The Vicious Web of Ponzi Schemes

"Double your money in 30 days." "A Once-in-a-lifetime investment opportunity." "No risk, only profit."

We have all heard these phrases from so-called "investment companies," promising quick and high returns with minimal investment. When you hear these words, think of a Ponzi scheme.

A Ponzi scheme is a form of scam where unsuspecting individuals are enticed into investing in an entity that does not exist. The fraudsters recruit by promising and guaranteeing life-altering opportunities while disguising themselves as an investment service company. However, the money is never really invested and instead ends up as profit for the fraudsters.

The scheme pays quick returns to the first investors from the money invested by the later investors to create the illusion of a booming business. The fraud continues until new investors come in or until enough victims ask for their money back, and the fraudsters profit from whatever money is left.

The term "Ponzi scheme" was coined in 1920 after an Italian-American businessman, Charles Ponzi, who gained notoriety for his investment fraud operation, which cost his clients an estimated $20 million.

Ponzi schemes are often conflated with pyramid schemes, as both are 'get rich quick' scams fuelled by fraudulent investments. However, there are fundamental differences between the two.

Ponzi and Pyramid Schemes

Ponzi schemes are presented as investment management services where the returns they get are from genuine investments. The investors are not required to recruit people to receive payments but only to entrust the service with their money. Victims often reinvest their alleged profits, which tends to delay the collapse of the fraudulent system.

The pyramid scheme works in the business sector and relies on network marketing. Most pyramid schemes do not offer a real product and are maintained solely by the money raised by the recruitment of new members.

Pyramid schemes are illegal in most countries, but they can be hard to detect as they are presented as many different things, such as investment clubs and often as legitimate multi-level marketing companies that sell a product or service but are used to hide the underlying fraud.

So, what is the "multi-level marketing business" that pyramid schemes are often disguised as?

Pyramid Schemes and Multi-level Marketing

The difference between pyramid schemes and legitimate multi-level marketing businesses can be hazy. Multi-level marketing companies primarily earn compensation from selling a particular product or service. While pyramid schemes primarily compensate members for the recruitment of new sellers.

Many multi-level marketing companies make it impossible for members to profit purely through sales, and many pyramid schemes disguise themselves as legal multi-level marketing businesses using a product or service to hide the pay and recruit structure. A notable example of a legitimate multi-level marketing company is Amway, which started in the United States and has branched out all over the world.

We should keep in mind that a legitimate multi-level marketing business should not require members to pay for the opportunity to sell a product or service.

How can we protect ourselves?

Some basic research should be conducted before investing in anything. A few things to keep in mind:

Always be sceptical: If it sounds too good to be true, it probably is. If it promises quick or high returns with minimal investment, it is probably a scam. Be wary of directives like "Act now or miss a once-in-a-lifetime opportunity."

Do not blindly trust; verify: A reputable financial or brokerage company will be registered and monitored by governing bodies and should be legally registered.

Before investing, understand the investment: You should always understand what you are investing in. You should not invest in something that you do not understand and cannot fully comprehend.

Report to the concerned authority: Whenever an investor comes across a Ponzi or Pyramid scheme, it is important to report this, as it will help future investors.

Ponzi schemes can be really detrimental to the economy. The largest Ponzi investment fraud in history was orchestrated by Bernie Madoff. He was a well-known NASDAQ chairman and founder of the Wall Street firm "Bernard L. Madoff Investment Securities LLC." He coerced investors into his investment firm and robbed billions from wealthy individuals as well as charitable organisations, publicly traded banks, and even universities. The scheme resulted in a loss of around $20 billion.

Bernie Madoff and his Ponzi scheme are often tied to the 2008 economic recession, which led to a huge part of the population losing their money, homes, and livelihoods. Being more vigilant about our investments and becoming financially educated is the only way to protect ourselves from big financial losses.

There is no such thing as a truly risk-free investment. Even the money we save in our bank has an inherent risk attached to it. Some people think that even our entire financial system is a Ponzi scheme because it needs perpetual growth, but that is a topic for another article.