Ponzi Schemes – An investment scam that recruits through friends and family

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Ponzi schemes are investment scams that pay existing investors with funds collected from new investors. There is no real investment.

Ponzi scheme promoters use money deposited by early investors to pay the first ‘dividend’. Investors feel comfortable and decide to invest more. Investors often encourage their family and friends to join.

Eventually all Ponzi schemes fall apart. They collapse when the promoter spends the money too quickly or the pool of investors dries up.

Warning signs of a Ponzi scheme

  • The rate of return is suspiciously high. The return may be as high as 10% per month.
  • Someone you trust tries to recruit you. It could be a trustworthy neighbour or someone in your church or community group.
  • The recruiter has already invested in the scheme and received great dividends.

How Ponzi schemes work

Ponzi scheme promoters convince people to invest money by promising high returns.

The promoter uses the money invested to pay a return. The investor thinks they’re getting the promised return and don’t suspect anything’s wrong.

Investors often encourage their friends and work colleagues to invest too. Ponzi scheme promoters can target community groups, like churches, to find victims. Ponzi schemes can have hundreds of victims.

What to do if you have invested in a Ponzi scheme

  1. Don’t invest any more money.
  2. Check if the company is on this list of companies you should not deal with.
  3. Check the company’s licence number.
  4. Warn your family and friends to stop them from becoming victims.

If you think you’ve been targeted by scammers, act quickly. See what to do if you’ve been scammed for steps to take and where to report it.

CASE STUDY

Tiana and Simon fall for a Ponzi scheme

In January, a Ponzi scheme promoter convinces Tiana to invest $100,000. The promoter promises a 10% return each month. He pays Tiana $10,000 each month using Tiana’s own money.

Tiana receives $10,000 each month as promised. She doesn’t suspect anything is wrong. Tiana encourages friends and colleagues to invest too. After three months, Tiana’s friend Simon invests $100,000 after hearing about Tiana’s great returns.

The returns continue to come in until April. In May, Tiana and Simon hear nothing from the promoter. They try to contact him but his number has been disconnected.

The promoter has taken off with the money. Tiana loses $70,000 and Simon loses $90,000. The promoter gets $160,000 out of the scheme.

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