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.