Fraudulent activity in relation to creating Ponzi schemes is considered a relatively common white collar crime. It is a type of investment fraud, since the organizers earn money through scamming new members of the scheme.
Ponzi schemes usually work by falsely promising a low-risk investment for extremely high returns.
Why are Ponzi schemes not viable?
Ponzi schemes are fraudulent and not viable because they do not have a sufficient amount of actual earnings. One of their defining characteristics is the fact that their main source of income comes from new members. This means that it is not a legitimate business, and only established members are earning significant profits.
How can Ponzi schemes be identified?
If a company is widely advertising a low risk investment with a promise to yield high returns, it is likely that it will be flagged at some point as a Ponzi scheme. It will also raise a red flag if a company is seeming to be desperate for new members, and spending more time on trying to recruit new members than on selling their product.
Ponzi schemes can also be identified through paperwork issues. Many sellers that are a part of Ponzi schemes may be unlicensed and lack any paperwork whatsoever. Their business and organizational strategies might also be mysterious and overly complex.
Any type of Ponzi scheme is fraudulent, but many companies may appear to be Ponzi schemes when they are actually completely legal. If you have been accused of operating a Ponzi scheme, it is important to defend yourself and protect your company's reputation.
Source: SEC.gov, "Ponzi Schemes," accessed Nov. 14, 2017