Ponzi Scheme: What Is This Form Of Fraud (and How To Detect It)
We all know, even if only by hearsay, some investment proposal that promised a great return under a dubious methodology.
It was surely a case of ponzi scheme We are going to discover what exactly this type of scam consists of, what it owes its name to and some of the best-known cases in which this system has been applied, with a promise that is impossible to keep.
The Ponzi scheme is a type of fraud based on a pyramid type investment. This implies that each person who joins the system must recruit new members so that the methodology continues to work Obviously, at each level this becomes more complicated, since the progression of people needed for each jump makes it practically impossible to complete at a certain point, so the system collapses.
In the case of the Ponzi scheme, what the scammer proposes to the first participants is that they deposit an amount of money and in exchange he will pay them another smaller amount month after month, but which in total will be greater than the initial investment.
But it does not end there, as we already anticipated, being a pyramidal system it also requires that participants look for new ones. They will also see their investment recovered whenever they find new referrals, therefore creating an endless system What is the obvious problem here? That the money is not being invested anywhere, it is simply redistributed, towards the top of the pyramid, where the scammer ultimately finds himself. As long as participants continue to enter, you can use that money to pay the payments you promised.
However, When it is no longer possible for new referrals to join the Ponzi scheme, there will be no way to give the benefits that had been guaranteed at first, since the amount of money is exactly the same as at the beginning, it has not been invested in any type of activity that has made the amount grow. This will cause the pyramid to collapse and most of the lower levels will lose their money.
The Ponzi scheme Carlo Ponzi, an expert fraudster known for his crimes, takes his name and who developed the system that concerns us here in 1920. Ponzi was an immigrant who had recently arrived in the United States and had low resources, but with a very alert mind and few scruples. He soon realized that he could do a big business, selling postal coupons that, supposedly, were purchased more expensively in the US than in other countries.
He began to look for investors for his business, whom he paid punctually, so the rumor quickly spread and in a matter of months there was a real hysteria of people wanting to join the Ponzi scheme, even going so far as to mortgage their houses for it. Of course, Ponzi did not buy or sell coupons, he simply paid investors, knowing that this trust was generating many more participants.
In less than a year, Carlo Ponzi had become rich, living a life of luxury and even taking control of a small bank. However, official organizations followed him closely and finally his company was intervened. But Ponzi would still have time for one last maneuver, paying the investments to everyone who claimed it This restored his confidence and thus gained the support of the people.
But it was evident that the system could not succeed and eventually fell into bankruptcy, causing most investors to lose all their money. He went to prison, but managed to post bail and was finally deported to Italy, his native country, where some people even received him with the honors of a philanthropist.
Warning signs that help recognize a Ponzi scheme
The danger of the Ponzi scheme is that it involves a scam that can be very attractive to some people with very basic financial knowledge , who would not realize the risk that the investment would entail. That is why we are now going to see what the most important indicators are to detect this type of scam.
Probably the main characteristic of a Ponzi scheme scam, and precisely what makes it so succulent in the eyes of the unwary, is that It proposes an a priori very low investment compared to the return that it will theoretically generate, and it will also do so in a short period of time Little investment, a lot of profit and all this in record time. Who wouldn’t want to make an investment like that?
The problem is that the financial world is much more complex than this. If an investment promises a great profit in such a short time, it either carries a very high risk, or it is a scam, as is this case.
2. Regularity in performance
Another red light that should make potential investors think twice are promises about very specific performance on a very regular basis. Any legal investment is subject to multiple market variables that mean they are not always exactly the same and that may be modified in different periods.
This indicator is especially important if, in addition to this regularity, a very high return is promised, as we saw in the previous point. In that case, it is better to stay away from the wonderful product they are offering us.
3. Lack of records
On the other hand, When it comes to investments that involve a Ponzi scheme, these do not respond to any type of official organization or registry which should already make the investor suspicious about the reliability of this operation.
Of course, no scam will have the guarantee of a prestigious organization backing it, so if a person decides to invest their money in a fraudulent system like this, they will not be able to check in any index what state the operation is in.
4. There are no sales licenses
Just as there are no records to prove the investments (they are not stocks that one can check on the stock market), There are also no licenses to sell the product of the Ponzi scheme How could there be a license to scam?
Therefore, if the investor asks the seller for official accreditations and the seller is not able to provide said documents, this is another sign that indicates that the product is most likely not trustworthy.
Ponzi scheme operations move in dark terrain, outside official channels. This makes the information conspicuous by its absence. The scammer always gives vague information, explains the operation in passing or does it in a totally incomprehensible way You can’t explain it in great detail because if you did, a slightly alert investor would realize that something is wrong.
If the information is not abundant, is not absolutely clear and the promoter of the idea does not respond in an understandable way to any type of doubt about it, we must turn on another of the red lights and abandon our idea of ​​investing in this type of product, because the chances of it being a scam will just increase considerably.
6. Lack of documentation
If we saw that there is hardly any information, much less will there be documentation about the operations. If the investor asks to check the papers and documents, he will surely always meet with all kinds of excuses that will ultimately prevent you from checking the reliability of the investment
The objective is clear, you cannot let the investor verify that in reality what he was promised would be done with his money is not being done. Another clear indicator that this is a Ponzi scheme and therefore, without a doubt, a scam.
7. Delays in payments
An investor has a single objective: to receive a profit for the money contributed. The problem is that there are no benefits in a scam. Actually there are, but obviously they are for the scammer, not the investor. So the last and surely the clearest sign that will alert us to the type of fraudulent business we are facing is the problem receiving payment.
The scammer will allege a whole series of problems and incidents to try to delay the payment of benefits for as long as possible In some cases, the investor will receive it, but the further down the pyramid you go, the more likely it is that the Ponzi scheme will collapse before the investor sees a cent.
