Ponzi Scheme

🔹 Definition

A Ponzi Scheme is a type of fraudulent investment scam that promises high returns with little or no risk to investors, but instead of generating actual profits, it uses funds from new investors to pay returns to earlier investors. The scheme depends entirely on a constant flow of new money and inevitably collapses when recruitment slows or too many investors try to withdraw their funds.

Ponzi schemes are illegal and are closely monitored under financial fraud, investor protection, and AML enforcement frameworks.

🔹 Frequently Asked Questions (FAQs)

Q1: How does a Ponzi scheme work?

• Early investors are paid with money contributed by new investors
• Promoters advertise consistent and unusually high returns
• There’s little or no genuine business activity or investment behind the scenes
• The scheme eventually collapses when it becomes unsustainable

Q2: How is a Ponzi scheme different from a pyramid scheme?

• Ponzi Scheme: Central operator controls all funds and promises returns to all investors
• Pyramid Scheme: Participants recruit others to invest and earn commissions, forming a multi-level chain
• Both are unsustainable and fraudulent, but Ponzi schemes often appear more “professional” or structured

Q3: What are red flags of a Ponzi scheme?

• Guaranteed or unusually consistent returns, regardless of market conditions
• Lack of independent audit or third-party oversight
• Pressure to “reinvest” instead of withdraw
• Vague or secretive about business model or trading strategy
• Promoters are often unlicensed or unregistered

Q4: What are the AML/CFT implications of Ponzi schemes?

• They involve large volumes of illicit proceeds being funneled through financial institutions
• Funds may be layered through offshore accounts, shell companies, or crypto wallets
• AML systems must detect suspicious transaction patterns, such as cyclical inflows and outflows
• Financial institutions may be required to file STRs/SARs and cooperate with law enforcement

Q5: Are Ponzi scheme victims entitled to recover their losses?

• In some cases, authorities may freeze assets and initiate clawback proceedings
• Court-appointed receivers or trustees may attempt to redistribute remaining assets
• Recovery depends on the stage of the scheme, jurisdiction, and asset traceability