Ponzi Scheme in Practice, 10 Signs that You Have Invested in Fraud

Have you invested your money in an online business that looked good at first, but you now doubt whether you have done the right thing? Or are you planning to invest in some online project, but may be worried about being scammed? Then you’re at the right place. I would like to share my personal experience with you; it relates to one of the most frequently used forms of online fraud – the Ponzi scheme. This article details how this scheme works in practice from beginning to the end; how to detect it; and when it is best to withdraw money and walk away.

If you are familiar with the information on my website, you may have already discovered that I learned the hard way, having experienced a few scams myself. I was inexperienced, perhaps impatient, wanting to make a lot of money quickly. A friend introduced me to a program and presented it as guaranteed earnings – a definite winner!

I lost my entire investment, as did my friend. Fortunately, it was only approximately $1000 so not a major disaster for us. Sadly, however, I also know persons who invested their life savings in similar schemes. These schemes were Zeekrewards (my first online business experience, not including PTC) and Banners Broker.

Before I will introduce 10 characteristics, or more precisely, stages of Ponzi scheme functioning to you, it would be appropriate to briefly explain what Ponzi scheme actually is.

What Is a Ponzi Scheme?

Investors are drawn to promises of high yield returns within a short period of time. The owner of a Ponzi scheme does not actually invest the money received. They will keep some of the money from investors for themselves and pay off the rest to a few investors who joined the scheme at the beginning – being among the first investors. Therefore the only source of income for the Ponzi scheme are the deposits of the investors. 

Money from new investors joining the scheme will then be used to pay “interest” to the investors who joined the scheme at the beginning of the program. When new users stop registering, the company goes bankrupt as the source of funding has dried up.

The Ponzi scheme does not actually generate any profit, as the owner does not invest the partners’ deposits, nor is there any actual product that would generate money. In other words, the Ponzi scheme is basically just a redistribution of money between its users, the investors.

A Simple Ponzi Scheme

A typical example of a program that operates as a Ponzi scheme is a High-Risk Investment Program (HYIP). It is a simple system to understand and should be clear to everyone at a glance, where such a program derives its revenue.

Characteristically, a 200% appreciation on your investment is offered over a period of time. For example, a deposit of $100 for 20 days will pay off $300. With such a high yield return, the program is generally recommended to other would-be investors as this amounts to “free money”. Additionally, an additional percentage return is paid for each person introduced to the system.

As a company offering such services does not actually generate any money (the only income of HYIP is the money from investors); it is clear how and why the company can accurately predict yield after 20 days.

Withdrawing money from these kinds of systems can be quite complicated and in 90% of cases, the money invested will be lost. This is the reason why an HYIP is considered to be an online business with the highest risk chance.

Please be aware that setting up such schemes is illegal and considered to be a criminal offense in some countries.

A Sophisticated Ponzi Scheme

While in the case of a simple Ponzi scheme it should be clear to everyone where the scheme gets the money to repay, etc., in a sophisticated Ponzi scheme, it is a bit more complicated. Owners of such fraud try to hide the illegal scheme either by having an actual product or by “real” appreciation of investors’ deposits. However, there is no actual appreciation, it is fraudulent and designed to give the impression of a legitimate investment opportunity or Multi-Level Marketing (MLM) company.

A Hybrid Scheme

Increasingly more common are so-called Hybrid scams that offer investment appreciation and products. Such programs operate on the principle of Ponzi and Pyramid scheme. There are some significant differences between the two schemes. To read more about the differences, click here.

All these Ponzi schemes work similarly though the products tend to differ somewhat. It may be an investment in the recycling of plastic waste (the Recyklix project), or investment in cryptocurrencies such as Onecoin, Coinspace. Or, it may be a guaranteed sports betting project such as Webet4you project. The creativity of such fraudulent projects is seemingly unlimited. These systems can be designed in such a sophisticated manner so as to make it very difficult to spot the fraud.

How Does the Ponzi Scheme Work? – 10 Phases

Let us discuss what all these Ponzi-based schemes have in common. Based on my previous experience, I would summarize the process as follows:

1. Aggressive Marketing, How to Attract as Many People as Possible

The first phase aims to create a huge hype to get as many users in the system as possible. There are several strategies used to achieve this, mainly, an engaging video about getting rich quickly that involves some emotionally moving stories, about how someone who may have been homeless became a millionaire, thanks to the company, etc.

To gain your trust, they have no difficulty appearing in public and organizing conferences and various events where they present their ‘perfectly thought-out business plan’. This was the case for Banners Broker. The owner himself even appeared in the media. This later turned out to be a huge mistake.

2. The Legitimacy of the Project Will Be Highlighted

At this point, you are still in the “honeymoon period”, where everything is great, the company has bold plans although, mostly unrealistic. Their sole aim is to reassure the investor that he/she is on the right track to get even more benefits or opportunities. They may recommend investment or purchase of an entry package, stressing that you need to invest now because tomorrow might be too late.

Some Ponzi schemes give the possibility of registration without an initial financial investment. Others will even give you an entry bonus – e.g. Recyclix project – recycling plastic waste. But inevitably, at a later date, they will use highly sophisticated methods, to convince you to invest your own money.

Recyclix offered a $20 entry bonus for registration. It’s a clever strategy. Generally, people will try to see how it works, to see that the company pays (yes, usually every scheme pays – at the beginning) and then people, encouraged by the initial payout, invest their own money into the system.

3. Paying Off a Few Investors to Demonstrate That the Scheme Works

The clever move of any Ponzi scheme is to pay off a few users, notably, those who have brought a lot of people into the system.  This demonstrates to others that it’s not a scam and that the system can really pay off. This is also an encouraging signal to other people who may be hesitant. After all, the company will be here forever, so there’s nothing to worry about. Your investment will repay itself after a few months. Bear in mind that each Ponzi scheme initially pays off.

4. Failing Interest in This Business Opportunity

The first sets of problems begin to emerge after some time. These can occur as early as a few months after the scheme has begun. In some cases, however, they may not emerge until after one year.  It all depends on how the system is set up for that particular company. When the number of new investors is rapidly reduced or even stopped completely, the scheme will collapse.

Logically, with the growing number of applicants for a payout, and the decreasing number of new registrations, it can only mean that the company’s expenses exceed their income. And since the Ponzi scheme does not actually generate any profit (except for investors’ deposits, the company has no other source of income), the owner/s have no means of paying out to their investors.

In order for the owner to control the scheme’s inevitable crash, they choose a selective payout based on performance whereby, only the recruiters who bring in a lot of new people into the system will actually receive a paycheck.

5. State Authorities’ Warnings

In some cases, government authorities (the financial market supervisory authority, consumer protection organizations, police, etc.) could issue a warning about investing in a given company. However, this is not always the case.

If such a warning appears in several countries, it is definitely time to withdraw money from the program.

Do not be mistaken in thinking these warnings are specific as they generally only reconsider any cooperation with a company ABC. The authorities themselves are not able to directly act against any companies that are based abroad. However, bear in mind that the mere fact that they have issued a warning is clearly saying something.

6. The Problems with Banks and Internet Wallets

If a company starts paying out through the Paypal payment system but later decides to move to some unknown internet wallet, regard this as suspicious. Paypal has very strict conditions of use. They do not cooperate with gambling companies, or with a pyramid or Ponzi schemes.

If companies change their payment methods (e.g. a bank, an online wallet) too often, it usually means that the institutions don’t want to be involved in their manner of business. One can only guess why….

7. Growing Criticism and Censorship

With increasing problems with any scheme grows criticism. Negative comments from investors afraid of losing their money will begin to appear in Facebook groups. However, since no one likes negative comments they will either be deleted or the person will be thrown out of the group altogether.

8. Depositing Cash in Hand-up Line

When co-operation with banks reaches a stalemate, the fraudsters who know well how these systems work could take the initiative. They know that the pyramid is about to collapse, but are determined to make more profit.

A well-functioning pyramid begins to disintegrate into a number of small private pyramids where the money is moved from one user to another. Whilst the main organizers of fraud do not like this very much, it gives them time to put things in order and to establish cooperation with another bank that is not yet aware of them.

9. Hackers, Hackers, and Hackers

To save the system and delay the inevitable collapse, they could change the terms of their business; increase minimum payout amount; extend your payout period from 3 days to 2 months; clear your digital account balance(s) so that you have to start over – The possibilities are endless. In some cases, they have even deleted peoples’ accounts for no reason at all.

There are also regular technical problems occurring within the system. But most commonly, hackers are used as an excuse. Up to 8 out of 10 fraudulent companies that operate on the Ponzi scheme are likely to claim that hackers have gotten into the system and stole all the money.

Not only will you be not able to withdraw any money from the system, but the company will no longer be making any selective payouts. By this, even the greatest supporters of the system will have understood that they were scammed. This is usually the end of the Ponzi scheme.

10. The End of a Dream of Getting Rich

Every Ponzi scheme, as well as the pyramid scheme, will end one day. The result is usually as follows:

• 10% of people earn money
• 20% will have their investment returned, and,
• the remaining 70% of investors lose their money.

The Ponzi scheme can end in several ways:

1. The authorities will react at the right time, track down the activities of such companies – as was the case with the online business Zeekrewards. The SEC stormed their offices and froze all investors’ money – some $ 250 million
2. The registered users leave the company themselves and the company disappears after a while. This kind of business can continue functioning for a few weeks or months as was the case with Banners Broker.
3. Smart and creative fraudsters never give up. It is often the case that the owner of a Ponzi scheme changes the name of the program or even the website, then they are back in business again with a new identity. In this case, there will not be any criticism of the new scheme anywhere on the Internet, so a few people will likely be caught out again.

Conclusion

This article outlines ten characteristic features of the Ponzi scheme from its origins to its collapse. It would be fair to say that all companies which have decided to do business in an illegal manner, function similarly.

However, the Ponzi scheme is not the same as legally conducted Multi-Level Marketing (MLM). In the case of MLM, commissions are received as a result of selling products or services on behalf of the MLM Company (read about this in the MLM section, in particular, the basic knowledge of MLM). Revenue is earned and profits generated when the products and/or services are sold. Consequently, the MLM Company has the money to make cash payments. However, with the Ponzi scheme, no profits are gained, since no investments are made. Yet, promises of greatly exaggerated profit margins are made to the members. But where does the money for your paycheck come from? If you have read this article carefully, it should not be a problem for you to answer this question.

Haven’t you find what you were looking for in the article? Then try to check the discussion forum. 

Have you ever come into contact with a Ponzi scheme? I will be glad if you join the discussion and share your experiences.

Did you find this article informative and the information useful? If so, please share it with your friends. If you are interested in finding out more about online earnings, I would definitely recommend joining my Facebook group, where I regularly post news about various work opportunities from home, doing business via the Internet and making money online. Do you prefer tweeting? Then follow me on Twitter.

George H.

My name is George and I currently work from home as a freelancer for a PR agency selling advertising. I also freelance as an online marketer for an e-shop, and I am actively involved in creating this website. I am always looking for interesting opportunities on how to make money online. I share my findings with my readers on this website. I consider this to be my hobby. I hope, that you can find some legitimate work from home, or perhaps you might be able to earn a little extra money.