L2A
Achieving Aspirations
PONZI SCHEME
Why in news?
Recently, the Odisha Economic Offences Wing (EOW) said that they will question Govinda in connection with a pan-India online Ponzi scam probe of Rs 1,000 crore.
- The authorities said that the Solar Techno Alliance (STA-Token), with an online presence in several countries, was illegally operating a pyramid-structured online Ponzi scam.
- It was being done in the garb of crypto investment.
About Ponzi scheme
- A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
- Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds.
- A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.
Characteristics of Ponzi scheme
- In a Ponzi scheme, a con artist offers investments that promise very high returns with little or no risk to their victims.
- The returns are said to originate from a business or a secret idea run by the con artist.
- In reality, the business does not exist or the idea does not work in the way it is described.
- The con artist pays the high returns promised to their earlier investors by using the money obtained from later investors.
- Instead of engaging in a legitimate business activity, the con artist attempts to attract new investors to make the payments that were promised to earlier investors.
- The operator of the scheme also diverts clients' funds for the operator's personal use.
- With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive.
- When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes collapse.
- As a result, most investors end up losing all or much of the money they invested. In some cases, the operator of the scheme may simply disappear with the money.
