What is Ponzi Fraud?
Ponzi fraud, also known as a Ponzi scheme, is a type of investment scam that promises high returns with little or no risk. Investors are typically enticed by claims of extraordinary profits in a short period. However, instead of generating profits through legitimate business activities, the scheme pays returns to earlier investors by using the capital from new investors. This creates the illusion of a profitable enterprise, but there is no real underlying investment.
Ponzi schemes are named after Charles Ponzi, who became infamous for running a fraudulent investment operation in the early 20th century. While Ponzi schemes can appear to be legitimate for a time, they are ultimately unsustainable and collapse when there aren’t enough new investors to pay returns to the existing ones.
How Ponzi Fraud Works:
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Promises of High Returns
Ponzi fraudsters often advertise exceptionally high returns on investment, luring individuals with the promise of minimal risk. The returns appear to be consistent, which draws in more investors eager to make a quick profit. -
Early Investors Paid with New Funds
Instead of generating profits from legitimate business ventures, the Ponzi scheme operator uses money from new investors to pay returns to earlier investors. This creates the appearance of profitability and keeps investors engaged. -
No Real Investment
There are no actual profits being generated; the scheme relies entirely on new investor funds. Ponzi schemes typically invest nothing at all, as the focus is on attracting new money to pay off existing investors. -
Collapse and Losses
The scheme eventually collapses when the operator can no longer attract enough new investors to pay returns, or when too many investors attempt to withdraw their money. At this point, most investors lose their money, while the operator may disappear with the funds.
