Ponzi Scheme

The fraudsters behind the Ponzi scheme who are organizing it promise high returns with a pseudo guarantee of profit. This deal creates a facade for a successful investment, which, naturally, appears like a very good project. However, this is not the case, as Ponzi schemes fail and collapse over time. 

The originator is Charles Ponzi, a notorious fraudster who gained millions from promoting these fake investment opportunities in 1920. However, the first fraud schemes like this can be found in books from the 19th century. 

Ponzi used the U.S. Postal Service to cheaply buy discounted international reply coupons for prepaid mail. Then, he redeemed them in the U.S. for higher-value postage. The currency exchange rates created a price difference that resembled legitimate profit. While this was legal, it was a form of arbitrage. In reality, Charles Ponzi wasn’t scaling this project and wasn’t buying that many coupons, but he was paying early investors with funds from later ones, which is now considered a classic pyramid scheme.

You can identify a Ponzi scheme by assessing the main red flags, which often consist of fake promises and signs of an investment opportunity being too good to be true. 

For example:

• Pressure to invest quickly
• Difficulty withdrawing money
• Guaranteed or unusually high returns with little or no risk
• Reliance on referrals or recruiting new investors
• Lack of transparency about how profits are made

In B2B relationships, it’s important to do your due diligence and verify other individuals/potential investors as well as third-party service providers and all related corporate entities to avoid such schemes and prevent financial crime. Solutions like iDenfy’s automated KYC/KYB platform help automate this verification process and save time. 

Bernie Madoff is the person who’s known for the biggest Ponzi scheme in history. He was sentenced to 150 years in prison and forfeiture of $170 billion in assets. His fraudulent tactics started to become noticeable due to the financial crisisin  2008. 

Once it hit, numerous investors wanted to withdraw funds. Madoff usedan investment strategy, called the split-strike conversion, where he used historical trading data to create false records. Eventually, he was sentenced to 150 years in prison a year later and died in prison in 2021.