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How to identify (and avoid) a Ponzi scheme

In the world of investments, there are countless opportunities for growth and wealth. However, with these opportunities come risks, one of which is falling prey to a Ponzi scheme. Named after Charles Ponzi, who orchestrated such a scheme in the 1920s, a Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The scheme leads victims to believe that profits are coming from legitimate business activity, when in fact they are simply the payments made by new entrants into the scheme.

Identifying and avoiding a Ponzi scheme is crucial to safeguarding your financial future. This guide will equip you with the knowledge and tools to do just that.


Understanding Ponzi Schemes

What is a Ponzi Scheme?

A Ponzi scheme is a form of investment fraud where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities. Operators of these schemes often entice new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.


Why Do Ponzi Schemes Collapse?

The systems are destined to collapse because the earnings, if any, are less than the payments to investors. Ponzi schemes require a consistent flow of money from new investors to continue. If it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

Ponzi schemes are quite destructive. They can wipe out entire life savings and disrupt the financial stability of both individuals and communities.


Identifying a Ponzi Scheme

Unusually Consistent Returns

Investments tend to go up and down over time, especially those offering potentially high returns. Be suspicious of an investment that continues to generate regular, positive returns regardless of overall market conditions.

Even the most stable investments can show minor fluctuations, and any investment that purports to deliver steadily positive returns should be viewed with scepticism.


Promised High Returns with Little or No Risk

Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity.

Investments that sound too good to be true often are. If an investment opportunity is offering a high return with little or no risk, it could be a Ponzi scheme.


Overly Complex Strategies

It's important to understand what you're investing in. If you don't understand how the investment works, and can't get complete information about the investment, be wary.

Some Ponzi schemes use sophisticated tactics to hide the true nature of their operations. It's a good rule of thumb to avoid investments you don't understand.


Avoiding Ponzi Schemes

Research the Investment

Before investing, thoroughly research the investment and the company. Verify the facts and be wary of any investment that can't be independently verified.

Check the credentials of the investment adviser and firm. A simple internet search can reveal a lot about the company and whether it is legitimately registered. 

Always get a second opinion, no matter how certain you are.


Ask Questions

Ask about the company's leadership, its products or services, and its finances. Legitimate companies should be able to give you this information. If you can't get solid answers to these questions, consider this a red flag.

Remember, it's not impolite to ask. It's your money, and you have the right to know.


Be Skeptical of Unsolicited Offers

Be wary of unsolicited investment offers, especially those over the internet. Ponzi schemes are often promoted through spam email or online advertising.

These unsolicited messages are often the bait for a scam. Always be skeptical and do your own research before investing.


Seek Advice from a Vetted Professional

Unfortunately, in the world of finance, there are financial advisers who pose as qualified, trusted professionals, when in reality this is far from the truth. 

In countries like the UAE, where the regulatory landscape is less developed, there are commission-driven salespeople who are incentivised to sell you junk products with unrealistic returns.

Always seek advice from a regulated firm and qualified adviser. Use a platform such as Profezo to find and select pre-vetted experts, ensuring you only speak to the best professionals.



Identifying and avoiding Ponzi schemes is essential to protecting your financial future. By understanding what a Ponzi scheme is, recognising the warning signs, and knowing how to protect yourself, you can avoid falling victim to this type of fraud.

Remember, if an investment opportunity sounds too good to be true, it probably is. Always do your due diligence before investing your hard-earned money.

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