How Ponzi schemes swindle money

Maulik Tewari | Updated on March 12, 2018 Published on April 27, 2013

Joining the long list of fake money making schemes — Potato bonds, emu farming, goat rearing — the Kolkata-based Saradha Group’s ponzi scheme, is the new kid on the block.

But what are ponzi schemes? These are fraudulent investment plans where the money raised is never really invested.

Early investors into the scheme are paid off with money raised from newer investors. This lasts as long as the fund is flushed with money. With no real business plan, it’s only a matter of time when the whole thing goes bust.

‘Ponzi’ owes its name to a Boston-based Charles Ponzi who swindled people of their money way back in the 1920s.

But it was in 2008 that the biggest ponzi scheme of all times was unravelled. The fraud scheme was worth $65 billion and run by Bernard Madoff, an American investment advisor.

Even though every ponzi is unique in its investment pitch, the modus operandi remains the same. People are coaxed into investing by promising lofty returns.

Adding to the bait, strong referrals by known people in the market, helps to bring in more investors.

Next, the scheme has to be kept going, to ensure a steady flow of investors.

The initial batch of investors is paid the assured returns for some time to come, so others start to take note of the ‘lucrative’ scheme.

The survival of a ponzi scheme requires yet another thing - a drama of some kind of investment activity taking place. This is to ward off any suspicion of fraud

Nonetheless, given the way a ponzi scheme operates, it is bound to blow up one fine day .

India’s very own Saradha Group operated ponzi scheme recently went bust. Deposits ranging from a hundred to a few thousands to even a lakh with tenure of one to several years were raised from people .

Coaxing people into investing their money, was made easy by hiring agents of Peerless General Finance and Investment, which had already been in the business of small savings collection in the state.

Besides, the group having over a hundred registered businesses - real estate, automobile, education and entertainment – only helped create an illusion that the money raised was being put to good use.

The fact that the group had a big presence in media and connect with some of the bigwigs in West Bengal only added to the illusion of safety.

The fact that many have been fooled time and again has hardly lent caution. Get-quick-rich schemes underpin people’s greed. Bitten, more than once, yet not shy. What say?

Published on April 27, 2013
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