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Ponzi Scheme: A Never-ending

Global Battle
 AUGUST 1, 2022
D uring the last few decades, fraud schemes have flourished one after another due to uncertain
economic conditions. Throughout the years, people in financial hardship continue to fall
victims to both large and small scams. Fraud and financial crimes are prevalent in today’s global
economy and come in various forms. One such fraud scheme is the Ponzi scheme. The Ponzi scheme
was named after Charles Ponzi, who in 1920 used a technique known as the “confidence trick.” He
guaranteed investors that their investment would double in 90 days after purchasing foreign postal
coupons. In the beginning, the investment appeared successful since he had paid the promised
returns to all early investors. When investors began pouring money into Charles Ponzi’s scheme, his
debt grew exponentially. Doubling everyone’s money made his debt grow substantially because he
owed even more. Although, this did not matter to Charles Ponzi, as long as the investors did not all
demand their funds at once. However, when the news that he was bankrupt came out, all his
investors panicked and rushed to withdraw their investments. As a result, he could not repay all his
investors at once. It was a huge lesson for investors to never just follow the crowd. The 100-year-old
scheme continues to adversely affect the lives of those around it.

Why Do People Keep Falling for Ponzi Schemes?

Ponzi schemes have been criticized for decades,
but Ponzi’s methods are still used today. The
The Ponzi scheme requires a constant
question remains: Why do people continue to fall flow of fresh money since it does not
for such schemes? The simple answer is because earn money from selling a product or
everyone wants easy money. People tend to look service
for shortcuts, but it is not always greed that pulls
them to these schemes. Ponzi schemes are disguised as genuine investments, and many consider
these to be attractive investment opportunities. This type of scheme takes advantage of the financial
system to embezzle millions, if not billions of dollars, from unaware investors. In the beginning,
investors are promised high returns, and the investment appears to be profitable. Consequently,
new investors are attracted to the scheme. The early investors are paid off with the money from the
new investors, and the cycle continues. The Ponzi scheme requires a constant flow of fresh money
since it does not earn money from selling a product or service. No real profits are ever made by
either the company or the investment—the funds are merely redistributed, and the investment is
claimed to be profitable. As long as new investors are coming on board, everything seems to be fine
for the time being. The scheme eventually collapses as it runs out of investors.

High-profile Ponzi Schemes in World History

Over the past decade, Ponzi scheme perpetrators have devised more complex schemes to defraud
innocent investors. Former NASDAQ chairman Bernie Madoff ran the largest Ponzi scheme in
history, worth approximately $64.8 billion. The most infamous Ponzi schemer after Bernie Madoff is
said to be Allen Stanford, who was convicted for an $8 billion Ponzi scheme. Together they exploited
thousands of people as well as companies who invested funds with them. Although Madoff and
Stanford perpetrated two of the biggest Ponzi schemes in the U.S. and in world history, they were
not the first to take advantage of innocent investors. Ponzi schemes such as these are just a few of
the many that have been recently exposed and brought to the world’s attention. Ponzi schemes,
whether designed from the beginning or become fraudulent after years of legitimate operations,
have undoubtedly ruined many innocent investors across the globe.

Ponzi Scheme Red Flags

Ponzi schemes share several common characteristics. Listed below are some of the red flags to look
out for.

Red flags for an individual investor:

Investments that yield higher returns usually carry a higher risk level. Investment opportunities
that promise a high rate of return or “guaranteed” return should be viewed with caution.
The value of investments tends to fluctuate over time. A regular positive return, regardless of
market conditions, should raise suspicion.
Investors are often offered high returns to discourage them from withdrawing their funds from
the scheme.
 Investors are pressured into making quick decisions and may be advised to keep the
investment a secret from family and friends.
The schemer uses technical jargon, and one encounters difficulty obtaining necessary
documents or paperwork.
The business model is complicated and hard to understand by a normal person in terms of how
such schemes generate returns for the investors.
Ponzi schemes usually have highly motivated sales personnel because the commissions are
high.

Red flags for financial institutions:

Check whether the company is registered, and make sure it has a legitimate business and is not
operating as a shell/shelf company.
Check the address of the company and raise a concern about a mailbox-only only address,
virtual office or small private office that could not possibly manage a business of the size being
claimed.
The company has a history of being investigated and/or disciplined for actions relating to unfair
business practices or misrepresentations of products and services. Consider searching for
“negative news” (also known as adverse media search) where required.
A company that claims to invent/have ground-breaking “new technology, products” or “special
investment scheme” should be treated with caution.
The company has only a few employees other than the founder and/or promoter(s).
There is unrealistic wealth as compared to the client profile, and the owner(s)/ultimate
beneficial owner(s) of the company have previous criminal, bankruptcy or civil court records.
The company has unrealistic business turnover and often lacks an audited financial statement.
Also, large-scale transactions are associated with unrelated businesses or accounts.
The company takes a defensive stance to questioning and has an unusual explanation of
business/account activities.

How to Prevent Falling for Ponzi Schemes

Do not be a courtesy victim. You should be extremely cautious of people randomly approaching
you and asking you to invest, especially friends, friends of friends, relatives and known figures
within your community.
 No investment can be guaranteed to be risk-free—only high returns can be achieved with high
risks. One should take precautions with companies that assure a risk-free investment and a
high return.
Do not put all your eggs in one basket. Diversify your assets, accounts and financial institutions
(FIs)—those who survived such a scam invested only a percentage of their assets, not their
entire life savings.
Never judge someone’s integrity by how they sound. An expert con artist can make even the
riskiest investment look safe and sound.
Ask questions whenever you need to. People often do not investigate before investing, so
fraudsters take advantage of that. Be familiar with the investment, the risk involved and the
company’s history. If it sounds too good to be true, it probably is!
Do your research before investing. Make sure you understand the company and its products—
research the company’s website, social media pages, reviews, etc.
Unsolicited and extremely lucrative offers should be questioned. If anyone you know made
money, it does not mean you will too. Take caution if you receive an unsolicited phone call or
email about a company that no current financial information can be found through
independent sources.

Are Banks Immune from Ponzi Scheme Liability?

Globally, Ponzi scheme victims seek to recover their losses from the FIs that Ponzi scheme
perpetrators used to hold victims’ funds prior to misappropriations (i.e., money laundering, terrorist
financing, etc.). In general, FIs are liable if the plaintiffs can prove that they were aware of the Ponzi
scheme. To defend against Ponzi scheme litigation, an FI must prove that it was unaware of the
underlying fraud. Banks also have legal obligations to investigate whether such clients are
laundering ill-gotten gains, regardless of whether they were aware of the scheme. As long as FIs
continue to be the sole sources of financial recovery until the dust of a Ponzi scheme clears, the
struggle over bank liability for negligence claimed by victims is likely to continue. Banks must take
reasonable steps to review existing and new clients and evaluate their potential exposure to such
schemes. A slight involvement, negligence, or failure to perform adequate know your customer
processes—and even failure to report Ponzi-related activities—will almost certainly risk regulatory
action litigation taken against banks.
Collaboration Between LE Agencies and FIs to
Combat Ponzi Schemes
Around the world, FIs and law enforcement (LE) agencies are at the forefront of efforts to detect and
prevent different kinds of fraudulent schemes. Through increased cooperation between LE and FIs,
perpetrators of Ponzi schemes can be tracked and identified through their financial transactions.
Criminals exploit financial system loopholes, but they also leave clues that can lead to their capture.
For instance, an FI is well-positioned to detect, respond and prevent Ponzi-like activities. Once such
threats are detected, FIs should immediately report them to LE agencies. Timely reporting or sharing
of suspected Ponzi activities could result in prompt investigation by LE agencies that might also have
additional information about the victim or the perpetrator. Each country’s financial intelligence unit
(FIU) also plays an important role, as they collect and analyze suspicious transaction reports and
other information relevant to money laundering and terrorist financing, and provide their findings to
LE agencies. A collaborative approach among LE agencies, FIs and FIUs can certainly contribute to
the disruption of such schemes at an early stage. As Helen Keller said, “Alone we can do so little.
Together we can do so much.”

Mohammad Rezaul Karim, CAMS, compliance professional at leading international bank

Rucsar Jabin, lecturer, marketing, University of Dhaka

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