Suspicious Scheme Detail

Ponzi Schemes


This chapter intends to caution citizens about various schemes floated by fraudulent companies/persons and to take preventive measures to avoid losing their hard earned money. This chapter attempts to make investors aware about various fraudulent schemes floated and features through which such schemes can be identified.

Types of fraudulent schemes:

The common forms of fraudulent financial schemes which rely on doubtful/unviable business models are:

  • (i) Pyramid schemes - referred to as multilevel marketing schemes. In a typical pyramid scheme, each member is promised a reward for recruiting more members. Such schemes, however, collapse when defaults occur and promoters abscond with invested money.
  • (ii) Ponzi schemes - The basic operation of a Ponzi scheme is commonly described as "robbing Peter to pay Paul". In Ponzi schemes the mastermind gathers all the funds from new investors and then distributes them.

What is a Ponzi scheme?

  • A Ponzi scheme is an investment fraud where clients are promised a large profit in short term at little risk.
  • Companies engaged in Ponzi schemes focus all of their energies into attracting new clients to make investments.
  • This new investments (income) are used to pay original investors their returns, marked as a profit from a legitimate transaction.
  • Ponzi schemes mainly rely on a constant flow of new investments to continue to provide returns to older investors.

How does a Ponzi scheme work?

  • Funds from new investors are used to pay purported returns to earlier investors.
  • Promise of much higher return than prevailing in the market with little or no risk.
  • Initial clients paid off.
  • Deliberately communicated success stories.
  • Unregistered investments and unlicensed sellers.
  • Secretive, complex strategies, issues with paperwork and difficulty in receiving payments.
  • The emphasis is on enrollment of members rather than sale of products.

Why would anyone be interested in investing such schemes?

The answer can be:

  • Greed
  • Use of celebrity and fake advertisement.
  • Lack of knowledge among uninformed investors
  • Regulatory vacuum
  • Blind faith and inducement through free samples

How to protect yourself from Ponzi schemes:

  • Beware of promise of higher returns:
    Any scheme promising abnormally high returns should be considered with caution. At the very basic level, abnormally high returns promised by the fraudsters should serve as a red flag for investors. Beware of promises of unrealistic returns.
  • Unknown Company:
    You might have heard about a scheme promising higher returns, but are you also aware about the company and its credibility? If not, how can you put your hard-earned money into a company or organisation which is unknown to you?
    Don’t rely on reputation or word of mouth alone. One of the best ways to know about a company is doing your own research on internet or social media. If you do not find any reliable information on the net, it is better to steer clear.
  • Track Record of Promoters:
    They should have clean image in terms of delivering promises. If you are unable to find any information, then do a search on the internet.
  • Registration Requirements:
    If a person is planning to invest in a non-banking finance company (NBFC), then he/she should be well aware that every NBFC is required to be registered with the Reserve Bank of India (RBI).
    NBFCs are not allowed to use the name of the RBI in any manner.
  • Ratings Assigned:
    NBFCs which accept deposits should have minimum investment grade credit rating granted by an approved credit rating agency for deposit collection.
  • Terms & Conditions:
    The charges should be considered well before taking the final call. Understand your investments; keep copies of all the investment and communications.
  • Take Informed Decision:
    One should check for the past record of the schemes, management team, corresponding regulations & financial information. Your decision should never be guided by greed. Check registration and background of individuals selling the investment. Do not trust anyone blindly in financial matters.
    Remember that even if the promoters of an NBFC are of impeccable repute and the credit rating is good, there is risk on these deposits as they are unsecured and the risk of insolvency is there.
  • Union Government model guidelines for states to curb Ponzi schemes:
    The Union Government has issued model guidelines titled as "Direct Selling Guidelines 2016" framework for states to regulate direct selling and multi-level marketing businesses to protect consumers from Ponzi frauds.

Ponzi schemes are banned under the Prize Chit and Money Circulation (Banning) Act, 1978. Though it is a Central Act, the respective State Governments are the enforcement agency of this law. These newly issued guidelines will allow states to make some change in their guidelines as per their localised requirements.

New Age – Cyber Scam

  • Lottery email from foreign countries
  • Fake email from financial regulators
  • Employment emails using the name of reputed companies.
  • Credit Card Limit updation calls posing as bank officials
  • Hacking of internet banking password
  • Prize winning pop-up while working on Internet

Pyramid schemes

  • In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
  • The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.


Always check details of the organization offering loans first and never transfer anything or give out your bank account details to any stranger.

You should always be sure regarding the credibility about the company offering such jobs. Many of the work from home schemes turn out to be ‘Get rich quick scams’ and are only means of luring people for getting high amount of money by doing simple tasks sitting at home. No money can be earned without hard work and never fall prey to such temptations.

The temptation to win a ‘jackpot’ is always high but a lot of it can be fraudulent. Here, you may get a notice or receive information that you’ve won something but need to send funds to pay for ‘customs charges’ or other fees to release goods or enable the huge prize money to be transferred to your account. Do not fall prey to such offers as they are not genuine. You will only end up losing your funds.

Guaranteed profits can generally be myths and are frequently used as tactics to trap gullible investors to invest in an exciting products or scheme that sounds highly attractive. These can be bogus schemes, generally known as Ponzi/Pyramid schemes. The offers like free holidays, travel etc. are only means to attract innocent investors.

You can report the details under “Report a suspicious scheme” screen of this portal. Alternately, you can file a complaint with the local police office/Economic Offence Wing Office.

If you’re an Internet user, please be aware of phishing scams that arrive in your inbox requesting money to be transferred. These scams are often under the disguise of ‘Help’ from someone you may know, a lottery ‘win’ that needs your bank details or even ideas to ‘double or triple your money in months’.

Scammers often use several clever tactics to send convincing and well-disguised emails to convince receivers to send money by threats or even invoking sympathy for a charitable cause. Some of the most common phishing methods include the following:

  • Using fake URLS that look accurate – pay attention to spelling errors
  • Emails that are fear-based or ‘urgent’
  • Using names of real companies and copying their logo and signature
  • Using names of friends and colleagues in help-related emails for charitable causes or to get them out of tricky situations.

If the email is personal in nature and is from someone you know, always confirm with the person first before taking any further action. If the email seems to be from your bank or any financial institution you deal with, call them to validate it before sending anything. Often scammers mimic or disguise the email id so it seems like it is from the bank so it’s best to be safe and pay attention.

If you receive any email asking you to ‘update your account details’ or ‘verify your information because your account details were stolen’, exercise caution and call the bank first.

We’re often tempted by attractive offers or schemes – be careful when downloading or opening attachments as files can trigger a virus and your information can get stolen.

Instead of using links, type the bank or company URL in the address bar, as sometimes clicking on links will redirect you to a fake address. Make a practice of always typing in the URLs so you will memorize the accurate web address and not rely on links.

Maintain an awareness of the financial activity in your bank accounts and make a habit of regularly checking them. Report any suspicious or uncertain transactions to your bank account or credit card firm.

For any financial website that enables you to log in, ensure the URLs always start with “https://” as the ‘s’ stands for security. If you make purchases online, again ensure the web address of the online retailer starts with https:// and has a ‘lock’ icon on the status bar to ensure your details remain encrypted.

It is also a good idea to set a ‘transaction limit’ with your credit card provider for every purchase online as this limits your exposure as it prohibits transactions beyond the limit. Check with them to see if they offer this service.

If your bank or credit card provider offers SMS notifications for every transaction, enable it as you can keep tabs if your card has been stolen or misused. If you notice any suspicious transactions, call your bank immediately to block the card.

  • Never write down your PIN codes anywhere they can be easily found
  • Do not give your PIN codes to anyone
  • Do not use the same online password for all your bank accounts. Create unique passwords
  • Change your bank account passwords frequently to ensure the safety of your account.
  • Do not let strangers access your computer and ensure it remains in a safe place at all times.
  • Do not ‘save’ passwords on your browser as much as possible.
  • Install anti-virus software to ensure your computer stays up to date on the security front.