A Ponzi Scheme

A Ponzi scheme is a scheme where the returns to existing investors are paid from money put into the scheme by subsequent investors, rather from real profits generated by the business.   It is fraudulent because investors are persuaded into thinking that they are investing into are investing in an underlying business that is generating real profits and revenue.

The manager of the scheme  knows the operation is a financial revolving door.

As money comes in from new investors on one side it flows out as returns to existing investors.  In a  Ponzi scheme, the business only makes money by persuading more and more investors into investing until the inevitable, all the investors find that their capital has vanished often along with the operators and promoters of the scheme.

It is named after the after the Italian Charles Ponzi, who in 1920 swindled millions out of the citizens of Boston with a scheme involving international reply postal coupons.

Spotting a Ponzi Scheme

It may not be as easy as you first think to spot a Ponzi scheme but a common factor is that it is usually operated in a non regulated activity. It is often sold as "an alternative investment"

Things to look out for are:

Non regulated activity "alternative investment schemes"

• It appears to good to be true.
• It is being sold through word of mouth.
• The returns offered are far higher than the current market.
• The person selling it is NOT a registered (FSA) individual.

This is NOT a comprehensive list but are warning signs.  Do not invest money in anything that is "an alternative investment scheme" that you can not afford to lose and where you have not taken professional advice.

An attitude of cynical suspicion will stand you in good stead.

Identity theft: stealing your name

Consider how easy it is to obtain information about you. A copy birth certificate and driving-licence, public records like the the Land Registry, Companies House and the Electoral Roll and the fraudster has got enough to make your life a misery.

A birth certificate eg , will supply your mother's maiden name .

Identity thieves often get your mail redirected, apply for credit-cards in your name and your real address using the former address on the application. Suddenly Mobile phone accounts, loans, overdrafts - all can happen in your name.

Protecting yourself against Identity thieves.

Be careful when you give private financial information to anyone. Consider do they really need this and why are they asking for it. Tear up or better, shred documents like credit-card slips, statements etc.

Experian and Equifax charge £2.00 allowing you to apply for your own credit-reference files. These files will show any applications for credit immediately report anything you can see is doubtful. For more information on see our page on how to obtain your Credit files

Do not hand over your credit or Debit card in a restaurant or store get them to bring the machine to you, or go the machine.. When entering your PIN put your free hand over the keypad. Do NOT be embarrassed about appearing to regard anyone in the immediate area as suspicious.

Financial fraud comes in many forms but be sure of one thing. Out there in this global village somewhere behind a telephone call, an email, a web site, an unsolicited directory advert opportunity or a share buying service there is too often a criminal wanting to steal your money or your identity or both.

We will be adding pages to the site again pointing to resources that you can use to protect yourself or to take action if you are a victim. Please check out our series of videos from the OFT on scams and how to avoid them.

We have a page on Boiler Room Scams.  This is a major problem on an international level.  Please read, visit the FSA information and make sure you do not become a victim.   These operators are sophisticated plausible individuals who will build trust over a period. 

The Financial Services Authority estimates that each year 30,000 people fall victim to such frauds in the UK at a cost of £300m.

This is a particularly nasty fraud the victims are often reluctant to come forward , embarrassed that they have been "so Stupid" as they see it.   These fraudsters are clever sophisticated individuals who have developed techniques and approaches over long practice which encourages a slow build up of trust.  The average victim loses £20,000 and many a great deal more.  It has been the cause of marriage break ups , suicides and financial misery for many of the victims.

Typically the fraudulent Broker will telephone and persuade a victim to purchase shares in a company not listed on any of the main exchanges.

The regulator said it is also investigating a type of share fraud where imposters pretend to be legitimate brokers looking to trade on behalf of shareholders  where the fraudster contacts people who are on shareholders' registers. An offer is made to buy or sell shares in the company in return for a fee. Once the fee is sent, the broker disappears.

A spokeswoman for the FSA said these fraudsters were "cloning legitimate firms to use their details". She added that the FSA has updated its advice to shareholders who receive cold calls, urging them to telephone the number of the registered company, as opposed to the number given out by individuals.

The fraudsters will often claim to be a perfectly legitimate firm that is registered with the FSA (which you can easily check see our firm check page). The advice is to check with the FSA register and use the phone number there to call the firm.