July 24, 2024

Contrarily, Ponzi scheme operators never invest as they claim, but use new investor’s funds to pay earlier investors.

Businessman Raj Kundra, husband to actress Shilpa Shetty, has come under Enforcement Directorate investigation for a suspected Ponzi scheme linked to money laundering. Assets worth ₹97.79 crore, including a flat in Mumbai registered to Shilpa Shetty, have been seized by the probe agency.

Ponzi scheme explained

A Ponzi scheme is a fraudulent investment system that promises high returns to investors. In essence, the returns earned by early investors are not profits but money from new investors. The cycle persists until new investors diminish, causing the scheme to fail and investors to lose their money.

The individuals behind a Ponzi scheme don’t invest the money as they claim but use the new investor’s funds to pay off earlier ones. This creates an illusion of profit. The scheme stays afloat with continuous incoming funds but crumbles when there are no more new investors, or when current investors try to pull out their funds, leaving many at a loss.

Avoiding Ponzi schemes

  • If it promises high returns with little or no risk (all investments are subject to some risk)
  • When forced to make quick decisions that make you uncomfortable
  • If there are negative reviews or company complaints online
  • When the scheme uses unfamiliar or complicated terms
  • If the scheme lacks transparency on how profits are made
  • When someone recommends keeping the investment confidential
  • If acquiring official documents related to the investment is difficult
  • If you’re prevented from withdrawing your funds, or offered higher returns to convince you to stay

Steps to take if you fall victim to a Ponzi scheme

  • Terminate all payments to the scheme.
  • Sever all ties with the fraudsters.
  • Keep a record of all interactions with the company such as letters and emails as evidence.
  • Report the scam to the authorities.
  • Be vigilant of potential identity theft or more scams as fraudsters often sell your information to other scammers.
  • Be cautious of “fraud recovery fraud”. These are scammers who pretend to be law enforcement or legal professionals who can help victims retrieve their money for a fee.