Ponzi scheme

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  • Published
    25th May, 2019


  • Three people, including two women, have been arrested by the ED in connection with an alleged multi-crore ponzi and investment fraud scheme that duped many investors in Telangana recently.
  • They have been arrested under the provision of the Prevention of Money Laundering Act (PMLA).


What is Ponzi scheme?

  • It is a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of heavy returns to the first investors from money invested by later investors.
  • The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that the later investors are the source of their returns.
  • A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute to funds and as long as most of the investors do not demand full repayment and still believe in the non-existent assets of the enterprise.
  • The scheme traces its origin to a person named Charles Ponzi, who became notorious for using the technique in the 1920s.

What are the characteristics of Ponzi scheme?

  • High investment returns with little or no risk: Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. The Ponzi schemes give guaranteed investment opportunity which is suspicious.
  • Overly consistent returns: Investment values tend to go up and down over time, especially those offering potentially high returns. A Ponzi scheme continues to generate regular positive returns regardless of overall market conditions and hence is considered suspicious.
  • Unregistered investments: Ponzi schemes typically involve investments that have not been registered with state regulators. Registration is important because it provides investors with access to key information about the company's management, products, services, and finances.
  • Unlicensed sellers: Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive or complex strategies: The investments in Ponzi schemes cannot be understood and do not give complete information.
  • Difficulty receiving payments: Clients have failures to receive a payment or have difficulty cashing out their investments in these schemes. The scheme’s promoters routinely encourage participants to "roll over" investments and sometimes promise even higher returns on the amount rolled over.

What are the Government efforts to control it?

  • Currently the Ponzi scheme frauds are dealt by Enforcement Directorate under Prevention of Money Laundering Act, 2002.
  • Attempts to regulate Ponzi schemes have taken the form of SEBI’s ‘collective investment scheme’ regulations. By law, any scheme that amasses more than ?100 crore requires SEBI’s permission.
  • The regulations allow SEBI to take action where it comes across an illegal collective investment scheme. To apprehend Ponzi scheme perpetrators, the watchdog can comb through phone records and conduct search-and-seizure operations.
  • The central government has formulated Banning of Unregulated Deposit Schemes Bill. This was approved by Lok Sabha but is pending in the Rajya Sabha. To protect the savings of over-trustful investors, the ordinance has stringent provisions to clamp down on ponzi schemes, including imprisonment up to 10 years for wrongdoers and confiscation of assets of firms found to have accepted deposits without authorisation.

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