A Ponzi scheme is a fraudulent type of investment scheme that pays returns to its investors using the investors’ own money or money paid by other investors instead of from real profits earned by the organization or individual running the operation. The type of scheme attracts investors because it offers higher than normal returns when compared to other investments. These returns are generally short term and unusually consistent or high. To keep the high returns going, the scheme needs an ever-increasing flow of money from new investors. The person orchestrating the scheme entices these potential investors with the promise of high returns.
There are some ‘red flags’ to that watch for to determine if an investment opportunity may be a Ponzi scheme. The first is the higher than normal returns, while this is enticing it is not the norm with investments. The investment has little or no stated risks, so it may actually seem too good to be true. The opportunity is spread by word of mouth and is offered as an exclusive opportunity for a select few. Another red flag is there is little or no paperwork and there are no taxes on returns. The groups targeted for the investment are generally chosen by affiliation and include ethnic or social groups.
There are also ‘red flags’ to watch for when the scheme is about to collapse. These include requests to cash out are met with delays and excuses, inability to contact the promoter, desperate attempts to get more investors and no investment documents are received. Once the whole operation collapses, the promoter vanishes and takes all funds with him and word spreads by word of mouth that this person cannot be found. At this point the investors have lost any money invested in the scheme and the only person who benefits is the promoter.
There are ways you can protect yourself from a Ponzi scheme. The first thing to do when an investment opportunity arises is find out as much information about the promoter, company or both. Conduct an internet search to check on the promoter. Many times if someone is involved in this type of scheme, they have done it before. Obtain documents explaining where the funds will be invested, the amount of risk associated and a detailed explanation of how any high returns will be achieved. Always ask questions and if cannot find the answers or information you need, its best to avoid the investment opportunity.