ponzi scheme
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In this article, Shivangi Sinha discusses how to lodge a complaint against Ponzi Scheme.

Investment fraud

Investments may have two faces:

  • Positive: Leading to development of an individual and the economy of the country.
  • Negative: Involving certain deceptive practices that scammers use to induce investors to make investing decisions.

A number of cases have been filed for a wide range of such deceptive practices. These scammers generally persuade innocent people to invest their money in stocks, bonds, real estates, or even currencies, by providing them false information.

Common investment frauds

Most common investment frauds include:

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Pyramid schemes

A Pyramid scheme is a sort of a business structure wherein members are recruited by the scammers with a promise that they can turn their small investments into large profits within a short period of time. There is no sale of products or services, rather the existing member gets money by recruiting other new members.

Ponzi schemes

A Ponzi scheme is a business model wherein the proceeds of new investors are used to pay off returns to the earlier members. No investment is made in this scheme.

Pump and dump

In this scheme, the scammer generally buys the stock of a small company at a very low price but they fraudulently sell these stocks at an inflated price in order to make huge profits and then they vanish by dumping his shares.

Advance fee fraud scheme

In advance fee fraud schemes the investor is required to pay an advance fee in order to get a deal of making a significant share in a large sum of money and after receiving the fee amount the scammer becomes untraceable.

Offshore scams

In order to receive huge profits, the investors are asked invest certain sum of money in the offshore scheme. These are done in order to avoid tax.

Ponzi schemes

Ponzi scheme is named after Charles Ponzi of Boston, Massachusetts, the person who brought in the concept of paying out returns to the earlier investors with money received from new investors.

It was in the year 1919 when Ponzi decided to set up his own office in Boston. After some days, he got a letter from a Spanish company which had sent an international reply coupon (IRC).

Not having much idea about the IRC, made Ponzi curious to know more about it. After doing a long inquiry about the same, he found a loophole in the whole operating system of IRCs.

Origin of Ponzi scheme

The system of IRCs worked by exchanging this coupon for one or more highly expensive postage stamps Ponzi used his mind to make high profits by buying IRCs in one country and exchanging them for more and more expensive stamps in another country.

For a smooth working of his business, Ponzi appointed his agents in different countries and sent them some money, who would then, buy IRCs there and send it to him at the US, where he used to exchange them for expensive stamps which technically gave him worth much more than what he used to spend on buying them. This is how the whole racket worked.

An online finance company named Ezubao in 2016 cheated around 900,000 investors out of more than $7.6 billion. The finance company offered a number of fake investment products in return of up to 15 percent. But the investors received not a single penny rather, the whole amount was spent upon buying luxury cars, real-estates, and other items.

The Reserve Bank of India (RBI) launched Sachet (www.sachet.rbi.org.in ), a website from where anyone can get information about companies that are allowed to accept deposits. You will also be able to lodge complaints and share information about illegal acceptance of deposits by unscrupulous entities.

Identification of Ponzi Schemes

In order to avoid being a victim of such Ponzi schemes, it is important to identify them. The method and the technology used for these Ponzi schemes may differ from time to time and place to place, but all of them share a similar operational mechanism such as:

  • The investors are promised a high return on investments with a very low risk of return or a very consistent flow of returns are received regardless of the market conditions, or
  • It makes difficult for the investors to pull off their money.
  • These are generally an unregistered investment having a very secretive or very complex strategy and they do not generally send their regular performance statements or the reports of their investments to their clients.
  • These are some of the red flags of Ponzi schemes, as laid down by the U.S. Securities and Exchange Commission.

Difference between a Ponzi scheme and the Multi-level marketing

Ponzi Scheme Multi-level marketing
Ponzi scheme is a fraudulent scheme multi-level marketing is a marketing strategy
there is no actual sale of the product, rather there is fake investment scheme. it is usually used as a channel for selling products and accordingly, the commission is paid to the distributors at the multiple levels when the product is sold.
The strategy of Ponzi scheme is to earn the illegal profit by conducting the fraud. A multi-level marketing company is a simple marketing strategy to increase your network (also known as network marketing), and accordingly, you are paid commission based on your sale reports.

Legal consequences of indulging in Ponzi schemes

Punishment for such schemes are:

  • Imprisonment which can extend up to 10 years.
  • Fine not exceeding INR 50 crores.

The government of India had also constituted an Inter-Ministerial Group for identifying the loopholes in the existing framework for deposit-taking activities and to suggest administrative or legislative measures including formulation of a new law to cover all relevant aspects of deposit-taking.

According to the latest report, the Government has decided the punishment of imprisonment which should not exceed 7 years for those who are running unregulated deposits or Ponzi schemes.

In the US, after the Ponzi schemes are unraveled, a trustee is appointed to recover money as far as it is possible, to make payments to the creditors. Moreover, a lawsuit is also filed against the perpetrator behind the Ponzi scheme.

Sahara group

  1. The founder of Sahara group Subrata Roy was accused of duping investors of some $5.4 billion.
  2. Sahara channelized an investment option wherein the investors had deposited money in schemes launched by the Sahara India Real Estate Corp Ltd and Sahara Housing Investment Corp Ltd, which was illegal according to SEBI.
  3. The Supreme Court of India issued a non-bailable arrest warrant against Subrata Roy.

Saradha group scam

The Saradha group scam of 2013, around 1.7 million investors of a Ponzi scheme. When it collapsed it lost the US $ 5 billion which were collected by issuing redeemable bonds and secured debentures and promising incredulously high profits from reasonable investments.

The officials had attached properties worth INR 1500 crore, which was held in the name of the Saradha group chief Sudipta Sen and out of INR 2500 crore (estimated fraud amount), INR 541 crore had been returned to the depositors.


CBI arrested the founder of PACL Ltd for the alleged collection of about INR. 450 million from around 55 million investors across the country who had invested their life-saving in the schemes, which was termed as one of those Ponzi Schemes.

Regulatory purview on Ponzi schemes

The Prize Chits and Money Circulation (Banning) Act, 1978 was brought into force after the Reserve Bank of India constituted a Study Group under the Chairmanship of James S. Raj. The Chairman of Unit Trust of India.

Money Circulation, according to the Act, defined as under:

Any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.

The Act empowers the states to formulate their own rule and regulations to implement the law.

With the increase in the scams across the country. Humanity Salt Lake the NGO filed a PIL against the in-actions taken by the regulatory body, SEBI. The regulator responded that Banned Ponzi Schemes do not fall under the regulatory purview of SEBI. It is the concerned State Government, who is the regulatory authority. Even though, banned by the Central Legislation i.e. The Prize Chits and Money Circulation 1978 (Banning) Act, 1978. The State Government which is the enforcement agency of this law.

As per the Direct Selling Guidelines 2016 Framework, as unveiled by the Central Government for the states to regulate the sector. The direct sellers need to comply with certain guidelines in order to avoid them turning into a Ponzi scheme such as:

  • The direct sellers are prohibited from charging any sort of entry fee from the agents.
  • It also mandates firms to constitute a grievance redressal machinery for the protection of consumers’ interests and such others.

What should a victim of a Ponzi scheme do?

Being offered an opportunity to invest in a new investment scheme, after investing in such scheme if you realize that you have become a prey in a Ponzi scheme, then stop further investing in that scheme and if you have provided them your bank details, inform the same to your bank.

The Reserve Bank of India (RBI) has recently launched an online website named Sachet, to curb Ponzi schemes in its initial stage.

It is an initiate of the State Level Coordination Committee (SLCC), which is a joint forum formed in all States to facilitate information sharing among the Regulators i.e. RBI, SEBI, IRDA, NHB, PFRDA, Registrar of Companies (RoCs) etc. and Enforcement Agencies of the States including the Finance Department, Home Department, Law Department, Economic Offences Wing etc.

The objective behind its formation is to control and curb of the illegal and unauthorized acceptance of deposits by unscrupulous entities. Every company is guided by its own regulatory body which regulates its business conduct.

  1. Sachet allows individuals to file a complaint directly using that common platform, from where the regulator can process it.
  2. If an individual is not aware of the regulatory body under which the alleged Ponzi Company is covered, even they can lodge a complaint using the similar procedure provided therein.

Help your regulator

The most important step in controlling these Ponzi schemes is to help the regulator by providing information about the entities suspected to run Ponzi Schemes. This can be done, again by using the Sachet.

It enables the regulator to gather information regarding any unauthorized acceptance of deposit or money through different schemes by any entity and as soon as the information is provided there, it is immediately shared with the Regulatory Authorities, who can then take the actions.

The victim can also track the status of their complaints.

Procedure to file a complaint

A victim having a suspicion that an entity is running an unauthorized acceptance of deposits can lodge a complaint through the Sachet website, following a simple procedure:

  1. First of all, one should visit the Sachet website www.sachet.rbi.org.in.
  2. File a Complaint and fill the registration form with details.
  3. Choose the regulator under which the Ponzi entity might be covered, but in case you are unaware of the same, the tab of ‘Don’t Know the Regulator’, may be used.
  4. Next step is to upload the scanned copies of the documents.
  5. After completing the above steps a complaint number will be given to you with the details of the regulator concerned.
  6. You can also track the status of your complaint by using the ‘Track your Complaint’ option.

Recovery of money invested in the Ponzi scheme

The recovery of the money which is invested in Ponzi scheme is now possible. Under the Prevention of Money Laundering Act, certain provisions provide for the restitution of the duped investors’ assets from attached properties of offenders.

For instance, over INR 101 crore worth of bank balance has been attached in connection with the money laundering probe in the Speak Asia online marketing scam which came into limelight in 2001.

A criminal case has already been lodged against the firm including its officials and few others, under the provisions of the Prevention of Money Laundering Act.

The opinion of U.S securities and exchange commission

  • According to U.S. Securities and Exchange Commission, a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.
  • Bernie Madoff hit the market economy Ponzi scheme is considered to be the longest-running Ponzi schemes. For 20 long years, investors invested in his investment company and received huge returns on their investments and the fraud could get revealed during the great depression period, when there was a great economic crisis.


Be cautious if someone is trying to sell out his investment product with a huge return, be cautious that something might be fraudulent. Check out whether the investment is registered or not. Though, registration may not be necessary for all investments, take out the information about the investment which is being offered to know the reason why it is not registered?


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