A Ponzi scheme is a form of fraud that attracts investors by promising high returns with little to no risk. New investors bring in money which pays dividends, or other types of payments, to existing investors. There is no actual investment offered by scheme operators.
Some warning signs of Ponzi schemes include:
- the rate of return looks too good to be true
- a promise of consistent returns regardless of market conditions and other external factors
- the logistics of the investment are too complicated to explain
- someone you know tries to recruit you
- the recruiter encourages you to make a quick decision
- the recruiter has already invested in the scheme.
Existing investors in a Ponzi scheme receive dividends funded by new investors and are unlikely to suspect that it is not a genuine investment. This encourages these investors to target friends, family and other acquaintances into the scheme, often attracting more vulnerable groups and individuals with the promise of quick returns on their investment.
In some cases, recruiters attract new investors by saying their investment in the scheme is a way to avoid tax.
Ponzi schemes need new investors and their money to survive. When scheme promoters fail to attract new investors, the scheme will collapse, leaving most new investors out of pocket and with little to no recourse to recoup their losses.
Example: Ms Jones loses her nest egg
Ms Jones makes a comfortable living as an office manager. She's already saved $200,000 for her retirement but is on the lookout for more investment opportunities.
While talking to a friend in the office, a colleague overhears. Her colleague says that her financial adviser has been able to get her a great return on her investment, far higher than the market average. Intrigued by her colleague's claim, Ms Jones asks for the financial adviser's contact details.
When Ms Jones calls the financial adviser, he promises a risk-free investment with a high rate of return, regardless of market conditions. He convinces Ms Jones that he has cracked the code on investments, using a lot of complicated financial jargon in the process. However, he says that he unfortunately cannot take her as a client because he only takes 10 clients at a time. She is disappointed and asks him to let her know when a spot is available. A few days later, he calls back to tell her he can now take her as a client and rushes to sign her up before other potential clients take that spot. In the rush to sign up, Ms Jones forgoes the usual checks she would normally do to make sure the investment is legitimate, such as checking the financial adviser's Australian Financial Services LicenceExternal Link or getting a second opinion from another trusted adviser.
Ms Jones believed her retirement fund was being invested in ways that would see her double her nest egg. However, her fund was being used to pay dividends to investors like Ms Jones' colleague, who had previously signed up, so they didn't suspect anything was wrong.
A few months go by and Ms Jones has not seen any returns on her investment. Meanwhile, the financial adviser has spent Ms Jones' money on himself. The scheme comes undone when the adviser cannot find new investors, and therefore cannot pay dividends to his existing ones. Upon further investigation into the financial adviser, Ms Jones finds that he was operating a Ponzi scheme, and reports him to ASIC.
Unfortunately for Ms Jones and the rest of the investors, there is little recourse for their losses. Their money has been lost to the financial adviser's scheme and has been used to fund his lavish lifestyle. Ms Jones now must start building her retirement fund from scratch.
End of exampleReporting Ponzi schemes
We are committed to disrupting all forms of financial fraud in the community that causes harm and undermines the integrity of the tax system, including Ponzi schemes.
You can protect yourself and others from investing in Ponzi schemes by being aware of the red flags and checking online resources about schemes from the ATO and ASIC. If you are unsure if a scheme is a Ponzi scheme, you can get a second opinion from a trusted financial or legal adviser.
If you suspect you or someone you know is involved in a Ponzi scheme, refer to the ASIC MoneySmart websiteExternal Link for how to report the scheme. You can also confidentially report fraudulent activity to us by making a tip-off or phoning 1800 060 062.
The Ponzi scheme warning signs, and how to protect yourself and others.