, eventually, new investors dry up and the scheme collapses, generally just leaving the person at the top with all the money.

Is Ponzi scheme always a scam?

A Ponzi scheme is always a scam because it’s built on false returns on your investment.

The problem is, it’s very hard to know it’s a Ponzi scheme until it actually collapses.

How can I spot a Ponzi scheme?

No matter the scam, there are always some signs it might not be above board. And these are particularly true of Ponzi schemes.

The main things to look out for are:

  • Guaranteed high rates of return, but with minimal or no risk (there is no such thing).
  • High pressure selling techniques such as forcing you to make quick decisions.
  • Use of technical jargon which is designed to impress you.
  • Being asked to keep investments a secret, even from family members.

Fraudsters will want their company to look legitimate, so don’t be taken in just because they have a website, glossy brochures and flashy job titles.

You can also check the Financial Conduct Authority (FCA) register to see if the company contacting you is regulated.

The most important thing to remember is, if it sounds too good to be true, it probably is.

What is the origin of the Ponzi scheme?

Nobody is exactly sure what the first Ponzi scheme was as it essentially involves taking investors’ money and running.

There are newspaper reports of such scams in America during the 1880s and similar frauds were mentioned in books by Charles Dickens in the 1850s. But, it was made infamous by a man called Charles Ponzi.

Who was Charles Ponzi?

Charles Ponzi was born in Lugo, Italy, in 1882 and emigrated to America in 1903.

After several years in the US and Canada, including a stint in prison for forging a cheque, Ponzi stumbled across a loophole in the cost of postage stamps that would cement his name in the history books.

The price of postage stamps varied widely across the world. However, Ponzi discovered you could purchase what was known as an international reply coupon for a lot less. These could then be exchanged for much more valuable American postage stamps.

Technically speaking, this was not illegal, but it required money to get the idea off the ground and Ponzi went out looking for investors.

What Ponzi did, which made this illegal, was take money from new investors to pay existing investors.

Famous Ponzi schemes

Unfortunately, Ponzi schemes are far from uncommon.

The most famous was celebrity investor Bernie Madoff who ran the longest and largest scam in history. His trick was trading on his reputation and falsify trading reports to make it look like he was making a profit.

But some of the other Ponzi schemes run to the ridiculous. In the early 2000s, Yilishen Tianxi managed to convince over a million people in China to invest in his ‘ant farming’ business!

Sergey Mavrodi went to extreme lengths to cover up his Ponzi scheme. He tried to convince investors it was the government's fault they had lost their money, to the extent he ran for office in the Russian State parliament and won, getting himself immunity in the process. He was eventually imprisoned in 2003.

What to do if you’ve been contacted by a Ponzi scheme?

If you’ve been contacted by someone who you suspect is selling investments in a Ponzi scheme, contact Action Fraud straight away on 0300 500 5000.

What to do if you’ve been a victim of a Ponzi scheme?

If you’ve been investing money in a Ponzi scheme then you should:

  1. Break off all contact with the fraudsters and don’t send any more money.
  2. Contact your bank to let them know so they can flag any suspicious activity.
  3. Keep all written and electronic communications.
  4. Contact Action Fraud to report it.

You should also beware of follow-up scams, where fraudsters contact you claiming they can help you get your money back.

If I’ve been the victim of a Ponzi scheme, will I get my money back?

Under normal circumstance, if your identity has been stolen or your bank account hacked, then you will probably be able to get most of your money back, because it might not have been your fault.

The problem with recovering your money from a Ponzi scheme is you willingly handed over the money.

This is not to say you can’t get your money back, but the FCA suggest the best way to maximise your chances of getting at least some of your money back is to act quickly and seek professional legal advice.

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