What is a Ponzi scheme?

Ponzi schemes are basically pyramid selling schemes which promise to make investors rich quickly – but they often fold quickly and without warning, leaving investors out of pocket.

How do Ponzi schemes work?

People are promised large sums of money if they invest, and, at first, the scheme appears to be working. This initial success then attracts new investors, their cash is then used to pay off the original investors, and the cycle continues.

A Ponzi scheme appears successful if the following three things are happening:

• New investors are adding funds
• Investors aren’t immediately asking for their repayments
• Both parties still believe they’ll get back their original investments

Why don’t Ponzi schemes work?

Ponzi schemes are effectively a scam - money that’s invested is always being ‘recycled’, and the company never makes a real profit – it just redistributes the money, claiming growth, and claims it’s doing well. As long as new investors keep putting their money in, the company appears to be doing well.

However, when people stop investing, the scheme collapses - generally just leaving the person at the top with all the money.

Are Ponzi schemes always scams?

A Ponzi scheme is always a scam because it’s built on the idea of paying out money which never materialises.

Sadly, they can be hard to spot until the company goes bust and you can’t access your investment.

How to spot a Ponzi scheme

Here are the main warning signs of a Ponzi scheme:

• You’re told you’ll get a guaranteed return, with minimal or no risk (there is no such thing – genuine investment opportunities point out that you can lose money)
• You’re pressured into making quick decisions you’re not comfortable with
• You spot negative reviews online, and the company’s social media accounts are littered with complaints
• You don’t understand the terms being used, and everything sounds like jargon
• You don’t understand how the scheme works and the people in charge are unwilling to tell you how the company makes money
• You’re told to keep the investment a secret from family and friends
• There are issues with getting paperwork and/or official documents
• If you ask to get your cash out, given a list of reasons to keep your money within the scheme – the people in charge will often try to prevent investors from cashing out by offering even higher returns for staying put.

If in doubt, check the Financial Services Register to see if the company contacting you is regulated by the Financial Conduct Authority (FCA). Also, if you’re thinking about making an investment, you should consider seeking independent financial advice before you part with any of your money.

What to do if you’ve been scammed by a Ponzi scheme

• Cancel all future payments
• Cut off all communication
• Document any communications you’ve had with the company, such as emails or letters – these may help you give evidence if you need to prove you were scammed
• Report the scheme organisers to the FCA on 0800 111 6768
• Scammers often sell peoples’ details, so watch out for fraudsters using different identities to target you again
• Be aware that "fraud recovery fraud" exists – this is when scammers claim to be police officers or legal professionals and offer to help victims of fraud regain their money. They claim that they can help you regain your money but they charge fees.

Can I get my money back if I’ve been the victim of a Ponzi scheme?

The issue with getting money back from a Ponzi scheme is that people willingly hand over their money, often without checking that the company they’re investing in is legitimate.

If you’d had your identity stolen or your bank account had been targeted by scammers, you probably would be able to get your money back – as the authorities would see the fraud as not being your fault.

The FCA recommends the best way to maximise your chances of getting some money returned to you is to is to act quickly and seek professional legal advice.