Financial Crime Awareness
What Is a Ponzi Scheme?
Learn what a Ponzi scheme is, the warning signs to watch for, and how to protect yourself and others from investment fraud. Based on ATO guidance.
Understanding Ponzi scheme fraud
What is a Ponzi scheme?
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.
Warning signs of Ponzi schemes
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
How Ponzi schemes spread
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.
The tax avoidance connection
In some cases, recruiters attract new investors by saying their investment in the scheme is a way to avoid tax. This false claim adds another layer of illegality and should be treated as a major red flag.
Why Ponzi schemes collapse
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.
Protecting yourself from Ponzi schemes
You can protect yourself and others from investing in Ponzi schemes by:
- Being aware of the red flags listed above
- Checking the adviser's Australian Financial Services Licence
- Getting a second opinion from a trusted financial or legal adviser
- Never rushing into investment decisions regardless of pressure
Reporting Ponzi schemes
If you suspect you or someone you know is involved in a Ponzi scheme, refer to the ASIC MoneySmart website for how to report the scheme. You can also confidentially report fraudulent activity to the ATO by phoning 1800 060 062.
Ponzi Scheme Warning Signs
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Too Good to Be True Returns
Promises of high returns with little to no risk-a major red flag that legitimate investments cannot guarantee.
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Consistent Returns
Claims of steady returns regardless of market conditions and other external factors that affect real investments.
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Complex Explanations
The logistics of the investment are too complicated to explain clearly, using jargon to confuse potential investors.
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Recruitment Pressure
Someone you know tries to recruit you, or the recruiter encourages quick decisions before you can do due diligence.
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No Actual Investment
There is no real investment-new investors' money pays existing investors, creating an unsustainable cycle.
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Scheme Collapse
When promoters fail to attract new investors, the scheme collapses, leaving most investors with little to no recourse.
Common questions
How does a Ponzi scheme work?
A Ponzi scheme attracts investors by promising high returns with little to no risk. New investors bring in money which pays dividends to existing investors. There is no actual investment-the operator simply moves money between participants until the scheme collapses.
What are the warning signs of a Ponzi scheme?
Key warning signs include: returns that look too good to be true, promises of consistent returns regardless of market conditions, overly complicated investment explanations, being recruited by someone you know, pressure to make quick decisions, and the recruiter already being invested in the scheme.
Why do people fall for Ponzi schemes?
Existing investors receive genuine dividends (funded by new investors) so they don't suspect fraud. This encourages them to recruit friends, family and acquaintances-often targeting vulnerable groups with promises of quick returns.
Can Ponzi schemes be linked to tax avoidance?
Yes. In some cases, recruiters attract new investors by falsely claiming the investment is a way to avoid tax. This adds another layer of illegality to the scheme.
What happens when a Ponzi scheme collapses?
When scheme promoters fail to attract new investors, the scheme collapses. Most new investors lose their money with little to no recourse to recoup their losses. Early investors who received 'returns' may be required to return funds.
How can I protect myself from Ponzi schemes?
Always check the adviser's Australian Financial Services Licence through ASIC. Get a second opinion from a trusted financial or legal adviser. Be wary of the red flags and don't rush into investment decisions.