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Penny Ledger
Ponzi Scheme
Luring investors to "invest" in equities to gain profit
People who seek to utilize intelligence to generate profit often invest in equities. However, not all investments are safe and guaranteed. Some, involving the Ponzi scheme, lure investors to invest in highly profitable and low risk investments in hopes of making unethical profit.
How does it operate?
Although they may sound like intricate systems, Ponzi schemes follow a basic set of rules. This system relies on constant investments from new investors and eventually collapses when the constant supply of money cuts off.
Implausible investment opportunities: The operators of Ponzi schemes often impress speculators with investment opportunities with very high returns and little-to-no risks. These investment opportunities also promise consistent returns, disregarding the state of the economy.
Steady investments: Rather than actually investing the speculators' money, the operators of Ponzi schemes use the newly gained investment to pay off the old investors, making it seem like they gained profit. Because of this, Ponzi scheme relies on steady additional investments.
Collapse: When the stream of additional investments stop coming in, Ponzi schemes are bound to collapse. This causes most speculators to lose their investments.
Is it as bad as it seems?
Considering the fact that Ponzi schemes maliciously trick investors, it is no question that it is unethical. However, how would this be an unethical operation if investors gain "profit", even if it may not be through legitament investments?
Very few profiteers: Because Ponzi schemes are designed to eventually collapse, it is rare for any investors to make a profit. Although, it is possible that few of the earliest investors make a profit, due to the fact that Ponzi schemes want their initial investors to re-invest, following their short success.
Withdrawing investments: Because Ponzi schemes pay older investors for new investments, there are often restrictions regarding withdrawing funds. When an investor tries to withdraw money, he/she may be faced with excuses or even questions about investing more funds.
Effect on financial markets: Many financial frauds, including Ponzi schemes, cause investors to be suspicious about the financial market. This may cause long-term issues to the economy due to the lack of trust in investment markets.
How does it make a profit?
If the new investments earned are used to pay the old investors, how do the con artists make a profit? Is doing so safe and effective long-term?
Withdrawing a portion: Operators often make a profit by withdrawing a percentage of the investments before paying the old investors. This portion is significant enough to be served as personal income, but not large enough to be suspicious.
Additional fees: Ponzi schemes often charge additional fees, such as entry fees, maintenance fees, and/or management fees. These fees allow operators to gain additional profit.
Money Laundering: Operators of Ponzi schemes often have "shell companies", which are companies that serve no purpose except to make a profit. The money earned through Ponzi schemes is invested into these shell companies, to remove suspicion from the FBI regarding earning unethical profits.
Why is it hard to detect Ponzi schemes?
Ponzi schemes usually operate under deceptive and intricate protective layers, with professional websites, marketing materials, and forged, but noticeable, legal documentations. Additonally, operators don't reveal where the ROI comes from, which makes detection challenging. Money laundering through shell companies is also difficult to be detected.
How can you prevent it?
Double-check: Upon hearing about an investment opportunity, double-check that the opportunity is legitimate. Most authorized investments are registered in the SEC. Also, investigate the company's financial history/reviews.
"Too good to be true": If an investment offer seems "too good to be true", there is likely a latent issue regarding it. If an investment has "guaranteed" returns or very low risks, it is important to do more through research.
Understand the system: Before investing your money, make sure to research and fully understand where the investment is going, and how return is generated. Also, check if there are any risks involved, which legitimate investments will likely have.
Be stolid to pathos: Oftentimes, operators of Ponzi schemes are going to emotionally sway you to not miss out on an investment opportunity. However, if something feels "too good to be true" or wrong in general, it is not a bad idea to go with your gut at times. In essence, be cautious when committing to investments.
Because businesses of Ponzi schemes are quite ubiquitous, it is important that individuals notice the red flags, and report any suspicious activities - even though it may be embarrassing.
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