The ponzi schemes they are fraudulent investment operations that continue to claim victims despite warnings about their consequences.
People continue to fall for this type of scam because of promise to get easy money in large amounts without much effort. They are also easy prey for scammers for misinformation or ignorance about how finances work.
The operation of Ponzi schemes has the following characteristics:
- The scammer, a natural or legal person, invites people to make money investments by offering them a high profitability.
- There is no investment or business. Simply, the same money that clients deposit is used to pay their own interest or the interest of new clients.
- New investors are attracted as the scammer honors his commitment to pay high interest on the money invested.
- As more people join, Ponzi schemes take the shape of a pyramid, name by which these operations are also known. The new clients, closer to the base, contribute the money to pay the profits of the investors who came before. At the top is the scammer.
- Ponzi schemes collapse when money stops coming in, when new customers are no longer attracted, a crisis occurs or the operation is reported.
- In many cases the scammer disappears, runs away with the investors’ money.
- Customers lose their invested money; the most fortunate could, if they intervene in justice, recover at least a part.
Among the favorite victims of scammers are those who for some reason are isolated from the financial system. For example, illegal immigrants. They are more vulnerable because their status conditions them when reporting.
Ponzi, the great scammer
Ponzi schemes get their name from Carlo Ponzi, who emigrated from his native Italy to the United States at the beginning of the last century. From a very young age, he was attracted to the idea of getting rich easily and got started in the criminal world through scams.
Ponzi devised the pyramid scheme with a coupon and stamp business bought cheaply and sold at a favorable exchange rate. He founded a company with little capital, and attracted investors with generous offers. It would pay 50% profitability in 45 days or 100% in 90 days to those who put money.
Such was the success that investors multiplied, everyone wanted to invest with Ponzi, many without even knowing exactly what the business consisted of. They were only driven by the desire to obtain a great return on their money in a very short term.
Ponzi made a fortune with this system. Actually used the investors’ own money to pay interest and not that from the business of buying and selling postage stamps.
Inconsistencies in the numbers presented to investors raised suspicions. The scheme began to falter as Ponzi pledged to make more profits. The amount of interest he had to pay increased and he could not pay it if no new clients arrived.
The pyramid collapsed when he could no longer pay, investors lost their money, and Ponzi ended up in jail.
The scam perpetrated by Bernard Madoff, based on a Ponzi scheme, is considered one of the largest in history.
He founded an investment firm in 1960, legally, which became one of the largest on Wall Street. Nevertheless, starting in 1992 he turned it into a gigantic pyramid fraud,
investors at the bottom paid the interest of those at the top. It was a large-scale hoax that fell on regulators, famous people and big businessmen.
Many did not understand what Madoff’s investment strategy consisted of, they only looked at the 10% safe return they obtained year after year. It was so “perfect” that profitability was sustained whether the market rose or fell.
With the 2008 crisis, Madoff could not cope with the withdrawals of funds demanded by investors. Had produced a 65 billion dollar hole. Madoff was sentenced to 150 years in prison.
How to protect yourself from Ponzi schemes?
To avoid being a victim, it is recommended to pay attention to Signs that could make us suspect that we are facing a possible Ponzi scheme fraud:
- Companies that pay the high promised interest on time. The punctual disbursement of earnings, a sure profitability, despite market fluctuations, should create doubts for us.
- Promotions that offer secure profitability and much higher than other options on the market.
- Ads that include the word “recruit”, which call for networking with family and friends to get quick money.
Do not be dazzled by the appearance of the offer. An invitation to a talk at a luxury hotel should not be considered sufficient to agree to invest in a business. The scam may come from a recognized company whose executives are millionaires, as the Madoff case demonstrated.
Doubting is not bad because it leads to asking questions, seeking information and consulting with others. It never hurts to wonder if the offer is too good to be true.
To avoid being scammed with Ponzi schemes, it is advised:
- If our desire is to invest, the best we can do is inform us Before doing so, study the possible options, without rushing.
- Do not invest in businesses that we do not understand.
- Do not trust businesses that offer quick enrichment and without any risk.
- Make sure we buy financial products with entities supervised by public bodies in our country.
- At present, if you plan to enter the world of cryptocurrencies you must also be careful. They are equally attractive to scammers who use Ponzi schemes. The principle remains the same, only they use new technology to deceive.