Find out how get-rich-quick schemes like Ponzi and pyramid schemes work, and how to protect yourself from these scams.
Get-rich-quick schemes promise investors high returns or dividends not usually available through traditional investments. While they may meet this promise to early investors, people who invest in a scheme later usually lose their money.
Two scams to look out for are Ponzi and pyramid schemes.
‘Ponzi’ schemes are named after Charles Ponzi, who guaranteed a 50% return to investors in the US in the 1920s. However, much of the money he received was used to pay ‘dividends’ to earlier investors. The scheme collapsed when he was unable to attract more money to pay investors who entered the scheme later. Unfortunately there are still schemes that follow this approach.
Pyramid schemes work in much the same way, although investors are encouraged to recruit more people and money by being paid commission when they do. These scams can also be called ‘franchise fraud’, ‘multi-level marketing’ or a ‘chain referral scheme’.
How get-rich-quick schemes work
Ponzi and pyramid schemes occur where payments are made to existing investors using money from new investors. This helps make the scheme seem genuine and profitable to the early investors and encourages them to attract more people and money.
But these types of get-rich-quick schemes collapse when the unsustainable supply of new investors and money dries up. Investors usually find most or all of their money is gone, and that the fraudsters who set up the scheme claimed much of it for themselves.
The focus of pyramid schemes is often on money that can be earned from recruiting new investors rather than the return on investment.
Get-rich-quick schemes often involve respected members of a group, such as community, religious, ethnic, elderly or professional groups. Leaders within a group might be targeted first, receive a high return on their investment and promote the scheme – or even introduce the people running it – to others before it collapses.
Migrant groups and people speaking minority languages are especially being targeted like this, as they can feel isolated and have difficulties understanding the scheme.
Remember: if it sounds too good to be true, it probably is!
We strongly advise you to only invest money with financial services firms that are authorised by us, and check the Register to ensure they are. You can also see on the Register whether an individual has been approved by us.
Beware of get-rich-quick schemes or investment opportunities that offer unrealistic returns, and consider getting independent professional advice before making any investment decision.
Take care if members or leaders of any group promote an investment scheme. Always do your own research and consider getting independent advice before handing over your money.
Also be careful when an opportunity to invest your money requires you to bring in subsequent investors to increase your profit – and be especially wary if you are told you can earn more from introducing investors than from the return on investment.
Be suspicious if you receive or are promised a very high and consistent return on your investment. And remember that early investors in certain schemes receive high returns but the money will eventually dry up and later investors can lose the lot.
There are more steps you can take to keep your savings safe – find out how to protect yourself from investment scams.
You can also find out about reporting scams.