Wednesday, October 2nd 2019
A Ponzi scheme
is a form of fraudulent investing scam were the investors are promised high rates of return with little risk and minimum efforts. The scheme generates returns for investors by acquiring new investors. The new investors have their money paid to the earlier investors as dividends. The system works as long as the scheme can find new investors to repeat the cycle.
Who was Ponzi?
The Ponzi scheme is named after Charles Ponzi
an Italian immigrant who devised the first scheme in 1919. Ponzi had arrived in Boston in 1903 and worked in various odd jobs including two jail terms for fraud and immigrants smuggling into to the US from Canada.
Around the beginning of the 20 century the postal service started to develop an international reply coupons IRC scheme
which would allowed a sender to pre-purchase postage, an earlier version of pre-paid postage. Companies and individuals were encouraged to send mail with a pre-paid coupon to their correspondence overseas. The receiver would take the coupon to his local post office and exchange it for the postage stamps needed for the reply. Ponzi discovered that the price of these stamps was fluctuating between the different countries the scheme was operating in. He then hired agents to purchase the international reply coupons IRC
in different countries and mail it back to himself. Once the coupons had arrived, Ponzi exchanged it for US stamps which had a greater value and sold the stamps onwards. It is estimated that he made a profit in access of 400% on these transactions.
Ponzi operated his business from an office in 27 School Street, Boston
were his next step proved to be his downfall. In order to enlarge the company turnover, Ponzi approached private investors with a very tempting proposition. He promised a return of 100% profit on a 90 days investment and later a 50% return on a 45 days term. In reality Ponzi's company stopped purchasing IRC's and used the money invested by new investors to pay the dividends for older investors. It is estimated that for the scheme to work, Ponzi could have filed a ship the size of the Titanic
with these coupons. It is estimated that if that around 160 millions coupons were needed to be purchased although the United State Post Office only had 27000 coupons in circulation at the time.
The scheme Ponzi had devised started to fold after a number of articles in The Boston Post
had attracted the attention of the authorities to Ponzi's activities. After spending a many years in prison Ponzi was deported from the US and eventually died penniless in Rio, Brazil on the 18 January 1949.
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