Scamwatch: ponzi schemes

It pays to be wary of investments that seem too good to be true...

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B2X945 Man sitting at his desk with a laptop and bills looking concerned. Image shot 2006. Exact date unknown.  man; businessman

Stay one step ahead of the fraudsters with our series of articles giving you the lowdown on the scams they use to trick people out of their hard-earned cash - and how to avoid being taken in by them.

This week, ponzi schemes - also known as pyramid schemes - that inevitably lead to those who invest in them losing money.

How does it work?
A ponzi scheme is a fraudulent investment operation where the individual or organisation running the scheme uses money received from new investors to pay returns to those who invested earlier.

Named after Boston businessman Charles Ponzi, who used the technique to defraud investors in 1920, they are often also known as pyramid schemes (although these usually involve a group of people investing a sum of money before persuading their friends and families to do the same in the hope of receiving a cash windfall, rather than an investment business).

The problem with schemes of this kind is that they always run out of new investors eventually, at which point those who have paid into them lose out.

This is the fate thousands of investors are currently facing after investing in an alleged $1.5 billion (£1 billion) ponzi scheme run by a Las Vegas investment company.

How can I avoid being caught out?
Like most investment fraudsters, the companies behind ponzi schemes often offer returns that are much higher than you could find elsewhere.

That's why it is always a good idea to be wary of any investment that seems too good to be true, especially if the people proposing it use hard sell tactics such as rushing you to make a decision.

I've been defrauded. What can I do?
If you have been caught out by a ponzi scheme, you should report the fraud to Action Fraud (0300 123 2040).

You are unlikely to get your money back, but at least this way it can stop the people running the scheme from luring in any more investors.

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