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Ponzi Fraud & Schemes

Getting To Know

How does Ponzi fraud work?

Ponzi fraud, also known as a Ponzi scheme, is a highly fraudulent type of investment and trading scam which promises investors high rates of return for very little risk. This type of scheme generates returns for early investors, with money then taken from investors later on. Ponzi fraud works similarly to a pyramid scheme, in that they are both based on using new investor funds to pay back early investors. 

In the same way that pyramid schemes fizzle out, Ponzi fraud schemes always dry up when new investors begin to slow and there isn’t enough money to be shared around, it is at this point that most Ponzi fraud schemes begin to unravel and investors see the truth behind their investments. 

With Ponzi fraud, investors are typically promised large amounts of money if they choose to invest, with the attraction of generating a significant return on their investment. At first, soon after they make the investment, it appears as though the scheme is working. This initial success is used to attract new investors and then their investment fund is used to pay back the early investors and so the cycle continues. 

Ponzi schemes are a scam as the money that is being “invested” is essentially just being repurposed, and there are never any profits made for the company. Funds are just redistributed amidst claims that everything is going well. But, the issue comes when investors begin to stop investing their money and the Ponzi fraud scheme collapses, often leaving the person at the top with all the funds with them very regularly disappearing, without paying people back.


How to spot a Ponzi fraud scheme

How to spot a Ponzi fraud scheme+

Ponzi fraud schemes are always a scam, as the very scheme is built on the idea of making a return, which never then materialises. Ponzi fraud schemes can be hard to spot, with many investors not realising what has happened until the company goes bust and then they don’t get their return. 

There are some warning signs of Ponzi fraud schemes, including:

  • You’re told that you’ll get a guaranteed return, with little to no risk involved. With genuine investment opportunities, any potential risk of losing money is explained. 
  • You feel pressured into making quick decisions which you might not be comfortable with. 
  • You may find negative reviews online, or complaints on their social pages. 
  • The terms they use sound like jargon and they confuse you with complicated terms. 
  • You’re not sure how the scheme works and the investors involved are unwilling to tell you more.
  • There are issues with receiving paperwork or official documents. 
  • If you request to cash out, you are given a list of reasons why you should keep your money invested. 

If you are ever in doubt about a trade, then you can always check the Financial Services Register to see if the company is regulated by the Financial Conduct Authority (FCA), or feel free to contact us and we can provide you with confidential advice. 

What’s the difference between a Ponzi scheme and a pyramid scheme?+

Ponzi fraud schemes attract investors with the promise of significant future returns. Ponzi fraud scheme operators can only maintain the front of the scheme being successful if new investors are continually brought into the scheme.

Pyramid schemes recruit people and use incentives in order to encourage them to bring along other investors. Usually, pyramid schemes require an initial upfront investment of a few hundred pounds and then members are required to sell products and hit sales targets with the promise of earning higher commissions or prizes to incentivise people to sell more.

Usually, pyramid schemes are “managed” by people who claim to have previously started off as an investor and have worked their way up, earning large amounts of commission as a way of encouraging people to invest. In reality, members within pyramid schemes will only earn a small portion of the profits they make and find that the managers are intense and pushy. Although similar to a Ponzi fraud scheme in that investments are required to get started, investors in pyramid schemes are usually required to continue making sales in an effort to recoup their investment fee and make money.

Can a Ponzi scheme ever be successful?+

Ultimately, all pyramid schemes and Ponzi schemes will collapse. Whilst they can, and often do, run successfully for a short period of time, they will eventually run out of money. Ponzi fraud schemes can only ever be successful in the short term if the inflows and outflows of cash are well-managed and new investors are continually brought in.

However, at some point, the creators of the scheme will run out of people to recruit into investing in the scheme and this is where it all starts to unravel. It is at this point that many of the investors get an idea of what is really going on and begin to worry about their funds.

Further Information

Frequently asked questions

01.Where did Ponzi fraud originate?+

The term “Ponzi scheme” was named after scammer Charles Ponzi back in 1920. Charles Ponzi’s original scheme was targeted towards the US postal service in 1919 which, at the time, had developed international coupons which allowed senders to pre-pay for postage and include this within their written correspondence. The recipient would take a coupon to their local post office and then exchange it for the priority airmail postage stamps that were needed in order to send a reply. This became known as arbitrage, which was not an illegal practice, but Charles Ponzi became greedy and soon looked to expand on his efforts. 

He headed the company, Securities Exchange Company, where he promised returns of 50% within 45 days and 100% in 90 days. As a result of his stamp scheme’s success, more and more investors became interested. But, instead of investing the money, Ponzi just redistributed it amongst the investors, telling them that they had made a profit. 

This lasted until 1920 when The Boston Post started investigating Ponzi’s company and, as a result of this, Ponzi was arrested and charged with mail fraud, later sentenced to five years in prison. The story of Ponzi fraud is an interesting one and, although Charles Ponzi was caught and charged, it has not stopped scammers from attempting similar schemes over the years. 

02.Why are Ponzi schemes so well known?+

Ponzi fraud schemes have been around for well over a hundred years and that means, unfortunately, there have been many victims of Ponzi scams in that time. There are some famous cases, such as Charles Ponzi, who the scheme was named after, and Bernie Madoff who executed the largest Ponzi scheme in history. The scheme was also used by the “Wolf of Wall Street” Jordan Belfort, with his story becoming well known in recent years as a result of the movie, alongside other scams such as Pump and Dump schemes and Boiler Room fraud.

Even though Ponzi fraud schemes have been around for such a long time, this doesn’t make them any easier to identify. It’s hard for investors to realise that they have fallen victim to a Ponzi scheme until after its demise. Although Ponzi fraud schemes are more well-known now, this doesn’t mean that fewer people are getting involved with the scheme, it is just getting harder for them to spot the signs.

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We understand that being the victim of a ponzi scheme can be tough to handle, but we hope that our support, action and guidance can enable you to recover lost funds and regain a sense of confidence and security in making trades and investments online.


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