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What is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investment operation that pays the returns to investors out of their own money or the money paid by new investors instead of money earned by the organization running the scheme.

The Ponzi scheme is arguably the most effective and popular way criminals pull money from hard-working people. It is named after Charles Ponzi, a con man who in the 1920s created several pyramid schemes that managed to pull over $20 million from his victims. Bernie Madoff managed to get $65 billion from his investors after 30 years.

Almost everyone knows about Bernie Madoff, but how many have heard of the Villalobos brothers? For about 20 years, Enrique and Oswaldo Villalobos were legendary in Costa Rica, paying clients up to 3,5% interest in cash per month. Called “The Brothers Fund,” they defrauded 6,400 American and Canadian investors out of around half a billion dollars, making it one of the biggest Ponzi schemes in Central America.

The scheme itself is simple. It pulls in those who honestly believe that it will work, only to find that their money is gone too late. It is a two-step process that starts with offering an attractive investment opportunity with a return that is too good to believe, yet many will still invest in these schemes. The second part is that there is no investing, only taking money from those new to the system and giving amount of their investment funds to the original investors to keep them on board. At some point, it will all collapse because not enough money can continuously be raised to pay off the investors. Madoff’s Ponzi scheme might have lasted to this day had the financial crisis of 2007 not arisen to deplete his ability to pay off the original investors. Despite all the attention drawn to such schemes, they are still being used today.

 

Ponzi Scheme

 

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