What is a Ponzi Scheme?

A Ponzi scheme is a very specific type of financial scheme which relies on a series of frauds.

World Money Laundering Report - Learning

First, let's be completely clear. A Ponzi scheme is not the same as a pump and dump or even a scheme to boost the value of a stock, security or commodity, however that is defined.

A Ponzi scheme is a fraudulent investment scheme where the Fraudster purports to sell "investments" with an attractive return, usually at a rate the outperforms the norm for that market.

But the "investments" do not perform as claimed and so new deposits are used to fund the return on earlier "investments." Sooner or later, the return on investments will exceed the flow of new deposits. The fraudster may also plunder previous deposits to fund promised but non-existent returns.

So, eventually, the "fund" runs out of capital.

This is often precipitated when "investors" seek to withdraw their capital and accrued profits. Also, the operators of many Ponzi schemes plunder the "fund" for their own living expenses which are often extravagant.

The frauds are:

1. That there is a valid investment scheme
2. That the scheme will generate profits at a certain level or range
3. That the fund is safe (often that it is protected by a government-backed scheme)
4. Statements will be produced showing that the funds remain intact and showing the enhanced value of the investment. This will be false.
5. Periodic newsletters will usually be issued, making statements as to performance without any specifics.
6. The fraudster will, generally, not specify exactly what investments are made.
7. The fraudster will often claim that there is a "proprietary trading" scheme or mechanism and that for commercial reasons that cannot be disclosed.

Education is perhaps the most important thing about financial crime risk and compliance. It's a field that is laden with misleading buzzwords and acronyms, with fluid terminology and, sadly, with much information that is at least inaccurate and often fundamentally wrong. Content in this section is carefully moderated to avoid these pitfalls with a view to creating a vital resource for everyone with an interest in this area of endeavour.