A Ponzi scheme is a type of investment fraud that contains processing of expected returns to current investors from the amount of funds collected from the new investors. Ponzi scheme regulators usually convince the potential investors by giving them an assurance of high returns depending on the amount of fund that they deepen into the scheme. This comes with a guarantee of high returns with minute or no risk. Ponzi scheme began in 1920s; it was started by an English man known as; Charles Ponzi. He convinced plenty of English citizens into believing that, by investing in a postage stamp they were assured of higher returns (Skousen 7).
This type of scheme can easily be identified by the model and scope of its operations; it limits its services to soliciting money from willing investors; irrespective of the state of the economy, these investors are always assured of higher returns to the amount that they inject into the scheme. Another factor that is unique to this type of scheme is; the money that new investors invest into the scheme is used to pay the investors that had invested earlier in the scheme. This type of scheme is not registered with any respective authorizing bodies.
There are plenty of warning signs that are associated with this scheme; a guarantee for high investment with zero risk is nearly impossible. There is no type of investment that guarantees for higher returns from simply investing in a scheme, economic mishaps always counter this type of venture by either appreciating or depreciating of interest rates depending on the market forces. Secondly, lack of registration of the scheme is a reason enough to warn any potential investor of investing in this type of investment; registration guarantees for information concerning products, services and company’s management to the investors. Another factor that serves as a warning sign is; complexity in processing and receiving payments. A scheme that is loyal to its investors easily processes any type of payments to its clients at any time. A case of difficulty in processing for payments serves as a warning factor to any potential investor.
There are plenty of dangers that are associated with a Ponzi scheme; complexity and secretive information is one of the key factors that serve as a warning sign. Provision of information to any potential is a key factor to any scheme that seeks to expand its services. Absence of paperwork and lack of proper documentation are another possible warning sign. Paperwork is critical to any two parties that want to make a deal. This guarantees for compensation in case one party defaults.
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Skousen, Mark. ” After the $50 Billion Ponzi Scheme: Four Danger Signs of Financial Fraud.” Human Events 22 Dec. 2008: 7.