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businessman hiding his face be careful of a Ponzi scheme

What Is A Ponzi Scheme?

It’s sad to say that, nowadays, there’s no end of financial scams to look out for. With living costs rising and wages not always keeping up, many of us are at risk of falling for get rich quick schemes which can leave us out of pocket. Common scams to look for include emails from strangers who promise to wire millions if you lend them money now or, as we’ll be looking at here, Ponzi schemes.

 

Ponzi schemes: what are they?

As with any scam like this, avoiding Ponzi schemes is about understanding what they are. And, to get a grip on that, it’s worth casting our minds back to 1903 America, where Italian-born Charles Ponzi was setting this scam in place. Ponzi was a known criminal who had already served time in prison for forgery when he came across the stamp-buying scheme which founded the Ponzi scheme as we know it today.

Charles Ponzi in 1920, while still working as a businessman in his office in Boston
Charles Ponzi in 1920, while still working as a businessman in his office in Boston

Ponzi’s original plan centered around exchanging cheap international reply coupons for much more expensive American stamps. This in itself was not illegal, but Ponzi funded his plan through investment. And, as the scheme continued, he began breaking the law by using investment money to pay for new investors who could get things off the ground. And, thus, the Ponzi scheme was born.

In short; schemes like these involve companies who claim substantial returns for anyone who signs up as an investor. They then use the money investors put in to pay for new investors who make the scheme look successful. It’s a case of money redistribution to make otherwise non-viable efforts look profitable. Sadly, schemes like these tend to dry up without any warning, leaving investors with nothing, while the scheme initiators leave with plenty of cash in their pockets. In the case of schemes which promise incredibly high rewards, this can leave investors facing significant losses.

 

How to spot a Ponzi scheme

Even when you know the ins and outs of Ponzi schemes, they can be difficult to spot. Scammers aren’t exactly open about what they’re doing, after all, and you may have no initial idea of the redistribution which is taking place behind closed doors. In fact, it’s not unusual for investors to have no real idea of what’s happening until the scheme has already collapsed and their money’s gone.

The good news is that most scams usually have some red flags if you know where to look for them, and Ponzi schemes like these tend to have more than most. Of course, checking the Financial Services Register is probably the best thing you can do when a company comes to you with investments which sound too good to be true. That will be able to tell you whether the Financial Conduct Authority regulates the company. It’s also well worth seeking financial advice before making any significant investment, scam or not.



 

Aside from that, warning signs that you’re facing a Ponzi scheme include –

  • Guaranteed high rates of return with minimal risk. The long and short of it is that there’s no such thing. Any legitimate financial company will warn you that there is never a sure return in the world of investment. Any company who claims otherwise aren’t being enitrely honest.
  • Pressure to make a decision quickly. Ponzi scheme organisers know that you’ll probably spot the holes if you go away and consider this investment. As such, they typically give you quick-fire deadlines which pressure you into immediate decisions. If an investment scheme is legitimate, the company behind it will likely encourage you to take as much time as you need.
  • Negative company reviews. While this isn’t always an exact science, it is worth checking the reviews of a company before handing over your cash. In some cases, disgruntled ex-investors will write negative reviews online and on social media. That said, remember that Ponzi schemes often don’t come to the fore until they collapse, so even a lack of negative reviews isn’t always endorsement.
  • Jargon which you struggle to translate. Companies should work to help you understand your investment, not work to confuse you.
  • Encouragement to keep investment a secret. This one doesn’t need much explanation. There should never be need to keep an investment you’re making quiet. If a company encourages you to do so, you can pretty much guarantee they’re scammers.
  • A reluctance to let you withdraw your money. When you invest money, you should be able to withdraw whenever you want to. But, of course, investors pulling their cash early could undo a scheme like this. As such, scammers will throw all manner of promises at you to keep your money where it is.

 

What to do if you’ve fallen for a Ponzi scheme?

As we’ve already mentioned, you sometimes won’t know a thing about schemes like these until it’s too late. If you do smell something fishy before making the mistake of investing, be sure to contact Action Fraud straight away on 0300 500 5000. If you’re worried that you’re already investing in a Ponzi scheme, make sure to –

  • Stop sending money straight away and refuse further contact
  • Inform your bank so that they can watch for suspicious activity
  • Collate any communications you had regarding the scam
  • Contact Action Fraud to report
  • Be wary of anyone who contacts asking for fees to help you ‘regain your money’

 

How to increase your chances of regaining lost money

With scams like these, getting your money back isn’t a cut and dry issue. You did, after all, willingly invest your cash. There was no identity theft or hacking in sight. This is especially the case if you failed to do adequate background checks into the company in question. That said, it isn’t unheard of for people to get at least some recompense for scams like these.

Your best bet at achieving this is to keep hold of all communications and seek professional legal help fast. Bear in mind, though, that scams like these are best avoided wherever possible, as total compensation is unlikely.