Architect and operator of the world’s largest financial fraud, Bernard Lawrence “Bernie” Madoff, died on April 14, 2021 in a federal prison. He was an American financier and convicted fraudster who ran the world’s largest Ponzi scheme and was serving 150-year sentence for money laundering, securities fraud and several other wrongdoings. He defrauded thousands of investors out of tens of billions of dollars over the course of almost two decades.
Madoff, who had also been the chairman of the board of directors of NASDAQ, an American stock exchange, admitted swindling thousands of clients out of billions of dollars in investments over decades. Notably, a court-appointed trustee has recovered more than $13 billion of an estimated $17.5 billion that investors put into Madoff’s business. At the time of his arrest, fake account statements were telling clients they had holdings worth over $60 billion.
Death of this Ponzi schemer is not an end to the world of financial fraudsters. But it should serve as a constant reminder to one and all, especially the gullible investors that Ponzi traps exist even today and fraudsters have been inventing new tricks by leveraging technology to defraud people of their hard earned money. And people continue to fall in the trap and losing money at their will.
It has been found that greed to make easy money is so intense that it sometimes overpowers ones financial wisdom. There are innumerable instances of investors falling prey to Ponzi traps. Volatility in the share market and low returns from bank fixed deposits lures these investors to take route of dubious unregulated schemes to earn quick bucks.
One should note that all unregulated schemes collapse in the end once the money leaving the scheme becomes greater than the money entering it. Any investment scheme promising higher rate of interest in today’s context has to be a very risky proposition. And the chances are that it is a Ponzi trap to rob you of your hard earned money.
In Kashmir, we witnessed some unregulated fund collecting companies in nineties promising to grow money by 34 times in 25 years by investing in plantations. Others offered doubling money in 15 months by investing in fictitious potato trade or real estate. Ultimately, those companies vanished from the scene and gullible investors were duped by crores of rupees.
Meanwhile, let me share a warning from the experts at the Centre for Counter Fraud Studies at the University of Portsmouth, United Kingdom. They have cautioned that with the coronavirus induced economic crisis deepening, highest levels of fraud and cybercrime have become order of the day. There are also concerns that existing preventative measures are not getting sufficient attention to deal with the heightened threats of Ponzi traps and identity thefts that come from a deep recession knocking at our doors.
During the ongoing Covid crisis, online Ponzi schemes have surfaced. The fraudsters have launched mobile apps luring users to invest money, with promised return on investment (ROI) at 1% a day. Even fraudsters issue debenture certificates to people, assuring high returns and many investors have lost crores of rupees after being trapped in these fraudulent debenture certificates.
What is a Ponzi scheme?
A Ponzi scheme is a fraudulent investing scam promising high rates of return at little to no risk to investors. The scheme generates returns for early investors by acquiring new investors. These schemes usually collapse on themselves when the chain of investors breaks and new investments stop.
Let me explain. Investors are paid from money collected from new investors instead of the scheme’s earnings. The scheme runs as long as new investors keep investing in the scheme. We can put it as a fraudulent investing scam promising high rates of return with little risk to investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. Once the new investments stop, these schemes collapse on themselves.
With the advent of technology, the concept of Ponzi scheme, named after a swindler Charles Ponzi, who orchestrated the first one in 1919, also got transformed. The worst victims of these unregulated schemes have been the poor and the financially not-so-fully-aware-population.
What should you do in such an ugly scenario?
As far as saving yourself from Ponzi traps is concerned, the responsibility lies on your shoulders. We have seen most of the investors want their money to grow in leaps and bounds in a short period of time. It’s this greed and urge for easy money which makes people to fall for it. So don’t be greedy. Before investing in a scheme, investors should ask questions about how the scheme plans to generate high returns, and what the underlying business model is.
How to identify a Ponzi trap?
The basic thing is to stay away from fund companies offering higher rate of interest with minimum risk on your investment and even claim to double your money in a shorter period. During ongoing Covid crisis, many fraudsters have come online offering 1% returns on your investment every day or guarantee to double your money in a short period. You should stay away from such offers. Current money market condition suggests that any investment that promises you over 12% annual returns has high probability of being fraudulent. It’s the equities which, according to the investment experts, can on an average deliver 10-12% annualised returns over the long term. At the moment no other avenues can deliver better returns than equities. But such investment also carries higher risk.
As an investor you need to keep this in mind that money can double in over seven years’ time if you are paid 10% rate of interest on your money deposited. An investment fetching you 12% will take slightly over six years to double your money.
It’s very important for you to understand the business model of the scheme. Fraudsters will usually describe their schemes in a most complicated way to confuse you. If you don’t understand the business model or modus operandi of the scheme, avoid investing in such schemes.
Remember, Ponzi schemes follow multi-level marketing model. In this model, they may even offer commission to investors to get more investors on board, besides, promising high returns with low risk.
The fund company running Ponzi schemes may also display company registration certificates and other documents to pitch as genuine company. Don’t go by these certificates. Registration certificates or any other government stamped paper may be genuine, but the most important thing is to find out the relevance of the business model of the company. So don’t get lured by the government registration certificates etc.
What’s a Chit Fund Scheme?
Chit funds are not investments and should not be even confused with Ponzi schemes. They are savings cum borrowing schemes, bringing savers as well as borrowers on the same platform. This scheme provides investors with immediate access to money at the time of need and can also raise loan immediately.
The mechanism of Chit Fund scheme is that a person enters into an agreement along with a specified number of people such that all of them shall subscribe to a certain amount of money or some kind of gain. When the person’s turn comes, either by claiming it himself or by lot mechanism or by some kind of auction he draws the amount of money he needs. By means of periodical installments over a time period, he has to
The scheme is managed in organised as well as in unorganised way. Organised chit fund is supervised and managed by a company known as Chit Fund Company. There are unorganised chit funds that run informally among family or friends.
Should one go for a chit fund scheme? Organised or otherwise, mostly risks remain associated with a chit fund scheme. There are innumerable instances when a chit fund manager disappeared with the corpus amount. There’s no assured security that a member would be depositing installment after winning the bid. So in the given situation when frauds even in organised chit fund schemes have robbed investors of millions of rupees, it is inadvisable to invest in chit funds. Remember, there is very little scope of recovery in case of a scam.