Definition and origin
A Ponzi fraud (or Ponzi scheme) is named after Charles Ponzi, an Italian-American fraudster who in the 1920s promised investors high returns on international reply coupons. In reality, he used the money from new investors to pay the returns to earlier participants. The system seemed to work as long as sufficient new participants joined — until it inevitably collapsed. The principle has since been repeated countless times all over the world. In a Ponzi scheme, there is no actual investment, no real product, and no real profit. The only source of “return” is the money of new participants. It is a mathematical impossibility to maintain this system — sooner or later there are not enough new participants and it collapses like a house of cards.
How does it work in practice?
The fraudster begins by presenting an investment with an attractive, stable return — typically 10-20% per year, high enough to stand out but not so high that it is immediately unbelievable. Early investors actually receive their promised return — paid from the deposits of later participants. This builds trust and ensures that existing investors invest more money and enthusiastically attract new investors. Meanwhile, nothing is actually invested. The money goes to the fraudster (who maintains a luxurious lifestyle), to the “returns” of earlier investors, and to the costs of maintaining the illusion. As long as the inflow is greater than the outflow, the system holds up. But every Ponzi scheme grows exponentially in its need for new money — and that growth is finite.
Characteristics of a Ponzi scheme
Be extra alert to investments that exhibit the following characteristics: consistently high returns that are not influenced by market conditions, little or no transparency about the investment strategy (“it is a secret”), difficulties when you want to withdraw your money, unclear or unverified administration, an organization that is not supervised by the AFM or a similar regulator, and the emphasis on recruiting new investors instead of achieving investment results.
Difference from a pyramid scheme
Although Ponzi schemes and pyramid schemes look alike, there are subtle but important differences. In a Ponzi scheme, most investors do not know that their return comes from the deposits of others — they genuinely think they are investing. In a pyramid scheme, participants are actively and consciously asked to recruit new members, and the revenue model is based on recruitment. In practice, the models often overlap and there are hybrid forms.
Famous examples
The most notorious example is the Bernard Madoff case in the United States, who ran a Ponzi scheme of tens of billions of dollars for decades. In the Netherlands, there have also been cases of Ponzi fraud, albeit on a smaller scale. The structure of some foreign investment constructions — where early investors appear to be paid out from the deposits of later investors — exhibits characteristics reminiscent of a Ponzi scheme.
Defrauded by a Ponzi scheme?
If you suspect that your investment is or was a Ponzi scheme, take action. Keep all documents and proofs of payment. Report it to the police. Report the fraud to the AFM. And contact Foundation BFRG to discuss whether a joint damage claim is possible.
