The Criminal Nature of the Ponzi Scam

The infamous Ponzi Scam, named after its most popular perpetrator Charles Ponzi, is a scheme that aims to defraud people into investing huge sums of money into an operation or a business, under the promise of around 50% interest that is collectible after only a short period of time (usually a month). The gist is that people are often told that the money will be invested into some ambiguous and huge sounding venture, like hedge funds or securities, when, in fact, no such investment exists.

How Does The Ponzi Scam Work?

Given the said conditions, the victims are then told that they will see major returns on their initial investment immediately after a few weeks or a month. They do get a higher amount, as promised. However, the profit did not come from any successful investment, as the scammer had said, but from the investments of the people who came after the victim.

Simply put, victim A’s profits will be paid from victim B’s investment. Subsequently, victim F’s investment will be used to pay off interests for victims A to E, and so on. The creator of the scheme amasses huge sums of money over time, without even needing to spend so much and to risk getting into a legitimate undertaking.  Everybody is happy for a while, but, eventually, when the load is too huge and too many people are getting lured, the weight bears down on the scammer and he or she is forced to flee, bringing all the money (minus the payouts) with him or her.

Nobody really bites into the Ponzi Scam early in the game. But when the scammer gains the trust of two to three people, he can expect business to start rolling in huge numbers as word of mouth sets in and others start to get curious about the get-rich-quick deal. The Ponzi Scam targets people who want to earn a load of cash without really having to work so much and within so short a time.

Is The Ponzi Scam Similar To A Pyramid Scam?

In a way, yes. The goal is essentially the same. However, while the Pyramid Scam’s victims depend on those who came before them and ultimately deal with their recruiters alone, victims of the Ponzi Scam interact with the key scammer directly, as with a rippling effect. In a Pyramid Scam, if a member fails to recruit another under his or her name, he or she should not expect any kind of return on his or her investment just yet. In the Ponzi Scam, everyone is guaranteed a huge interest. In addition, a Ponzi Scam can also survive even with just a few members, as long as they are convinced to reinvest their earnings into the “company”.

What The Law Says

People caught under the Ponzi Scam will be held in violation of many state and national racketeering and fraud charges, the most popular of which is the RICO, or the Racketeer Influenced Corrupt Organizations Act. If found guilty, those convicted could face up to 20 years in jail, depending on the gravity of the situation, thousands of dollars in fines, and forfeiture of all assets (real, tangible, and intangible). It is important to note that a Ponzi Scam does not refer to a type of investment fraud; it is a process or method of acquiring money that is illegal in nature.

The best defense against being duped into entering such dangerous schemes is to first know and understand the nature and legality of any type of investment you’re getting into. The best defense is an extra-vigilant offense.

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