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What is a 'Ponzi' scheme?

Named after Charles Ponzi, who became notorious for using the technique in the 1920s, a Ponzi schemes require an initial investment for the promise above average returns.

They often use vague verbal guises such as "hedge futures trading", "high-yield investment programs”, “FX derivatives” or "offshore funds" to describe their income strategy.

It is common for the operator to take advantage of a lack of investor knowledge or competence, or sometimes claim to use a proprietary, secret investment strategy to avoid giving information about the scheme.

The basic premise of a Ponzi scheme is "To rob Peter to pay Paul".

Initially, the operator pays high returns to attract new investors and entice current investors to invest more money. When other investors begin to participate, a cascade effect begins. The schemer pays a "return" to earlier investors from the investments of new participants, rather than from genuine profits.

The returns repaid are only a small portion of the capital paid in to the scheme, and as long as new investors contribute funds, and most of the investors do not demand full repayment or access to the non-existent assets they are purported to own, the scheme will run.

Red Flags for Ponzi Schemes:

  • High investment returns with little or no risk.

  • Overly consistent returns.

  • Investment values tend to go up and down over time, especially those offering potentially high returns.

  • Unregistered investments, sellers or intermediaries

  • Secretive or complex ‘proprietary’ strategies.

  • Issues with paperwork.

  • Difficulty receiving payments or refunds