What’s A Ponzi/ Pyramid Scheme?
Ponzi or Pyramid schemes can go on for years and are generally founded on dishonest or deceptive conduct which promises higher than usual yields on investments without eliciting the true nature of the scheme.
Pyramid schemes may be masked as legitimate investment opportunities, and may offer packages which may be purchased for varying amounts, and a high return on the investment, and/or a share percentage of net advertising revenue. Pyramid schemes may be described as a business variation of the “chain letter”, and essentially rely on new investors to generate funds to pay off old investors.
It typically works by promoter ‘A’ offering ‘B’ and ‘C’ opportunities to purchase distributorships for a proposed start up company at a fixed starting price, (usually $1,000). For every new investor acquired by the selling of distributorships by an investor, that investor is paid a percentage or fixed sum of the money initially invested. Essentially the plan can go on without anyone being hurt and everyone still makes money, however, the number of investors needed to keep the scheme afloat can easily exceed population figures, making the scheme go bust. The scheme is therefore referred to as a pyramid because those at the top, usually those having initiated the scheme benefit most, while those at the bottom lose most.
The History of the Ponzi Scheme
Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.
Decades later, the Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.
Remember, operating a Ponzi or Pyramid scheme is illegal and perpetrators will end up in jail.
How Ponzi/Pyramid Schemes are Promoted
Persons involved in Ponzi/Pyramid schemes use various ways to attract you to invest in their scheme. Both individuals and legal persons (companies, partnerships, charities, etc.) may become victims of the scheme as they could all invest. The most common medium of promoting the scheme is through the use of:
- the internet-- they create beautiful sites which give tell-tale stories of how successful the scheme and how others have benefited;
- the print media -- utilizing newspapers, magazines, brochures, pamphlets, etc.;
- the broadcast media: usually in the form of advertisements;
- individuals -- specifically recruited or volunteering as representatives or promoters within a particular jurisdiction with promises of commissions on every new investor introduced.
Be aware that persons promoting the scheme with the hope of getting huge payouts might themselves be victims of the scheme and may not be fully aware of its nature and scope.
Be careful of promises of high yields on investments that are too good to be true.
Protect Yourself Against Fraudulent Schemes
Investment business involves the buying, selling, subscribing for or underwriting of investments as an agent. You are required to be licensed by the Commission before you engage in any of these activities.
A Ponzi scheme may be considered as an unregulated form of an investment business product. It is, therefore, important that you seek advice from the Financial Services Commission before you fall afoul of the law in this regard.
If you are licensed by the Financial Services Commission, you should also not engage in the business of promoting, selling, or subscribing to these products as this too would be illegal. According to the Securities and Investment Business Act, “a licensee should not issue, or cause or permit to be issued an advertisement, brochure or similar document that forecasts false or misleading information or is dishonest and conceals a material fact about the product.”
The Ponzi scheme disguises the source of funds and lures persons into the belief that the scheme will constantly generate funds. In a small community like the BVI, a Ponzi scheme would have devastating effects, as there would be a smaller pool of persons from which money can be solicited to join the scheme, so it would quickly go bust.
The Securities and Investment Business Act requires any person carrying on investment business of any kind from within the British Virgin Islands to have a license. Conducting investment business without the required license is a crime. The BVI law’s reach, however, cannot go beyond the jurisdiction of the BVI. So the best form of protection against fraudulent schemes is to be vigilant.
- If the returns on investments are very high (more than usual compared to what really obtains in the retail market), the reality may not necessarily be what it is promised to be.
- If you have not invested anything, do not expect anything: therefore if you receive information that you have won monies, vacation trips, etc. in a scheme you have not invested in, the likelihood is that you are being lured into parting with your money or other property;
- If you cannot have access to relevant data regarding the scheme’s financial statements and whether or not its finances are audited by a known reputable firm, you should be suspicious and seek professional advice;
- If the scheme’s operations are not transparent and your questions are not being answered in a straight-forward manner or are answered in a less-than-satisfactory manner, you are probably dealing with a fraudulent scheme;
- If your research on the owners and/or operators of the scheme elicit some criminal background (especially if it relates to dishonesty) or elicit very little information, you should be suspicious and seek further professional advice before making any investment;
- If your instinct tells you that the scheme may not be what it seems, you probably should not invest in it: when it comes to parting with your property, you must develop a clear and convincing judgment.