Let’s say you found an investment website offering returns suspiciously high. The adviser, website or promoter ‘promises’ investors a high return on investment and say it is secure, but you haven’t heard of them and your research makes you feel somewhat uneasy. Usually when things are too good to be true they usually are. 

Why? You need to be informed about what is called a ‘Ponzi Scheme’.

These are a type of pyramid scheme which are based on the principle of ‘rob Peter to pay Paul’. The name comes from Charles Ponzi, a New England offender from the 1920s, who assured investors, in just 90 days, a 40 percent return on their investment, compared with 5 percent in a savings account. This worked for a period of time but eventually the investment went bust, and this fraudster was convicted. 

How this works in this modern day is investors are lured in on the promise of large returns. The scheme operator takes in money from new investors and uses it to pay off the earlier investors until no more new investors are left and the whole scheme collapses, with the newest investors losing everything.

Basically, you are tempted to invest your money, but underneath it all, there is no actual ‘investment’. Ultimately the scheme fails because the scheme operator quickly spends the money or the pool of investors runs dry. These schemes only require a few people to invest in the early stages to be successful and can go on for years undetected if there is enough money to pay ‘dividends’.

Following is an example of how this works:

You invest $100,000 in a scheme in September. The promoter then pays you $10,000 each month using your own money.

You receive $10,000 each month so you are not suspicious, and you encourage family and friends to also invest, which they do.

After you all have invested your savings, the returns continue to come in December. But in January, you don’t hear anything from the promoter. You try to contact this company but the telephone number has been disconnected.

The promoter has disappeared leaving you and your friends devastated. You have lost $70,000, not to mention what your friends have lost, which is now the promoter’s gain from this scheme.

If you feel that you have invested in such a scheme you need to stop, check this list: www.moneysmart.gov.au/scams/companies-you-should-not-deal-with

You need to check the company’s licence number on ASIC Connect’s Professional Registers. You should also report the scam to ASIC. If the scheme operators are trading in Australia, ASIC may be able to prosecute and also raise an alert about the scheme. Warning family and friends is also helpful to avoid any further investor falling victim.

So before you invest in any scheme you should do independent checks to see how the investment returns are really going to be generated. Don’t just trust the word of the person/website marketing you the scheme.

And remember, the biggest tell-tale sign of a Ponzi Scheme is the suspiciously high rate of return. That old saying applies here: If it sounds too good to be true, it probably is.

The information provided is general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of a qualified advisor before you make any decision regarding any products mentioned. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly Northern Tax & Financial Services Pty Ltd employees or agents shall not be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.