David L. McCormick

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How Ponzi schemes work and red flags

On Behalf of | Dec 22, 2021 | White Collar Crimes

White collar crimes are commonly nonviolent schemes committed by people in affluent financial positions, hence the name. One type of white collar crime in Minneapolis, Minnesota, is a Ponzi scheme, which works similar to a pyramid scheme. The crimes of Bernie Madoff cost investors $65 billion and coined the term Ponzi mania.

Overview of a Ponzi scheme

The FBI works with government agencies to track white collar crimes and catch the culprit before the scam starts. The scammer uses deceit, omissions, and misstatements for their own financial benefit, often costing the victims their entire savings. The Ponzi scheme gets its name from Charles Ponzi, a con artist from Italy who ran a foreign postal reply coupon scam.

A Ponzi scheme promises investors a large profit, but they must pay a fee to generate it. It may seem like the scam works, but the profits they generate are coming from new recruits. The difference between a Ponzi and a pyramid scheme is a pyramid scheme usually requires members to build a downline.

Red flags

A common red flag of a Ponzi scheme is making promises of consistent returns in a short time without risk. Any investment involves some risk and profits are not always consistent and may fluctuate based on market health. All investment opportunities must be registered with the Securities and Exchange Commission, the agency that oversees investing and mutual funds.

A person offering these opportunities should be willing to share the investment information and give needed documents. If the person does not wish to share information or explains in terms hard to understand, it could signal a scam.

Since white collar crimes impact the economy, anyone involved in them faces stiff penalties. The prosecution must prove the defendant willingly and knowingly committed the crime. The defendant may fight the charges with some valid defenses, such as no knowledge.