Paving The Way To Justice

Cassandra Stamm
Paving The Way To Justice

What is a Ponzi scheme?

On Behalf of | Jan 15, 2024 | White Collar Crimes

Barron’s reported law enforcement uncovered 57 Ponzi schemes in the U.S. in 2022. Most of these had cryptocurrency at the center. This was also an increase over the previous year.

With this becoming a growing concern, it is important to understand what a Ponzi scheme is and how it works. This is especially important as such scams can be hard to distinguish from legitimate investing opportunities.

Ponzi scheme basics

A Ponzi scheme is an investment scam that lures individuals with promises of high returns. The name comes from Charles Ponzi. He orchestrated one of the most infamous schemes in the early 20th century. These fraudulent operations rely on the continuous influx of new investments to pay returns to earlier investors.

The mechanism behind a Ponzi scheme is deceptively simple. The orchestrator convinces individuals to invest their money. They promise unrealistically high returns. Instead of generating profits through legitimate business activities, they pay returns using funds from new investors. This creates an illusion of a profitable enterprise. That attracts more individuals eager to capitalize on the seemingly lucrative opportunity.

Issues with Ponzi schemes

One hallmark of a Ponzi scheme is the lack of a genuine business or investment strategy. Legitimate investments generate returns through activities such as trading or manufacturing. A Ponzi scheme relies solely on funds from new investors to pay off existing ones. As long as new investments keep flowing in, the illusion persists, and the scheme can continue. Ponzi schemes collapse when the operator can no longer recruit enough new investors to meet the growing obligations.

It can be easy to fall prey to a Ponzi scheme. Becoming part of the operations can lead to criminal charges since it is a white collar crime. By understanding the mechanics, individuals can protect themselves and make informed investment decisions.