What you need to know about Ponzi schemes

‘A fool and his money are soon parted’ as the old saying goes. Right?

Not necessarily.

The financial scams being promoted these days – especially over the internet – have become as sophisticated as the clients they are attempting to target.

What is a Ponzi scheme?

They are named after Charles Ponzi, a well-known fraudster who used this technique to fleece his victims in the United States early last century. Ponzi schemes are scams in which unusually high returns are advertised to lure in new investors. The capital invested by new investors goes to pay income to earlier investors, so new investors are always needed to keep the scheme going. In reality, the funds are commonly used by the promoters to prop up their lavish lifestyles.

Recent example of a Ponzi scheme

Derek Turner – Turning Enterprises International

In Australia, a sophisticated scam was perpetuated in the early 2000s against wealthy investors by a New Zealand-born conman named Derek Turner through the company he controlled, Turning Enterprises International. Based in the tax-haven of Bahamas, he promised investors monthly returns of 37 per cent as a result of his ‘sophisticated proprietary investment techniques’.

Turner’s clients included successful businessmen, professional share traders and celebrities. After a lengthy investigation by the US Federal Bureau of Investigation (FBI), he was convicted in 2006 of fraud and is currently serving a 20-year sentence in a US Federal Prison.

Tips for spotting a Ponzi scheme

Determining what is a Ponzi scheme versus a legitimately sound investment opportunity isn’t always easy. Here are some aspects to consider if you come across an investment opportunity that just seems too good to be true.

• Emotive language: This is often used to trick investors into parting with their cash. Be careful of advertising that promises a “high-yield investment opportunity” or states that the investment uses “top-secret” investment techniques allegedly unknown to the wider financial community.
• Lack of transparency about how returns are generated: Make sure you really understand the investment. Ask as many questions as you need to – it’s your money after all! Don’t be tempted to invest in anything you don’t fully understand.
• Secrecy: A genuine investment promoter will be licensed with the Australian Securities and Investments Commission and will be happy to provide you with fund data that can be verified. Be suspicious if promoters are overly secretive in their dealings with you or use diversionary tactics to avoid providing information such as audited financial statements .
• Check fund statements thoroughly: To maintain the appearance of authenticity a fraudster will need to provide fund statements to investors. Checking the reliability of any returns data can go a long way to uncovering a possible scam.

It pays to be careful. Always seek advice from a licensed financial planner about new investments.

Refer to www.fido.gov.au for further information about financial scams, including Ponzi schemes.