Ponzi and pyramid 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 the scheme later usually lose their money. Find out how to avoid these scams.
‘Ponzi’ schemes are named after their creator Charles Ponzi who, in the 1920s, guaranteed a 50% return to investors in the US. However, much of the subsequent 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.
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 so. These scams can also be called ‘franchise fraud’, ‘multi-level marketing’ or a ‘chain referral scheme’.
REMEMBER: IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS!
How it works
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 both types of scheme 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 schemes often involve ‘affinity fraud’ as respected members of a group can be targeted first, receive a high return on their investment and promote the scheme to others before it collapses. Find out more about affinity fraud.
The focus of pyramid schemes is often on money that can be earned from recruiting new investors rather than the return on investment.
How to protect yourself
We strongly advise you to only invest money with financial services firms that are authorised by us: check our Register to ensure they are. You can also see on our Register whether an individual has been approved by us.
Beware of investment opportunities that offer unrealistic returns and consider getting independent professional advice before making any investment decision.
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.
What to do if you have been scammed
If you are concerned you have been scammed you should stop paying money to the individuals involved.
You should then report the scam to us by contacting our Consumer Helpline. Please provide as much information as you can about your investment and the company or person involved, including their contact details.
We may be able to intervene where a firm or individual is selling, promoting or advising on investment opportunities without our authorisation. We can also act where a firm or individual has been accepting deposits without our authorisation.
You should also report the fraud to the police. If you sent money to a UK or overseas bank account, or by another type of money transfer, contact Action Fraud on 0300 123 2040.
Find out about more scams and how to protect yourself from scams.
Page last updated 15/06/2012
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