Ponzi Schemes

READ ARTICLES FROM 2016 INTERNATIONAL FRAUD AWARNESS WEEK

A Ponzi scheme is fraudulent business operation that promises investors high returns on investment with little risk. Projected returns in excess of 50% are sometimes offered to entice one to invest. In return, investors are led to believe their money will be invested in a legitimate business operation and they will receive regular cash returns on their investment. In reality, their money goes to earlier investors, and their returns come from funds collected from new investors. The scheme is based upon the ability to attract new investors because without these investments, there would be an inability to pay existing investors.

The first Ponzi scheme was orchestrated by an Italian immigrant named Charles Ponzi in 1919. At the time, it was typical for a government to allow individuals to redeem postal stamps for local currency. Ponzi intended to capitalize on this system by purchasing postal stamps from a foreign country and holding them until the currency’s value increased. Friends and family of Ponzi joined this venture by providing the necessary money to invest in the operation. Ponzi promised a 10% return each month, which created buzz for his venture because banks were only offering a 5% return per year. Ponzi was entrusted with approximately $15 million dollars from investors. He used ‘new’ money to provide fake returns to ‘old’ investors. When it was discovered that Ponzi was becoming bankrupt, investors demanded their money back and Ponzi’s scheme was finally uncovered. He was unable to return approximately $4 million and he was convicted for his crimes. Ponzi pleaded guilty to mail fraud and spent time in federal and state prison before he was deported to Italy.

A key aspect for a Ponzi scheme to succeed is the promise of high returns with minimal risk. These individuals need a way to draw attention to the scheme so they develop and provide individuals with unheard of profits. Many investors tend to question the high rates of return and the orchestrator of the plan must have a believable story. This story must provide investors with something reasonable that they think they are investing in. This can range from anything involving banks to mortgages to international manufacturing companies. The key to making this story believable is the use of diverse, complex, and unique situations.

Once an investor has been drawn into a scheme, the individual conducting the operation must work to gain investor trust and conceal the truth for as long as possible. Once the trust of investors has been fully gained, the orchestrator must meet this trust with the promised payments. These payments must be made on time in order to verify the initial story and not create cause for concern. This keeps investors happy and allows them to not question the operation because they are receiving returns on their investments.

Because the money received from investors is not actually being invested but it is rather going to pay the supposed returns of other investors, the operation collapses when there is a lack of new investors. This cycle must be sustained in order for the individual’s work to go unnoticed by investors.  This is why it is so important to attract new investors with the high rate of return with low risk and with believable yet attractive stories.

There are countless examples of Ponzi schemes occurring around the world each year, but the most recent and shocking scheme was discovered in 2008 and involved prominent businessman Bernie Madoff. Madoff was able to convince affluent business people and even firms to invest in his strategy of “absolute returns.” Individuals trusted him and did not question his methods even though he was very secretive about what he was doing with their money. An important element to note is how investors saw it as a privilege to be able to trust Madoff with their money. It has been said that individuals were asking his current investors to pull strings for them to be able to give Madoff their money. Madoff’s operation was discovered when he was unable to keep up with investors requesting repayment, just like how every other Ponzi scheme is brought crumbling down. Madoff’s investors ultimately lost approximately $20 billion throughout the duration of his scheme.

Between the years 2008 through 2013, the average size Ponzi scheme involved approximately $98 million. Of the schemes uncovered since 2008, over 400 prison sentences, totaling nearly 5,000 years, have been delivered to the perpetrators of these schemes. If you think you may be a victim of a Ponzi scheme you should contact law enforcement, legal counsel and a forensic accountant.

FRAUD WEEK ARTICLES

• Preventative and Detective Fraud Controls in Accounting Software
• Fraud in the Workplace
• Do You Know Your Employee
• Important Considerations when Conducting an Effective Fraud Risk Assessment
• Expense Reimbursement Fraud
• Recognizing Vendor Fraud
• Occupational Fraud Prevention in Construction
• Excess Benefit Transactions and Their Impact on Not-for-Profit
• Health Care Fraud 
• Ponzi Schemes
• Occupational Fraud and Abuse Statistics