How the Ponzi scheme works

Italian native Carlo Ponzi gave the world one of the first lessons on how to deceive hundreds of investors and fraudulently withdraw money from them.

From time to time, there is a report in the media that someone was offering a dizzying assessment and everything ended in a fiasco for everyone involved. Let’s recall perhaps the most famous deception in human history – the so-called Ponzi scheme.

At the beginning there was an effort to make money by selling Italian IRC coupons, similar to postage stamps, and at the end there was a colossal fraud. But not the one Bernard Leon Madoff created a century later. We also have Czech Ponzos and Madoffs.

From time to time, there is a report in the media that someone was offering a dizzying assessment and everything ended in a fiasco for everyone involved.

Carlo, later as Charles, Ponzi was an Italian immigrant who came to New York for his American dream in 1909. He wanted to get rich from a young age, which he did not succeed in. After years of futile attempts, during which he was often in prison, he came up with a way to win over investors. He devised a simple plan to buy IRC coupons. In practice, this meant buying a large number of these coupons and selling them in the US. Everything had only one flaw in beauty, Ponzi did not find a way to sell the purchased IRC coupons and turn them into money. Nevertheless, he did not hesitate to accept investment deposits from investors and to live on high.

Scam inspired by correspondence

It was not until 1919 that Ponzi’s bright hour came. During this year, he received a correspondence card from Europe, which was in the IRC (International Reply Cupon) format, which means a mail coupon with a prepaid reply. It worked as follows. The sender will send an ordinary international correspondence card with a stamp instead of a stamp, on the other side of the ticket you will write your reply and send it back to the sender, who has subscribed to your reply. You don’t need a postage stamp.

At this point, Carlo Ponzi got an interesting idea. What would happen if he bought cheap IRC coupons, commonly sold in Italy for a few cents, and sold them for dollars in America? Ponzimi assumes that the resulting profit would be a pleasant 400 percent of the entire transaction. The new business plan has two hooks. The first is marginal, Ponzi needs to find investors, the second hook will not be solved for the time being, the sale of Italian IRC coupons in the United States, in which they are simply not for sale.

In January 1920, he established the first branch of his Securities Exchange Company and launched his business plan. In the future, it will have a lot of attributes such as the Ponzi scheme, the Ponzi scheme, or simply and simply a plane or a pyramid.

One hundred percent yield in three months

Charles Ponzi was a shaker of soul and body, so he focused only on receiving investment. At that time, it offered investors a profit of 50 percent or equal to one hundred percent of the profit over a 90-day investment period. Many people jumped at him. He did not even hide his business plan – he will buy cheap postal reply coupons abroad, which he will sell in the USA with the appropriate margin.

Although it paid a profit to investors, it was not a return in the true sense of the word. He only redistributed the deposits received and paid out former investors from them. He earned a five-year sentence for fraud also thanks to the fact that he cooperated fully with the police from the beginning. Otherwise, he was threatened with life imprisonment.

Ponzi scheme vs multilevel

There are a number of systems to get rich, whether legally or not. While the Ponzi scheme, the pyramid or the plane are illegal activities, the MLM, or multilevel marketing, is a legal business. Both approaches work on similar schemes, which differ in detail. While MLM relies on commissions from the network created by the entity under it, fraudulent systems lack this distinction.

The Ponzi scheme, also known as the plane, is an extended model based on newcomers funding those who came earlier. If new souls are constantly being replenished, the scheme can work continuously for several years. As was the case some time ago in the United States, when investor Bernard Madoff promised high appreciation. He took the money for the proceeds from the people who boarded the plane later.

Colossal Madoff’s plane

Unlike Ponzim, Bernard Leon Madoff was a different format. He was not involved in a previous criminal career. He did not get into prison until after his fraudulent scheme, which was based on the Ponzi scheme, was broken. Madoff accepted deposits from new investors, from which he paid out returns to existing ones. Unlike Ponzim, his career lasted a long time. Bernard Madoff founded the investment company Bernard L. Madoff Investment Securities in 1960, in which he was Chairman of the Board for another 48 years. Madoff now lives in prison, where he has been serving a prison sentence of 150 years since 2009. He was left with a $ 50 billion scam. In addition, he was fined $ 170 billion.

Excessive credibility, low financial literacy and the vision of quick earnings. These are the three common denominators for sending money to fraudsters.

In a similar way, fraudsters withdraw money from people for ages. They promise them a high return with almost zero risk. They are protected by the satisfaction of former clients and cheerfully draw lifelong savings from people.

Ignorance does not excuse

One thing all they have in common is to try to get money out of the pockets of trusting people. It is ignorance of basic financial and investment terms, lessons and recommendations. Opposition to large and well-established institutions such as banks, insurance companies and investment companies goes hand in hand with this situation. Believing easy returns without risk is easier than understanding how investing in mutual funds works.

Last but not least, confidants are generally greedy and want to make as much money as possible. However, there is no cure for human greed. There will still be cases where people entrust their savings in the hope that a fat yield will fall into their laps without delay.

In addition to greed, the victims of similar scams are also linked to low levels of financial literacy. Finally, we ask a question that we leave unanswered. How high must the yield be to look suspicious? Is it ten percent, 17 or 30 percent or more?