Although it has been years since its invention, the Ponzi scheme continues to be a scam that affects thousands of people. But what is it and how does it work?
When we talk about a Ponzi scheme, especially in light of the increasingly frequent frauds against unsuspecting individuals, we wonder how this model works and how it is possible to prevent scams from being carried out.
Interest in the Ponzi scheme has returned with the death in April 2021 of banker Bernie Madoff, creator of the largest Ponzi scheme in history. In 2009 Madoff pleaded guilty to defrauding some 37,000 people in 136 countries around the world over the course of forty years of activity. Madoff engineered the largest Ponzi scheme in history, managing to collect over 60 billion with his scam, which for decades no one noticed.
But how was this possible? Let’s find out what the Ponzi scheme is and how it works, to understand how Madoff managed to evade any type of control for so long.
How did the Ponzi scheme come about?
The scheme can be defined as a sort of economic model aimed at illegally obtaining large amounts of money from those who are scammed. Although it has evolved over the years, the basis of the system remains the same: the first people who get involved are allowed to obtain economic returns in a short time, but on the condition that they always bring new clients willing to pay new fees. In fact, earnings derive exclusively from one factor: the shares paid by new investors. Only the first ones involved get the money and obviously the fraudulent sales scheme is destined to end, since there are no underlying investments that generate profits.
The scheme takes its name from Charles Ponzi, an Italian immigrant to the United States who managed to mastermind a massive scam against the whole nation.
The Ponzi scheme therefore has its roots in the early 1900s, when Charles Ponzi gave new life to the scam sector. Although he was not the first to use this scheme, he managed to orchestrate a scam so massive as to tie his name to the practice itself.
Through the scheme, Charles engineered a scam on nearly 45,000 people and managed to raise over $15 million from the entire country, all from just $2.
How the Ponzi scheme works: an example to understand it
To understand what the Ponzi scheme is and how it works, it is first of all necessary to think step by step. In fact, the scam works in stages, almost with a pyramidal structure. Below is a simple example to clarify the matter.
1) Promise high earnings
The first phase of the Ponzi scheme involves approaching the victim. This is offered an investment with large earnings with higher returns than market rates. All in the shortest possible time.
Example: I propose to the victim an investment - not documented - in the short term with rather high earnings and I promise to respect what was agreed.
2) Gaining Trust
The second step is about earning the trust of the victim. The scammer will return part of the amount initially invested to it, but only to give the system the appearance of effectiveness. The customer, or rather, the victim will believe that the system is working and from here it will be easier for the scammer to continue with the next steps of the Ponzi scheme.
Example: I return what was agreed, even by drawing on the funds of new investors. By doing so, I gain the trust of the victim who, seeing that he is repaid, will begin to trust me and provide me with new money.
3) Extend the network of victims
Next step of the Ponzi scheme will be the extension of the network of potential clients/victims. The more the effectiveness of the investment is known, the more other victims will fall into the Ponzi scheme scam.
Example: having gained the victim’s trust, he will be inclined to speak well of me and of the investment, which will attract new victims and new money.
When the Ponzi scheme ends
The defrauding spiral of the Ponzi scheme will end only when the requests for reimbursements are so high as to exceed the proceeds deriving from the defrauding of other victims. Here, in short, what is the Ponzi scheme and how it works.
Fraud history
Years ago the Ponzi scheme was back on the front pages of all the newspapers because of the two Americans, Joseph Meli and Steven Simmons, who had defrauded several customers convinced they were investing in different shows.
However, this is only one of the latest hits achieved through the Ponzi scheme. The scam has affected an infinite number of victims in recent years and among the most striking cases it is worth mentioning the 2014 London VIP broker fraud and the $7.6 billion scam that broke out in China.
Recently, there has been talk of a Ponzi scheme again with the story involving the speculative football fund Uefa Football: a reassuring name, an evocative logo, a promise of growing earnings, but which had nothing to do with the football organization. On October 12 2021, Consob suspended the activity of this platform as a precautionary measure. The Italian newspaper Corriere della Sera explained how "Uefa Football" presented itself as "Financed by the United Arab Emirates consortium, the headquarters in London, is a way to invest and manage football finance in order to create low-risk and long-term income...". Basically, the fund would have promised earnings by betting on the results of the matches.
However, the most famous application of the Ponzi scheme is the one linked to the fraud by Bernard Madoff, former president of the Nasdaq and well-known face on Wall Street. Madoff, with his over 60 billion dollars, turns out to be the most striking example of this fraudulent economic sales model.
How to avoid the scam
The most important thing is to avoid falling for the scam, which could be quite simple. Given that one of the characteristics of the Ponzi scheme concerns the lack of details provided by the fraudster, an excellent advice could be to ask for as much information as possible on the investment we are about to make.
To avoid running into a Ponzi scheme, rumors of good investments should never be trusted. It’s the data that makes a difference. What am I investing in? How safe is it to invest? Can I trust these people? These are the questions that should always be asked when faced with the opportunity to invest.
Now that we have clear what the Ponzi scheme is, how it works and how to avoid the scam, the warning that everyone should keep in mind is to always be careful. The Ponzi scheme seems to have no age and the scam could always be around the corner.
Original article published on Money.it Italy 2022-10-20 19:19:02.
Original title: Schema Ponzi: cos’è, come funziona e come evitare la truffa
