10 Ways to Recognize Ponzi Schemes


The Ponzi scheme is one of the oldest, most notorious investment frauds in the world, with over eight thousand (8,000) schemes across the world in the past decade.

At the very start, a Ponzi scheme sells the illusion of a sustainable business so long newer investors are periodically introduced into its system and older investors do not request full repayment. In order to attract investors, Ponzi scheme promoters promise enormous returns and pay them in order to set their balls rolling.

Charles Ponzi, an Italian whom the scheme is named after gained prominence as far back as the 1920s by promising investors in North America a 50% and a 100% profit within 45 days and 100 days respectively. Although Ponzi was not the originator of the now-global notorious investment scheme, he got so good at it and grew on him that people named the fraudulent scheme after him.

Despite being a notorious investment fraud that can easily be recognized from hundreds of miles away, Ponzi schemes keep growing even in today’s world, with the same noticeable tricks, promises and “100% guarantees” that makes it difficult to miss.

To a layman, all Ponzi scheme adopt the “rob Peter to pay Paul” model; earlier investors are paid “their profits” using the investments of later investors. To survive, and continue to function properly, newer investors must be injected into the scheme periodically for their money to be shared amongst earlier investors. If this is unattainable, the system will inevitably crash, leaving investors at a loss.

10 Ways to Recognize Ponzi Schemes

Almost every Ponzi scheme in the world shares the same characteristics you can’t miss and below is how to recognise them:

1. Abnormally high returns

The first telltale sign of any Ponzi scheme is the abnormally high returns on investments (ROIs) Ponzi promoters promise. Although Ponzi schemes can take on several forms and might look unique at first, the intrinsic theme remains the same; investors are assured that they will make so much in a short time and their ROI can almost be doubled. When compared to other investment types, Ponzi schemes have a way of creating a false sense of shortcut to success when in reality it is far from being a legitimate deal. Always remember this adage; “if it is too good to be true, it is probably a fraud.”

2. “Guaranteed high returns”

Other than the fact that Ponzi schemes are comfortable with promising incredibly high investment returns, another way to recognize them is the promise of “guaranteed high returns”. Ponzi schemes promise this in order to calm potential investors and trigger deep-seated investors’ greed and equip their mindset that the scheme can’t fail. In reality, no returns can be considered guaranteed because the most decent of all investments carry some associated risks.

3. Vague business model

If after 5 minutes, you are still left in confusion about a business model, then bolt! Every investment business model should not be complicated that it would take up to 20 minutes to explain. And because Ponzi scheme promoters do not like to give people the idea that their business is a Ponzi scheme from the start, they are forced to adopt semantics and play around with big words such as ‘high yield investment’, ‘hedge future trading’, etc. The goal is often to intimidate and mesmerize potential investors from knowing what their business is genuinely all about. According to Warren Buffet, you should “Never invest in a business you can’t understand.” A good rule of thumb you must never ignore if your money means anything to you.

4. The need for more investors

Ponzi schemes are like Pyramid schemes and need newer investors in order to survive and remain operational. Because of this, investors are often compelled to bring in newer investors in order to get paid faster. If they don’t tell you this, Ponzi scheme promoters often wrap sweet rewards around referrals in order to motivate existing investors and convince others into hopping on the train. If this is the case with any investment you find yourself in, your investment sense should be tingling already.

5.  Credibility via association/hierarchy

Most Ponzi scheme promoters love to create an atmosphere of exclusivity by pulling in potential investors into their smaller circle as a way of building trust and allaying investors’ fear. If this isn’t happening, they opt for the “association by hierarchy” method in order to delegate or grant exclusive access to older or earlier investors. This method creates an illusion of a serious business with a proper structure where the top “executives” or “CEO” can’t be reached easily but information still runs freely because only a few have access to them. In a period of panic when investors might want to hear directly from the “CEO”, the Ponzi promoter comes out, address the situation as normal and goes back in.

6. Unlicensed/Registered investment companies

Every state and federal security law require that investment companies should be registered and licensed but this is never the case with Ponzi schemes. Most Ponzi schemes are usually owned by individuals who mask them under already registered company names as a way of deceiving potential investors that their companies are registered with the CAC when, in fact, they are not registered as an investment company. Never fall for this!

7. The pressure to act immediately

A good investment company will always be around for as long as the company stands but because Ponzi schemes are designed to be short-lived. Their promoters tend to create a false sense of urgency; creating the impression that the investment scheme is time-limited. Since the scheme is shrouded in a tent of secrecy, potential investors are often advised to “act now” in order not to miss a “lifetime of opportunity”. Asking people to invest and act immediately is foreign to sound investing principles and the idea of one should be greatly considered a red flag.

8. The pressure to reinvest

Ponzi schemes are destined to collapse from the get-go but how long they can survive is largely dependent on how well investors keep monies within the scheme. A Ponzi scheme will collapse when the income is not regular or when investors withdraw their investments and fail to put their monies back in. In a bid to curb this, Ponzi scheme promoters tend to offer mouth watering incentives to investors who do not cash out. While investors are deceived into believing that their money is put to good use and their investments are breaking grounds, the obvious truth is that most Ponzi scheme promoters do not invest in anything on behalf of investors. If an investment scheme asks you not to cash out because there are rewards, then that is all the proof you need that you are dealing with a Ponzi scheme.

9. Consistently high performance

It is very normal to see investment markets fluctuate or rise and fall over a period of time. As a matter of fact, investment market fluctuations will likely affect your returns in any reputable investment company. This is because there are risks with investments and it won’t be Christmas every day, no thanks market fluctuations. Strangely, this is never applies to Ponzi schemes because they are known to be consistent even in the face of a global meltdown. The trick? So long newer investors keep coming in then the scheme is perfectly fine. At all cost, avoid investments that promises to deliver regardless of overall market conditions.

10. Absence of physical address

Most Ponzi schemes start and end on the internet. And because their owners understand what their aim is, they, as much as possible, avoid a physical location where people can walk into. However, newer Ponzi scheme promoters are becoming even more daring with each passing day that some now get office spaces and hire staff in order to look legitimate. Regardless, of whatever form they adopt, there’s always a way out for you as an investor in order not to part with your hard earned money. As a potential investor, it is not out of place to find out the nature of an investment and proof. If a company says it is into charcoal exportation, then by all means request to see their warehouses and documents to back up their claim. If an investment company says it is into agritech, then find out where their farm or poultry is located. Another thing to note is the age of the “investment” company. If it is less than two years old perhaps your sixth sense should reverberate non-stop.

Wrapping Up

Ponzi schemes can take on various forms and formats and it is never enough to bank on the words of friends and family members just because they invested and are reaping their benefits. Often times, the earliest investors and the Ponzi scheme operators get to enjoy the scheme before it all falls apart. Always ask questions, read reviews, under business models, etc., before deciding whether or not you want to put your money into any investment scheme. Most importantly, avoid greedy. Ponzi scheme promoters bait potential investors and the greedy ones always fall hard. It never ends well with Ponzi schemes.

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