Ponzi Schemes: What they are and how not to fall for one

Everyday Ponzi schemes dupe lakhs of investors of crores of rupees. Lakhs of unsuspecting investors put in their life’s savings into these schemes under the promise of high returns.

Any scheme that promises to get you rich quickly, is potentially a Ponzi scheme. A Ponzi scheme lures investors into putting in their money with the promise of high returns.

Your money is shifted from one place to another. But with no stable business model, any Ponzi scheme is bound to fail. Eventually the money runs out, the returns fizzle out and the company shuts shops.

There are several types of Ponzi schemes, but one common scheme that has recently left many investors in the lurch is a Halal scheme.

In the Muslim community, the Sharia Law prohibits drawing interest on money. They invest in Halal or ethical schemes where money is invested in trading of commodities, or in the form of partnerships where the profit is shared. Halal means permissible.

How to spot a Ponzi scheme

- If its too good to be true! And that should be the first red flag.

- Consistent should be a good thing, right? Not always. Returns on any investment fluctuates based on the market condition.

- If you aren’t given authentic paperwork, or if the scheme has a complex structure that isnt being explained to you.

- If the scheme doesn’t let you withdraw your principal amount or insists you stay invested for higher returns.

- Always check if it is registered with a financial regulator. A company registered with the RoC does not mean its authentic. The investment scheme has to be registered under the RBI, SEBI, IRDAI or PFRDA. You can check on RBI’s Sachet website.

As soon as you get suspicious, stop investing further. If they have your bank details, let you bank know. Victims can also file a complaint on the Sachet website to alert regulators and catch the scam in time.

There may be respite going ahead.

In July, the Lok Sabha passed the Banning of Unregulated Deposit Schemes Bill, 2019. This bill seeks to set up courts that will ensure that the investors get their money back by attaching and selling property of those running the Ponzi scheme in 180 days.

Watch the video below to know more: 

Here is the full transcript of the video:

IMA jewels, Heera Gold, Saradha, Rose Valley – what do all these have in common?

They were all Ponzi schemes that duped lakhs of investors, of crores of rupees. Many unsuspecting investors put in their life’s savings into these schemes because of the promise of high returns. And these are just the biggest ones. Every other day, people lose lots of money to such Ponzi schemes.

So, we’re here to tell you what a Ponzi scheme is, and how not to fall prey to one.

Any scheme that promises to get you rich quickly, is potentially a Ponzi scheme.

A Ponzi scheme lures investors into putting in their money with the promise of high returns. 

Where the money is being put, how the business is running doesn’t matter. It could be anything: A simple investment scheme, partnership in a business, investing in commodities... All that matters is that you are promised fantastic returns.

As more investors come in, their money is used to pay the old investors. A part of the money also goes into making the owner of the scheme rich. Your money is basically being shifted from one place to another.

But with no stable business model, ALL ponzi schemes are bound to fail. Eventually the money runs out, the returns fizzle out and the company shuts shops. 

The losers? Investors.

There are several types of Ponzi schemes, but one common scheme that has recently left many investors in the lurch is a Halal scheme.

In the Muslim community, the Sharia Law prohibits drawing interest on money. So fixed-income investments that give regular interest are out of the question. 

Instead, they invest in Halal or “ethical schemes” where money is invested in trading of commodities, or in the form of partnerships where the profit is shared. Halal means permissible.

In the case of IMA and Heera Gold, investors were made partners in the gold trading business and profits were shared. These schemes lured the Muslim community under the pretext of faith and social responsbility. 

How do you spot a Ponzi scheme? For starters, it’s probably too good to be true! And that should be the first red flag. If you are approached with an investment scheme that promises returns of nearly 20% or more, make sure you investigate further before putting your money there.

A second red flag is consistent returns: Consistency should be a good thing, right? Not always. Returns on any investment fluctuates based on the market condition.

A third marker is dodgy details: If you aren’t given authentic paperwork, or if the scheme has a complex structure that isn’t being explained to you, that should be a red flag!

Also, if you can’t withdraw your principal amount or if the scheme insists you stay invested for higher returns, it could be sign of a scam.

Also, always check with the agent or the company if it is registered with a financial regulator. 

If a company is registered with the RoC, it  does not mean it's always authentic. The investment scheme has to be registered under the RBI, SEBI, IRDAI or PFRDA. You can check on RBI’s Sachet website.

In the case of Halal schemes, India’s Banking Regulation Act 1949 does NOT recognise such banking, though many investment instruments offer a ‘Halal option’. 

But Islamic banking is not formally recognised or regulated in India, thus attracting Muslims towards Halal schemes that promise high returns to avoid traditional banking. Thus increasing the risks of scams such as IMA and Heera Gold.

What to do if you’re trapped in a Ponzi scheme

No matter how wary you are, you could still fall into the trap of a Ponzi scam.

As soon as you get suspicious, stop investing further. 

If they have your bank details, let you bank know. 

Victims can also file a complaint on the Sachet website to alert regulators and catch the scam in time.

There may be respite going ahead.

In July, the Lok Sabha passed the Banning of Unregulated Deposit Schemes Bill, 2019.

This bill seeks to set up courts that will ensure that the investors get their money back by attaching and selling property of those running the Ponzi scheme. This would be done in 180 days.

The bill also seeks to create an online database for information on deposit takers where they must compulsorily register.

Most often, Ponzi schemes thrive over a person’s greed to make a quick buck. So always remember, if it sounds too good to be true, then its most likely a scam!