Ponzi schemes

Dividends but no real investment

One of the simplest yet most effective investment scams is the ponzi scheme. The promoter promises investors a return on investment and says it is secure, but there is no real 'investment'.

The promoter convinces people to invest with their scheme. They then use the money deposited by early investors to pay the first 'dividend' until investors feel comfortable and decide to invest more. Some investors then encourage their family and friends to join. Eventually the scheme falls apart because the promoter starts to spend the money too quickly or the pool of investors dries up.

Here are tips on how to pick a ponzi scheme from a real investment.

Warning signs of a ponzi scheme

  • The rate of return is sometimes suspiciously high (maybe as high as 10% per month or 120% per year)  - but it can also be just the usual rate of return
  • The person who tries to recruit you is someone you think is trustworthy, like a neighbour or someone in your church or community group
  • The recruiter may have already invested in the scheme and received great dividends

Read our case study on a ponzi scheme to see how Maria loses her money.

Read ASIC's media releases about the conviction of ponzi operator Chartwell Enterprises, and a penalty and ban issued to ponzi 'Mastermind' David Hobbs

Where do ponzi schemes operate?

Fraudsters and operators of unlawful investment schemes sometimes target community groups such as churches to find victims. In some cases, members of the community group have innocently encouraged each other to put money into the illegal scheme.

This means that when the scheme collapses, not only do the investors lose their money but relationships break down between friends, neighbours or community group members.

How long can the scheme last?

If the promoter of the scheme is disciplined about how much money is left in the account to pay 'dividends', the scam can go on for many years. Ponzi schemes only require a few people in their early stages to be successful.

How ponzi schemes work

Here is an example of how a ponzi scheme works and it is shown in the table below. In January, the promoter convinces Katie to invest $100,000 in his scheme. The promoter then pays Katie $10,000 each month using Katie's own money.

As Katie receives $10,000 each month she doesn't suspect anything is wrong and happily recruits friends and work colleagues to invest too. After 3 months, Katie's neighbour Adam decides to invest $100,000 after hearing about Katie's great returns.

After both Katie and Adam have invested their savings, the returns continue to come in April. But in May they don't hear anything from the promoter. They try to contact him but his number has been disconnected.

The promoter has taken off leaving two devastated people in his wake. Katie lost $70,000 and Adam lost $90,000. The promoter got $160,000 out of the scheme.

This is example has only two victims but in reality these schemes can have dozens or even hundreds of victims.

Katie and Adam invest in a ponzi scheme

Month Katie Adam
January Invests $100,000 -
February $10,000 returned -
March $10,000 returned Invests $100,000
April $10,000 returned $10,000 returned
May No contact No contact

What to do if you have invested in a ponzi scheme

  1. Stop investing any more money
  2. Check if the company is on our list of companies you should not deal with
  3. Check the company's licence number on ASIC Connect's Professional Registers.
  4. Report the scam to ASIC

ASIC may be able to prosecute the ponzi scheme operators if they are operating in Australia. ASIC may also be able to issue an alert about the scheme. You should also warn your family and friends, to stop them from becoming victims.

The biggest telltale sign of a ponzi scheme is the suspiciously high rate of return. That old saying applies here: if it sounds too good to be true, it probably is.

Before you invest in any scheme you should do independent checks to see how the returns are really going to be made. Don't just trust the word of the person selling you the scheme.


Related links


Last updated: 27 Nov 2015