Investing your hard-earned money in a financial market allows you to not only make substantial amounts of money but also offers tax benefits. Thus, money saved is money earned. Governments around the world always encourage their citizens to invest and trade in financial markets.
Unfortunately, many do not have adequate financial knowledge and end up becoming victims of online financial scams. Many are unaware of the difference between a Ponzi scheme vs pyramid scheme.
What is a Ponzi scheme?
A particular kind of criminal activity that was named after Charles Ponzi in 1920 has been referred to as a Ponzi scheme. The entire fraud runs on the premise of paying off old investors through the collection of money from new investors. Thus, scammers have to ensure that more and more recruits join this scheme to keep the fraud afloat. Once the supply of recruits dries up, the scheme collapses. In the end, only the scammers benefit, while the rest lose their financial assets.
In this age of the internet, scammers have adapted this scheme to their advantage. As they are well aware that not everyone is financially savvy, targeting individuals is easy. What’s more alarming is that you never see the faces of scammers who perpetrate these online fraudulent activities. They stay in the comforts of home while targeting many around the world.
As per Ponzitracker.com, in 2023, 66 Ponzi frauds were discovered. Thus, on average, every five days later, a new scam is uncovered. Compared to 2021 and 2022, where 34 and 58 schemes were uncovered, respectively, these numbers are bound to increase in the coming years. These are the official data that have been reported, and estimates are much higher than these as many refrain from reporting due to guilt and shame.
The emergence of Ponzi schemes
Charles Ponzi was a charlatan who thought that his foolproof plan could make him rich within a short span of time. In 1920, he attracted and enticed several victims through fake promises based on a postal stamp speculation scheme. He had promised that his so-called “investors” could double their money very quickly.
He also stated that the scheme was a “no risk, high returns” scheme. Initially, many invested and were confident that their money would be safe. However, as more and more investors joined, Charles found it extremely difficult to maintain his scheme. He was transiting from one place to another, and his entire time was consumed by paying off old customers with the money from new ones.
Finally, his charade was exposed, which landed him in prison.
Although Charles Ponzi was not the first one to come up with this scheme, it was Adele Spitzeder from Germany and Sarah Howe from the United States. However, the sheer amount of money invested by the investors in the scam made Charles Ponzi famous, thus the name Ponzi Fraud.
To date, scammers have adopted similar strategies to carry out their schemes.
Workings of Ponzi Scheme
Scammers are well aware that a person can only earn finite money through jobs. Everybody wants to upgrade their lifestyle, and it is not a crime. However, the government allows individuals to make money by investing in financial markets.
Since not everyone is careful with their money or, rather, lacks the necessary awareness regarding handling finances, scammers find it easy to fool their victims into their web of lies. Not everyone is born with a silver spoon, and many are not careful with their financial affairs. Such a combination makes them an easy target for scammers, who push them further into a chaotic financial situation. Thus, those who fall victim to such scams may take years to straighten out their credit score.
Even though in this digital age, everyone practically owns a smartphone, many still do not understand what is a Ponzi scheme and eventually fall victim to one such scam.
Initially, when the potential victim invests in the scheme, they invest a bit and earn money as they have been promised. They make investments in increasing amounts as they gain confidence in the return on their investment. As the supply of recruits dries up, there is no new money left to pay off old investors. And when the entire operation collapses, the scammers are the ones to benefit, leaving the potential victims with nothing.
Many times, these potential victims do not have adequate money with them to invest, so these scammers will ask them to invest a little. These charlatans will pay as promised to their potential victims. These con artists will encourage their victims by providing them with the money that was promised for their investment.
Once confidence is gained, these con artists will recommend that their victims invest money from their emergency fund, such as a mortgage fund, a college fund, and so forth. They will also advise them to apply for a personal loan and even take money out of their retirement plan.
Recruiting someone for these fraudulent activities is easy, as many wish to upgrade their lifestyles. Someone with a bad credit score can also fall victim to such schemes. These con artists will mimic a financial advisor and convince their potential victims with heavy financial jargon. Convinced that they are interacting with someone who has expertise in the field of finance, these victims fall easy prey.
Potential victims of scams are often lured in by the guarantee of monetary rewards for participating in the plan. The entire focus is on making money, not how the business model would work. They will also incentivize their potential victims through referrals. These victims are promised more if they were to provide referrals, and upon joining, they would get extra incentives.
The main intention behind scammers asking for referrals and providing monetary benefits to potential victims is to attract more people to the scheme; the more, the merrier. Thus, as the web of lies spreads, more potential victims fall for it.
When these victims recruit their near and dear ones, they not only endanger their financial security but also their relationships. When the scam is revealed, many are not only pushed into financial disaster, but the relationship between those they recruit also turns sour.
Ponzi scheme vs. Pyramid scheme
Although both schemes are almost identical in providing fake transaction receipts for the schemes that seem to make a profit, they differ in the way they operate.
The main difference between the two is that in a Ponzi scheme, the potential victim may earn a commission on a referral, while in a pyramid scheme, a continuous commission is assured on the performance of their recruits.
There are other differences between the Ponzi scheme vs pyramids; in the former scheme, potential victims are encouraged to invest more and more. These business models involve investments in unregistered services or businesses. Scammers will frequently use words like “no downside,” “guaranteed consistent returns on investments,” “exclusive investment opportunities,” and so forth.
In a pyramid scheme, the entire business operation revolves around the recruitment process. Potential customers earn money through referrals. To conceal the scam, these scammers will offer starter kits, inventory, or even training kits and make them mandatory for being a part of the scheme. They frequently use words like “building your downline and upline,” “unlimited earning potential,” “multi-level marketing,” and so forth.
Examples of a Ponzi scheme?
If there is a debate about whether there are more Ponzi scheme than pyramids, then it is hard to tell since the number of such scams reported is small compared to the actual number committed. The internet has opened our eyes, and within a fraction of a seconds, one can get to know various scams perpetrated.
In December of 2008, Bernie Madoff was convicted of pulling off a $65 billion Ponzi scheme as well as a pyramid scheme. He had projected himself as a successful financial advisor and provided fake portfolio progress. The scam would have continued had it not been for the 2008 global financial crisis.
As the world reeled towards a global recession, many Madoff investors started to demand money by selling off their portfolios. Initially, he managed to pay a few, but the number of investors was huge, and the money they invested was equally huge.
There is a huge buzz regarding cryptocurrency, a new asset class. However, due to the nature of these cryptos, it is easier to cheat new investors into a scam.
Although these are new asset classes, they have been constant victims of cyberattacks perpetrated by scammers and hackers. The recent collapse of FTX, a crypto exchange, is one such target for the Ponzie scheme.
In 2022, FTX, a crypto exchange, filed for bankruptcy for mishandling clients’ money. The former CEO, Sam Bankman Fried, managed to scam the company’s client to the tune of $10 billion. When the news came that FTX was running a Ponzi scheme in an interview, every investor tried to remove their cryptos from the FTX exchange. Due to the sheer number of investors and the amount of money left by them on the exchange, Some managed to get their cryptos out, but most couldn’t. Thus, in the end, the exchange filed for Chapter 11 bankruptcy.
Tips to Identify a Ponzi Fraud
What is a Ponzi scheme? How to spot one is easy if you keep your mind open and process it when you find a business opportunity. Below is the checklist that will tell you if you are dealing with a scammer or a genuine business opportunity.
Fake Promise of “little or no risk”
Every business opportunity has some risk attached to it, whether big or small. If the returns on investments are high, then there is a huge risk, and vice versa. No business in the world is free from risk. If someone says they have a low-risk, high-return business opportunity, then it is a scam.
Consistent Returns
No business offers huge, consistent returns on investments. There are favorable as well as unfavorable period cycles that each business has to undergo. If someone promises fixed, huge returns, then it is a scam.
Overcomplicated or Secretive Investment Strategies
If the business model focuses more on how much you will make money and has little or no process for how the money will be invested or how the business model works, you can be sure it’s a scam. If someone says that it’s a trade secret and refrains from indulging in how the business model works, then it is not worth your time and effort.
Problems With The Paperworks
If any account you receive is riddled with inconsistencies and errors, then you can be sure it’s a scam.
Difficulty in Accessing Money or Recommend to Reinvest
If you face difficulty accessing your money from the scheme or the financial advisor recommends you invest in the scheme for more future growth potential, then you can be sure it’s a scam.
Reporting a Ponzie
If you find yourself a victim of such a scam, then you must take quick action. First, make a detailed note from your first interaction with the scam until the time you realize you have fallen victim. Ensure that you have all the correspondence and screenshots provided by the scammer during the scam.
File a complaint with the FBI’s Internet Crime Complaint Center after visiting your local law enforcement agency and providing them with all the details.
Contact the Securities and Exchange Commission and file a complaint with them.
Approach your bank and tell them about the fraud; also, stop all the payments to the scammer’s account. Contact your credit bureau agency and ask them to freeze all your accounts until the investigation is completed. Ask them for your free annual credit report, and be on the lookout for suspicious activities. Inform immediately if you come across any of them.
You can also seek professional help by contacting our financial asset recovery specialist and asking them about your case. They will provide you with the most optimistic solutions regarding the recovery of your stolen assets.
Final Thoughts
Always keep an open mind and trust your gut. If your gut says that it’s a scam, there’s no need to entertain the business opportunity further.
Whether it’s fiat currency or crypto, it’s your hard-earned money. Don’t feel disheartened and blame yourself; instead, you need to take action. Contact us, and our financial asset recovery specialist can help you out.
The more time you spend thinking smaller, the smaller the chances of recovering your lost wealth. Contact us now!
