These schemes originate from the 1920s when Charles Ponzi, an infamous ‘investor’, promoted a number of scam investments which later became known as Ponzi schemes. The largest and probably most well-known Ponzi scheme, which brought in over $65 billion, was carried out by Bernard Madoff, who is currently serving 150 years in Butner Federal Correctional Complex. Mr Madoff was adept at enticing investors and created a façade of exclusivity amongst the super-rich, which, coupled with the consistent returns, made his scheme irresistible.

A Ponzi scheme, unlike a genuine investment vehicle, pays investors from capital introduced by new investors rather than profits earned by the investment. This type of scheme will usually pay out the promised high return to the first group of investors in order to generate interest and bring in new funds.

Usually, a Ponzi scheme has a limited shelf life and will collapse for one of the following reasons: the promoter vanishes with the money; not enough new people are investing funds in the scheme to enable the operator to pay out returns; or a significant economic downturn that causes investors to withdraw their funds en masse.

Investors should be on the lookout for the hallmarks of frauds that could be Ponzi schemes. One such example is an investment opportunity offering exceptionally high returns, which are ‘guaranteed’ or without ‘risk’. High returns are almost always accompanied by higher risk, so any investments offering amazing returns for little or no risk should always ring warning bells.

Promoters may also try to dazzle you with technical jargon and prey on a lack of investor knowledge, putting pressure on investors to make a hasty decision. Additionally, these schemes are often unregulated making it easier to avoid detection. As a result, there is usually incomplete information on investments which should be another red flag for investors.

To avoid falling victim you should conduct a careful analysis of any investment opportunities and check if they are regulated or licensed. You should also check that the returns have some correlation to the market. Investment values generally go up and down over time so be wary of investments that promise regular positive returns.

Before making a decision, it is a good idea to meet with a Licensed Independent Financial Adviser to answer your questions. If you suspect that you may have been a victim of a Ponzi scheme you should contact a local Certified Fraud Examiner who can assist you with considering the available options and whether to report the matter to the relevant local authorities, such as the Bermuda Police Service, the Bermuda Monetary Authority, or the Bermuda Financial Intelligence Agency.

KRyS Global, a fraud investigation and asset recovery firm based in Bermuda, wrote this article as a way to increase community awareness about fraud. For more information contact Mathew Clingerman, managing director, KRyS Global at Mathew.Clingerman@krys-global.com