How to Avoid Ponzi Schemes ..... Do you think Swisscash is a scam?

By Mark Nestmann

At least once a week, I receive a call from someone who's invested in a Ponzi Scheme, lost everything they invested, and is now asking for help. Less often, I receive a call from someone who's invested in an arrangement promising fantastically high returns, and wants assistance protecting the proceeds.

In the former case, my standard answer is to contact a private investigator, although in most cases, nothing can be done to recover the money. In the latter case, my standard answer is to contact me once the money is in the bank. I have yet to receive a single call back.

These experiences led me to investigate the life of Charles Ponzi, and I recently began reading a biography of the famous Boston swindler. Beginning in 1920, Ponzi offered investors in an "international postal coupon scheme" a 50% return on their money in 45 days, or a doubling of their money in 90 days. Within months of unveiling the scheme, investors were lining up to give Ponzi money. But when the Boston Post ran a series of articles casting doubt on the legitimacy of Ponzi's scheme, it collapsed, and investors lost millions.

Ponzi was able to create the illusion of success by paying off early investors with funds raised from later ones. His was a classic pyramid scheme, and, so famous did it become that the term "Ponzi Scheme" is now used to describe any such fraudulent arrangement.

The lure of easy money is irresistible to many investors, which is why Ponzi Schemes persist. And they're especially prevalent offshore. Just last week, one of the key participants in one of the biggest offshore frauds I've examined in my career, the now-defunct "First International Bank of Grenada," was sentenced for his role in defrauding 4,000 investors out of more than US$200 million. Investors were promised annual returns of up to 300% and told their money was fully insured. Alas, the scheme was bogus, along with the insurance company.

So, how can you avoid Ponzi Schemes? Here are a few suggestions:

  • Conduct due diligence and don't rely strictly on appearances. In Ponzi's case, even a cursory check of his credentials would have revealed that he had been imprisoned for forgery and had no experience in managing investments.
  • Obtain independent advice. Have a qualified professional review any strategy suggested by an offshore promoter. In Ponzi's case, The Boston Globe investigation revealed that the total number of international postal reply coupons circulating was only a tiny percentage of the amount necessary to support Ponzi's claims.
  • Turn your back on "guaranteed" profits if they seem unrealistic. Ponzi guaranteed investors 100% every 90 days. While returns of this magnitude are occasionally achievable, they can never be guaranteed.
  • Don't rely on secrecy. Many offshore Ponzi Schemes promise that information about your "profits" will never be shared with the IRS. That may be true, but even if it is, this promise is an invitation to blackmail. The promoter knows that since you've broken the law, you are unlikely to make a claim in court for the return of your assets if they disappear.
  • If it seems too good to be true—it probably isn't true. Understanding this is the most important precaution of all. Unrealistic profits, unrealistic promises or a vague feeling that you're being "led on" are all indications that whatever deal you're being "pitched" is best avoided.
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