Why is ponzi illegal

Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Personal Finance Financial Fraud. Part Of. Types of Financial Crime and Fraud. Financial Crime and Fraud Examples. Control and Regulation. What Is a Ponzi Scheme? Key Takeaways Similar to a pyramid scheme, the Ponzi scheme generates returns for older investors by acquiring new investors, who are promised a large profit at little to no risk.

Both fraudulent arrangements are premised on using new investors' funds to pay the earlier backers. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. Joseph T. In accounting terms, money paid to Ponzi investors, described as income, is actually a distribution of capital. Instead of returning profits, the Ponzi schemer is spending cash reserves, all for the purposes of raising more funds. Where a basic investment scam raises money and disappears the Ponzi scheme stays in business by circulating investor funds. There are usually little or no legitimate investments taking place.

Most of the funds are used by promoters for expensive lifestyles and transferred into property or offshore accounts.

Schemes typically run for at least a year, although some Ponzis have flourished for a decade or more. Every one of the top frauds cited by the North American Securities Administrators including Internet and other high-tech scams, telemarketing, and abusive sales practices has been run as a Ponzi scheme.

For example, an operation may be incorporated in Delaware, sell most of its products in Los Angeles, and bank its profits in Missouri. Prosecuting has to encompass each venue and relate local activities to the larger scheme. Pyramid schemes came back with a vengeance. Like most economic activity, fraud occurs in cycles, and new pyramid schemes exploited a new generation of consumers and entrepreneurs that had not witnessed the pyramid problems of the 's.

Also, the globalization of the economy provided a new outlet for pyramiding. Pyramids schemes found fertile ground in newly emerging market economies where this type of fraud had previously been scarce or unknown. In the U. The introduction of electronic commerce has allowed con artists to quickly and cost-effectively target victims around the globe. Pyramid operators can target specific audiences by posting messages in specialized news groups e. In addition, through unsolicited e-mail messages -- known on the Internet as "spam" -- pyramid operators can engage in cheap one-on-one marketing.

Whereas it might cost hundreds or thousands of dollars to rent a mailing list and send cent post cards to potential recruits, it costs only a fraction of that to send out similar e-mail solicitations. The Federal Trade Commission's current law enforcement efforts reflect this new wave in pyramiding. The Commission has brought eight cases against pyramid schemes in the last two years, 30 and six of those have involved Internet marketing.

FutureNet, Inc. The FTC filed suit, charging that FutureNet's earnings claims were false because the company really operated an illegal pyramid scheme. Near the time of filing, FTC investigators discovered that FutureNet had begun to sell electricity investments as well, riding a wave of speculation in advance of the deregulation of California's electricity market. The Commission continues to litigate its case against three non-settling individual defendants. Pyramid schemes not only injure consumers.

In many cases, they affect the daily operations of banks and taint the banking industry's overall reputation for safety and soundness. Many pyramid promoters disparage the bank industry and promote their own program as a superior alternative to traditional banking and investment. Melvin Ford, a defendant in the SEC's recent case against International Loan Network, stated that his company's bonus program was "the most powerful financial system since banking.

In FTC v. Cano, 35 the Commission observed first-hand the impact of pyramid schemes on the banking system and individual banks. CDI representatives claimed that they could offer such attractive terms because they had a special marketing relationship with a large overseas bank, the Banque Nationale de Paris BNP. According to the transcript of a taped sales meeting, CDI hinted that a broad conspiracy prevented U. A CDI representative claimed, "normal banks do not want people to know that they could have a 6.

Our evidence also showed that the defendants likely misled the one bank with which they did have a relationship. When investors paid by credit card to join CDI, the defendants apparently processed these payments, not through CDI but through a different "front" company with a VISA merchant account. Consequently, the defendants put their own merchant bank at risk for any charge backs that VISA might credit to angry investors. In the end, CDI members never received their credit cards, and according to a Commission economist, at least 89 percent of them would never have made enough money to recoup their initial investment.

Last autumn, the Commission obtained a temporary restraining order and a preliminary injunction against the CDI defendants, as well as a freeze over their assets. The Commission estimates that over the five-month life of CDI, more than 30, consumers from the U. The matter is still in litigation; the Commission is now seeking to amend its complaint and name additional defendants.

In the largest pyramid case brought by the Commission in the 's, we witnessed how pyramid operators often try to use the international banking system to hide their assets. The program spawned numerous web sites on the Internet and victimized thousands of investors across 60 different countries. Although the defendants initially operated out of the United States, the Commission discovered they had secreted millions of dollars to offshore bank accounts in Antigua.

But international cooperation saved the day. Law enforcement is the cornerstone of the Commission's fight against pyramid schemes; however, we also try to educate the public so that they can protect themselves. In our educational efforts, we have tried to take a page from the con artists' book and use new online technology to reach consumers and new entrepreneurs. For example, on the agency's web site at " www. The Commission records over 2 million "hits" on its home page every month and receives several thousand visitors on its pyramid and multilevel marketing pages.

The staff of the Commission also has posted several "teaser" web sites, effectively extending a hand to consumers at their most vulnerable point -- when they are surfing areas of the Internet likely to be rife with fraud and deception.

The "Looking for Success" site is one example. It advertises a fake pyramid scheme. The home page of "Looking for Success" promises easy money and talks in glowing terms about achieving "financial freedom. GOV, where consumers can learn more about how to avoid pyramid schemes. In an effort to provide information to new entrepreneurs, especially those who may unwittingly violate the law, the Commission has conducted a number of "Surf Days" on the Internet.

The first Surf Day, conducted in December , focused on pyramid schemes. Commission attorneys and investigators enlisted the assistance of the SEC, the U. Postal Inspection Service, the Federal Communications Commission, and 70 state and local law enforcement officials from 24 states.

This nationwide ad hoc task force surfed the Internet one morning, and in three hours, found over web sites or newsgroup messages promoting apparent pyramid schemes. The Commission's staff e-mailed a warning message to the individuals or companies that had posted these solicitations, explaining that pyramid schemes violate federal and state law and providing a link back to FTC.

GOV for more information. A month later, the Commission's investigative staff revisited web sites or newsgroups identified as likely pyramids during Surf Day and found that a substantial number had disappeared or improved their representations and claims made to consumers.

In February of this year, the Commission announced yet another innovative use of the Surf Day concept, this time targeting deceptive e-mail solicitations. The Commission collects unsolicited commercial e-mail from annoyed consumers and other sources. A large percentage of these e-mails contain apparent chain letters or pyramid schemes. The Commission searched its e-mail database, topic by topic, and along with the Postal Inspection Service sent a warning letter to over individuals or companies identified as potentially responsible for promoting pyramids or other get-rich-quick schemes.

Unfortunately, pyramid schemes are likely to continue to proliferate both here and abroad in the near future. However, we can all help stem the tide by working together. Members in the the banking or financial sector can help law enforcement agencies in several ways.

First, if your country does not have a law that makes pyramid schemes illegal, you should encourage your government to enact the necessary legislation and provide sufficient resources for enforcers to pursue pyramid schemes. Associations of reputable bankers or insurers, whose businesses can be jeopardized by the illicit schemes of unlicensed insurers or securities dealers, can be effective allies.

Second, you can report any suspect investment programs or potential pyramid schemes. Technically speaking, this was not illegal, but it required money to get the idea off the ground and Ponzi went out looking for investors. What Ponzi did, which made this illegal, was take money from new investors to pay existing investors. The most famous was celebrity investor Bernie Madoff who ran the longest and largest scam in history.

His trick was trading on his reputation and falsify trading reports to make it look like he was making a profit. But some of the other Ponzi schemes run to the ridiculous. Sergey Mavrodi went to extreme lengths to cover up his Ponzi scheme.

He tried to convince investors it was the government's fault they had lost their money, to the extent he ran for office in the Russian State parliament and won, getting himself immunity in the process.

He was eventually imprisoned in You should also beware of follow-up scams, where fraudsters contact you claiming they can help you get your money back. Under normal circumstance, if your identity has been stolen or your bank account hacked, then you will probably be able to get most of your money back, because it might not have been your fault.