What is Ponzi Scheme?

Ponzi Scheme is an investment fraud system where investors are paid with the return of their own money or with money from future investors.  

More clearly, the Ponzi Scheme uses the collected payments from new investors to pay previous investors. Ponzi Scheme scammers often promise investors to make a profit with little or no risk.  However, the main purpose of Ponzi regulators is not for the investor to make a profit. They pay investors to make the plan seem credible. 


For example, a country's low-interest rate may mean cheap borrowing for people who need funds. Or it could mean that people who demand interest income to invest their savings earn lower earnings. Ponzi scheme fraudsters try to win the investor by promising high-interest rates with low risk. He then suggests more interest to another investor to pay the money of the person offering interest. So the plan becomes a cycle. 


History of Ponzi Scheme

Ponzi Scheme's name comes from Charles Ponzi, who implemented the first plan in 1919. 


Ponzi has promised its investors to earn at least 50% profit from international reply coupons. Through international reply coupons that allow the sender to pre-purchase postage, the recipient can exchange the coupon for another postage stamp. So, Ponzi convinced tens of thousands of investors that they were making a profit using postage stamps. 


Ponzi saw the varying prices of postage stamps from country to country as an opportunity and enabled them to purchase cheap international coupons through agents. He then exchanged the coupons he bought for more expensive stamps. Thus, stamps were sold at higher prices to make a profit. Through this plan, Ponzi convinced tens of thousands of investors that they were making arbitrage profits using postage stamps. However, the non-existent profits caused the system to crash after a while. 


The Relationship Between Ponzi Scheme and Money Laundering 

The most famous Ponzi Scheme history in recent years, belongs to Bernard Madoff Investment Securities LCC. For more than a decade, Bernard Madoff has defrauded investors and built a large investor network from which he collected cash. 


Bernard Madoff, the largest investment fraud in the US, also highlighted the importance of anti-money laundering compliance solutions. Businesses must take a risk-based approach and take precautions against the risk of money laundering and fraud, both of their customers and the business.


Besides, there are certain anti-money laundering regulations that every business has to comply with. These regulations were created to prevent fraud, corruption, terrorist financing, and money laundering, and businesses that do not comply with these regulations may be subject to severe penal sanctions. 


However, toward the various case studies conducted, businesses must create a Suspicious Activity Report (SAR) for any risk situation and report it to the Financial Intelligence Unit (FIU).