Ponzi schemes
What is a Ponzi scheme?
Made famous in the United States by Charles Ponzi, these swindles promise high returns on group investments. Each participant is encouraged to bring in new investors. There is no actual investment—investors' money is used to pay out returns to those drawn into the scheme to create the appearance of a profitable investment. The only people who make money are the scam artists who skim money from the scheme.
How does a Ponzi scheme work?
Ponzi schemes require a constant inflow of investors’ money or they collapse. Even though the original investors sometimes see returns, they often do not get all of their money back.
Promoters often encourage original investors to ‘roll over’ or reinvest their funds in the scheme. To get people reinvesting or to help with the word-of-mouth promotion of the scheme, the fraudsters pay a return to early investors from deposits made by later investors. Fraud artists may also create fake statements to show investors how their funds are growing at a phenomenal rate.
Sometimes Ponzi scheme operators spend money on administering the scheme and paying out investors, but the majority of investors’ money is stolen or squandered. In some Ponzi schemes, investors’ stolen money will move offshore. This helps fraud artists avoid having the money seized by authorities.
Watch out for one or more of these common characteristics:
- Promises of high returns that you will receive in payments over time
- Talk about pooling your money with other investors or offshore with experts
- People touting complicated, secret investments that have some kind of exclusivity to them
- Individuals selling investment products who are not registered to trade securities or other investment products
- Statements and contracts not associated with a registered firm, or documentation that looks like it could be a forgery
Research before you invest
Check our Fraud warning signs section to familiarize yourself with the language and techniques found in almost every investment scheme. There are also videos of people who talk about how they had their savings taken by a fraud artist.
Visit our Avoid investment fraud section to learn about techniques and tools you can use to protect yourself against fraudulent investment schemes and their promoters.
Report it and warn others
If you have been approached or know of an investment that fits the description above, contact your provincial securities regulator immediately.
In BC, contact BCSC Inquiries. You can also anonymously report suspicious activity through InvestRight’s Report a scam webpage.
Residents from other Canadian provinces can find contact information for their provincial securities regulator at
www.securities-administrators.ca.
If you know a person who has put money into, or is considering contributing, to an investment like the one described above, give or send them this information, and encourage them to do more research.