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Ponzi Scheme
Context:
An IIT graduate, Pratik Radhakrishnan alias Rohan Menon, was arrested in Bengaluru for allegedly running a ?65-crore Ponzi scheme involving fake investment promises.
Definition and Characteristics
- Ponzi Scheme: A fraudulent investment scheme promising high returns with little or no risk.
- Key Features:
- Returns are paid to earlier investors from the money collected from new investors.
- Requires a continuous inflow of new investors.
- Collapses when fresh investments stop.
- Often masked as multi-level marketing (MLM) or direct-selling.
Historical Background
- Named after Charles Ponzi (1919), an Italian swindler in the U.S.
- He promised 50% returns in 45 days using international postal reply coupons.
- Became a symbol of financial fraud worldwide.
Difference Between Ponzi Scheme and MLM (Multi-Level Marketing)
|
Aspect |
Ponzi Scheme |
MLM (Legal Direct Selling) |
|
Basis |
No real product/service |
Actual product/service sold |
|
Returns |
Paid from new investors’ money |
Earned from product sales |
|
Legality |
Illegal (money circulation) |
Legal, unless it resembles pyramid |
|
Sustainability |
Collapses when new investors stop |
Can sustain if genuine business exists |
Safeguards in India
Legislative Framework
- Prize Chits and Money Circulation Schemes (Banning) Act, 1978
- Bans money circulation and chit fund-like Ponzi schemes.
- State governments are primary enforcement agencies.
- Prevention of Money Laundering Act (PMLA), 2002
- Enforcement Directorate (ED) investigates Ponzi cases as money laundering offences.
- Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act)
- Comprehensive law to ban unregulated deposit-taking activities.
- Punishment: 1–10 years imprisonment, fine ?2 lakh–?50 crore.
- First claim on recovered money: depositors.
- Provides for repayment/disgorgement mechanisms.
Regulatory Oversight
- RBI: Issues warnings and regulates NBFCs to prevent deposit fraud.
- SEBI: Monitors collective investment schemes and unregulated fundraising.
- State Police & ED: Investigate fraud cases under criminal law and PMLA.
Recent Examples in India
- Saradha Scam (West Bengal, 2013) – multi-crore chit fund scam.
- Rose Valley Scam – Ponzi scheme disguised as real estate and hospitality.
- Pearls Agrotech Scam – raised deposits from farmers promising land ownership.
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