These schemes are a type of illegal ‘rob Peter to pay Paul’ operation named after Charles Ponzi who took deposits from 40,000 US investors on the promise of fabulous returns – at one point he claimed to be able to double their money in 90 days if they invested in a fund that exploited a loophole in the pricing of US postal coupons.
Schemes like this grow rapidly as word spreads that early investors have been paid huge rates of return on their capital. The fraudster funds these returns using contributions from the much larger numbers of subsequent investors who are keen not to miss out on the scam opportunity – at one point in 1921, Ponzi took $1million during a single three-hour period.
Eventually, such schemes are doomed to fail. Ponzi managed to take $15 million of subscriptions for a fund that only ever held $30 of postal coupons.
• Watch Tim Bennett’s video tutorial: What is a Ponzi scheme?