A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors.
BoU explains that money invested by clients is not invested in any legitimate business but used to pay the people operating the scheme as well as those who invested earlier on.
“This is why Ponzi schemes can sometimes appear to be genuine and profitable investments; because the people who invested first seem to be benefiting,” BoU said in a statement issued on Monday.
A pyramid scheme is similar to a Ponzi scheme but, like the name “pyramid” suggests, it is based on a hierarchy whereby new investors are the bottom of the pyramid.
The income they provide by paying membership fees or an initial investment is used to pay original investors. These new investments are marked as a profit from a legitimate transaction.
However pyramid schemes, like Ponzi schemes, do not sell products or make real investments – they simply rely on money from new investors which is channeled to those at the top of the pyramid.
They only generate income by promising extraordinary returns to new recruits to convince them to invest; and may require recruits to bring in additional investors before receiving payment..
Both Ponzi and pyramid schemes always collapse though, as it becomes unsustainable for those running it to deliver on the promises they have made to investors. Once they collapse, there is often no way for those who invested to recover their money.
Signs That An Investment May In Fact Be A Ponzi Or Pyramid Scheme
- It guarantees you high returns with little risk of losing your investment. A good general rule to follow is; if it sounds too good to be true, then it is false.
- It promises you consistent returns regardless of the market conditions. Legitimate businesses usually experience times of profit and times of loss.
- The investment strategy or business activities are described as too complex for investors to understand, or top secret. If a business idea cannot be explained, it is suspicious
- The company or proprietor running the scheme focuses all their energy into attracting new clients to make investments. Without a constant flow of new investments to continue to provide returns to the scheme owners and older investors, the scheme falls apart.
- Both old and new clients face difficulty trying to remove their money from the scheme. Many times, it has already been spent on paying the proprietors or other investors.