Ponzi schemes are investment scams or fraud that pay existing investors with funds collected from new investors. There is no real investment.
Ponzi scheme promoters use money deposited by early investors to pay the first 'dividend'. This payment helps to convince investors the investment is real, so they feel comfortable and invest more.
Eventually all Ponzi schemes fall apart. They collapse when new investor deposits can no longer support 'dividend' payments to existing investors. Or the pool of new investors dries up.
Warning signs of a Ponzi scheme
- The rate of return is suspiciously high and may be 'guaranteed'. The return may be up to 10% per month, or more.
- The investment term may be long term or 'unended'.
- Someone you trust unknowingly promotes it as an investment. It could be a neighbour or someone in your social circle.
- The promoter has already invested in the scheme and received great dividends.
- The scheme may be promoted by 'affiliates' on digital platforms, such as social media or online chat groups. It may use buzzwords like AI and crypto.
- They are offering investment in a financial product but do not hold an Australian Financial Services (AFS) licence. Or you can't find independent information about the product.
- You are strongly encouraged to reinvest your dividends. Or you have trouble getting your dividends or withdrawing your funds.
How Ponzi schemes work
Ponzi scheme promoters convince people to invest money by promising higher than average returns.
The promoter uses the money invested to pay a return. The investor thinks they're getting the promised return and don't suspect anything's wrong. But they may not fully understand the investment. Or how it can supposedly provide much higher returns than other investment options.
Because it seems so good, investors often encourage their family and friends to invest too. Ponzi scheme promoters can target community groups, like places of worship, to find more investors. The schemes can have hundreds of victims.
Ponzi schemes usually don't ask you to recruit new members or take any specific action. But they may encourage you to get excited about it, in the hope you tell others.
Pyramid schemes
A Ponzi scheme that seeks the referral of new investors is more commonly known as a ‘pyramid scheme’.
Pyramid schemes may appear to operate as a real business selling financial products and services (including managed investments). But their core goal is to recruit new members rather than increase sales.
Pyramid schemes:
- often ask for a fee or to invest money to join
- lure you with an ‘exciting business opportunity’ rather than a financial product
- promise you more money if you recruit others to join it, perhaps offering you commissions to get new members
- may use online articles, groups and social media posts to detail how it works and target networks of family and friends
Pyramid schemes are illegal and regulated by the Australian Competition and Consumer Commission (ACCC). Report pyramid schemes to Scamwatch.
What to consider before you invest
Before you invest in anything, do your own research on the people, companies and investments. Make sure you understand:
- how it works and how you make money
- if it’s realistic for you to participate long-term (for example, if you have to constantly recruit, it probably isn’t)
- if it aligns with your values (for example, if you’re asking your network to be involved, what happens if it goes wrong)
- how the promoter generates the funds to pay any dividends and returns
If you are considering investing in a financial product, like a managed fund or trading on financial markets, the promoter must hold an Australian Financial Services (AFS) licence.
Check if they are on ASIC’s investor alert list and follow the steps on check before you invest.
What to do if you suspect a Ponzi scheme
Ponzi schemes may operate from overseas or within Australia. You may not be able to get your money back if it has been paid out to other investors or spent by the operator.
If you think you have invested in a Ponzi scheme, report it to ASIC.
Tiana and Simon fall for a Ponzi scheme
In January, a Ponzi scheme promoter convinces Tiana to invest $100,000. The promoter promises a 10% return each month. He pays Tiana $10,000 each month using Tiana's own money.
Because Tiana receives the promised return each month, she doesn't suspect anything is wrong. Tiana encourages friends and colleagues to invest too. After three months, Tiana's friend Simon invests $100,000 after hearing about Tiana's great returns.
The returns continue to come in until April. In May, Tiana and Simon hear nothing from the promoter. They try to contact him but his number has been disconnected.
Unfortunately, the promoter has taken off with the money. Tiana loses $70,000 and Simon loses $90,000. The promoter gets $160,000 out of the scheme.
Tiana and Simon report the scheme to ASIC, so that they can warn others.