Ponzi Scheme: Part 1

Basic Principles

A Ponzi Scheme, sometimes also referred to as a Ponzi scam, is a fraudulent method that has been used by several conmen to extort money from people.

The conmen lure in people to invest money in a scheme that guarantees the investors high returns & low risk. However, the swindlers just redistribute the money around while keeping a percentage of the money to facilitate their expenses & luxuries.

The money invested by newer investors is used to pay the so-called returns of the older investors. While the investors think that their money is being used to finance legitimate business activities, it’s actually being used to carry out nefarious payments to their fellow investors.

The scammers use their speaking skills & promises of a high-interest return to create a riveting façade to swindle people of their hard-earned money. Essentially, these fraudulent schemes work on the adage, “robbing Peter to pay Paul”. Ponzi schemes work only when there is a constant inflow of money.

The scam falters when investors start pulling out copious amounts of money from the illicit scheme or when the value of money owed to the investors exceeds the value of initial investments made by the people. From the con artist’s point of view, the latter case is especially problematic since the swindler has little to no source of legitimate income.

A peculiar feature of Ponzi scams is that once started, they cannot be stopped unless the scheme itself gets exposed or collapses due to the aforementioned reasons. No matter how a Ponzi scheme fails, the investors lose a considerable amount of money, thereby ruining their lives.

Difference Between Ponzi & pyramid scheme

Most people confuse the terms “Ponzi scheme” and “Pyramid scheme” and use them erroneously as synonyms.

Though both scams work by the underlying principle of deceitful investments, they differ in other aspects. A pyramid scheme works when the founder recruits as few people to rope in more people into the scheme, and the recruits have to initiate more people into the scheme, thereby continuing the pyramid & exponentially increasing the members.

The founder & initial group of recruiters reap all the benefits while the people who get trapped in this racket lose their money. However, in a Ponzi scheme, the founder usually ropes in investors themselves and uses the money to pay off older investments. The investors spread the scheme after being satisfied by the “credibility” of the scam.

In Pyramid schemes, people are made to believe that they earn money by getting in more people while in a Ponzi scheme people are fooled into thinking that their money is being invested in some business activity.

These are a few ways to identify and avoid being trapped in Ponzi scams. If one is vigilant enough to pick up these hints, they can save themselves from facing severe losses and stop scammers from extorting them of their money.

- Anirudh Sai H