In News:

Probe agency seizes Business Jet at Hyderabad Airport in "Ponzi Scam" Case.

What is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investment operation where returns to earlier investors are paid using the capital of new investors, not from legitimate business profits. It creates an illusion of high returns with low or no risk.

• Origin: Named after Charles Ponzi, who orchestrated such a scam in the USA in 1920.
• Mechanism:
  • Relies on a continuous influx of new investors.
  • Uses word-of-mouth, high-return promises, and deceptive marketing.
  • Collapses when new investments stop, leading to default on payouts.

Ponzi vs Pyramid Scheme

• Ponzi Scheme: Pays earlier investors from newer investors' money, without involving them in recruitment.
• Pyramid Scheme: Rewards early participants for recruiting others, creating a hierarchical structure that collapses as recruitment slows.

Recent Developments

• ED Action (2024): The Enforcement Directorate (ED) seized a business jet at Hyderabad airport in connection with a ?850 crore Ponzi scam involving a Hyderabad-based company.
• Odisha Case: The STA Crypto scheme operated as a Ponzi-cum-multi-level marketing (MLM) scam, luring people with promises of crypto earnings in return for recruiting more members.

Legal Safeguards Against Ponzi Schemes in India

• Prize Chits and Money Circulation (Banning) Act, 1978
  • Bans prize chits and money circulation schemes.
  • Enforced by State Governments.
• Banning of Unregulated Deposit Schemes Act, 2019
  • Specifically prohibits unregulated deposit-taking schemes including Ponzi models.
  • Provides a unified framework to protect depositors.
• Prevention of Money Laundering Act (PMLA), 2002: Used by ED to trace and seize proceeds of crime from Ponzi operators.

Red Flags of Ponzi Schemes

• Unusually high and consistent returns
• No clear investment strategy or revenue model
• Over-emphasis on recruitment
• Difficulty in withdrawing funds
• Lack of regulatory approval or transparency

Consequences of Participation

• Investors: Risk of complete loss of capital.
• Promoters: Face legal action, asset seizure, and imprisonment.
• General Public: Erosion of trust in financial systems.

Preventive Measures for Individuals

• Verify if the scheme is registered with SEBI, RBI, or other regulators.
• Be cautious of too-good-to-be-true returns.
• Conduct due diligence and consult financial advisors.
• Report suspicious schemes to authorities like SEBI or EOW.