Ponzi Scams
Ponzi scam can be defined as a fraudulent operation based on investment, which pays returns to its investors from the money they pay themselves, or paid by the other investors. It is thus different from the profit that is earned by organization or individual that is running the described operation. Charles Ponzi gave his name to the scheme, because was the first to become notorious for using it back in 1920 (Wilkins, Acuff & Hermanson, 2012). Although he wasn’t an inventor, his scheme attracted so many investments that it became well-known throughout the USA.
The traditional scheme of the new investors’ attraction is founded on the promises of greater returns, than in case of the other investments. Usually these returns are inconsistent or abnormally high. In order to keep the scheme running, it is necessary to constantly attract new investors. These systems cannot last forever, as earnings are less than the payments required for the investors. In the majority of cases, such scams are interrupted by the police before the collapse, as the bigger its scale becomes, the more there are chances of its discovery by the authorities.
The scheme works in an interesting way. After promising extraordinary returns, they are indeed paid at first. It results in attraction of new investors, creating a cascade effect, and urging the existing investors to pay more money. Then, the returns to new investors are paid from the money of new participants. In some cases it is not even necessary to pay back the returns, as the investor sees the returns and decides to wait for the higher returns (“Ponzi Schemes,” n.d.). If some investors decide to take their money out of the scheme, their requests are usually satisfied in the timely manner so as to show the reality of such action to the other participants.
Still, everything usually ends up worth vanishing of the promoter, or end of the investors’ inflow. Some external market forces can also put an end to the scheme. In any case, it is not possible to deny that Ponzi scam is one of the most brilliantly designed fraudulent schemes in our society.
References
U.S. Securities and Exchange Commission. (n.d.). Ponzi Schemes – Frequently Asked Questions. Retrieved from http://www.sec.gov/answers/ponzi.htm.
Wilkins, A.M., Acuff, W.W. & Hermanson, D.R. (2012). Understanding a Ponzi Scheme: Victims’ Perspectives. Journal of Forensic & Investigative Accounting, 4(1), 1-19.
