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Article
Publication date: 12 November 2018

Valerie Uppiah

The purpose of this paper is to analyse the regulation of the financial crime of Ponzi scheme in Mauritius. Contrary to money laundering which has a legal framework to…

Abstract

Purpose

The purpose of this paper is to analyse the regulation of the financial crime of Ponzi scheme in Mauritius. Contrary to money laundering which has a legal framework to combat it, for Ponzi scheme, there is no specific legal mechanism to combat this particular financial crime. Therefore, the aim of the paper is to provide for an analysis of Ponzi scheme which includes, inter alia, the definition of a Ponzi scheme, its modus operandi and how it should be tackled. Focus will be placed on devising a specific legal framework for it in Mauritius.

Design/methodology/approach

The research method used to conduct this research and write this paper is a black letter legal research method. An analysis of several laws and cases is carried out so as to provide for the legal background of the research.

Findings

The investigation conducted in this paper will lead to the conclusion that Mauritius has to devise a law which will specifically combat Ponzi schemes. This law shall provide for the ways to counter this financial crime as well as the duties of the various financial supervisory bodies.

Originality/value

The paper provides for an analysis of the operation of Ponzi scheme in the Mauritian context. The paper also examines the existing legal framework that combats this financial crime in Mauritius and highlights its strengths and weaknesses.

Details

International Journal of Law and Management, vol. 60 no. 6
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 15 July 2021

Umar Mohammed

This paper aims to examine the nature and operations of the two main Ponzi schemes (DKM Diamond Micro Finance Company and Menzgold Company Limited). It explores how such…

Abstract

Purpose

This paper aims to examine the nature and operations of the two main Ponzi schemes (DKM Diamond Micro Finance Company and Menzgold Company Limited). It explores how such dubious schemes were able to circumvent financial regulatory bodies and their impact on the social, political and economic spheres of Ghana.

Design/methodology/approach

The paper adopts both quantitative and qualitative research approaches and relies on secondary sources of data from the Bank of Ghana, World Bank and textbooks, etc.

Findings

It was found out that inadequate supervisory role by financial regulators was a factor that made these schemes thrive in Ghana which had dire consequences on the socio-economic of the country.

Originality/value

This is the first paper that explores the major Ponzi schemes in Ghana.

Details

Journal of Financial Crime, vol. 28 no. 3
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 24 August 2020

Taofik Hidajat, Ina Primiana, Sulaeman Rahman and Erie Febrian

This paper aims to identify psychological factors that influence people to be involved in Ponzi and pyramid schemes.

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Abstract

Purpose

This paper aims to identify psychological factors that influence people to be involved in Ponzi and pyramid schemes.

Design/methodology/approach

A psychological approach to finance or behavioural finance is applied in this research because of the assumption that human beings are not always rational. The sample consisted of 98 investors in 11 cities in Indonesia who were or had invested in an investment program with a Ponzi or pyramid scheme. The snowball sampling technique was applied.

Findings

The conclusion is that optimism (emotional bias), confirmation bias, representativeness bias, framing bias and overconfidence (cognitive bias) positively influenced investment decisions related to Ponzi and pyramid schemes.

Originality/value

The novelty aspect of this research is the implementation of a behavioural finance perspective to answer and express the fascinating phenomenon of Ponzi and pyramid investment schemes.

Details

Journal of Financial Crime, vol. 28 no. 1
Type: Research Article
ISSN: 1359-0790

Keywords

Abstract

Details

Investment Traps Exposed
Type: Book
ISBN: 978-1-78714-253-4

Article
Publication date: 11 May 2012

Stanley Paulo and Chris Gale

The purpose of this article is to expose the Miller‐Modigliani 1961 Ponzi scheme that has masqueraded as a dividend irrelevance proof, and show that it constituted a Ponzi

2947

Abstract

Purpose

The purpose of this article is to expose the Miller‐Modigliani 1961 Ponzi scheme that has masqueraded as a dividend irrelevance proof, and show that it constituted a Ponzi scheme at the time of publication and ever since publication. This is important especially as Miller‐Modigliani 1961 stated in the first sentence of their article that their dividend irrelevance proof was targeted at corporate officials, investors and economists seeking to undertake and appraise the functioning of capital markets.

Design/methodology/approach

The equations and notation used by Miller‐Modigliani 1961 to prove dividend irrelevance were carefully considered and analysed in order to establish whether proof reliably, validly and unambiguously proved dividend irrelevance. In addition, statute on both sides of the Atlantic, UK and USA, was considered in order to ascertain the legal standing of their proof.

Findings

This article shows that the Miller‐Modigliani 1961 dividend irrelevance proof constituted a recipe for a Ponzi scheme in terms of statute at the time of publication and ever since publication. Since Miller‐Modigliani 1961 made extensive reference to the works of eminent finance researchers and academics of the 1930s, 1940s, and 1950s, as well as to their Modigliani‐Miller 1958 seminal article, and attentively present and discuss the intricacies of the arguments these researchers made to the progression of knowledge, it would be challenging to content that they were unaware or ignorant of important legislation that applied in 1961.

Originality/value

There is no evidence from a scrutiny of publicly available secondary sources to suggest that the Miller‐Modigliani 1961 Ponzi scheme, alias “dividend irrelevance” has previously been done or published. This is surprising because the Miller‐Modigliani 1961 dividend irrelevance proof has occupied a particularly prominent position in the finance literature and has been the subject of numerous studies and research projects.

Details

International Journal of Law and Management, vol. 54 no. 3
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 7 October 2019

Vasant Raval and Vivek Raval

This paper aims to analyze the attributes of Ponzi schemes (“Ponzis”) to determine whether they are a unique class of financial fraud.

Abstract

Purpose

This paper aims to analyze the attributes of Ponzi schemes (“Ponzis”) to determine whether they are a unique class of financial fraud.

Design/methodology/approach

The authors apply the disposition-based fraud model to classify and differentiate the attributes of Ponzis. This classification exercise helps comprehend the distinct drivers of Ponzis.

Findings

Fraud risk factors of Ponzis are different from those involved in other financial frauds. Four propositions about risk and risk mitigation measures are developed.

Research limitations/implications

The research approach used is conceptual, not empirical. However, the insights from this exercise should inform how different Ponzis are from other financial frauds and why they should be treated as a separate class for prevention and enforcement. In turn, this may trigger an interest in empirical research focused on the unique risks of Ponzis.

Practical implications

Knowledge of risk factors unique to Ponzis will permit a consideration of customized risk mitigation measures to prevent or detect Ponzis. Enforcement actions can also become more effective because of a distinct risk-based classification of Ponzis.

Social implications

The prevention of damage from Ponzis hinges upon how well prospective victims are educated to become aware of signs of Ponzis. This should lead to the more effective protection of investors from victimization from Ponzi schemes.

Originality/value

The implicit understanding that all financial frauds are alike and that the risk-factors involved are substantially the same across all classes of fraud is challenged. This revelation opens opportunities to add value through focused research on Ponzis as a distinct class of fraud.

Details

Journal of Financial Crime, vol. 26 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 2 January 2018

Stacie Bosley and Maggie Knorr

This paper aims to empirically identify factors that increase consumer vulnerability to pyramid scheme fraud and compares/contrasts dynamics and implications of pyramid…

1714

Abstract

Purpose

This paper aims to empirically identify factors that increase consumer vulnerability to pyramid scheme fraud and compares/contrasts dynamics and implications of pyramid and Ponzi fraud.

Design/methodology/approach

Statistical techniques, including multiple regression, are used to analyze participant data (with over half a million individuals) from a now-defunct US-based pyramid scheme, Fortune Hi-Tech Marketing.

Findings

Findings suggest that this pyramid scheme flourished in counties with identifiable affinity groups: religious communities, Hispanic populations and certain age cohorts (e.g. recently retired). Recruitment success varied significantly between geographic regions, with the highest levels of recruitment in the South. While prior research finds a possible positive relationship between education and Ponzi participation, this is not the case in the pyramid scheme studied. Furthermore, while Ponzi schemes might be pro-cyclical, collapsing during contractions when participants seek to extract their money, this pyramid scheme exhibited counter-cyclical behavior.

Practical implications

State and federal regulators, as well as consumer protection advocates, should learn from analysis of past pyramid scheme cases. Such analysis informs allocation of scarce resources and supports the case for targeted, active education. Clarifying differences between Ponzi and pyramid fraud helps to support clear and effective intervention.

Originality/value

This is the first research to analyze national participant-level data from a pyramid scheme to inform future action. While it confirms some past findings, such as the connection to affinity fraud, it adds to collective knowledge on pyramid schemes and the differences between pyramid and Ponzi fraud.

Details

Journal of Financial Crime, vol. 25 no. 1
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 3 July 2017

Norman Mugarura

The purpose of this paper is to explore dynamic issues relating to Ponzi and other fraudulent investment schemes to demonstrate how scammers convince victims of investment…

1077

Abstract

Purpose

The purpose of this paper is to explore dynamic issues relating to Ponzi and other fraudulent investment schemes to demonstrate how scammers convince victims of investment opportunities that turn out to be nothing but fraudulent. Specifically, it explores the nature of Ponzi, Pyramid, Advance fees scams and the mechanisms used to defraud unsuspecting victims of their money. The risks associated with Ponzi schemes can be gleaned in the fraud case of Bernie Madoff (1998) who had been running a Ponzi scheme in the USA for 20 years and reaping investors of their returns without ever discovering it until the business collapsed. The other notorious investment scams include “the Nigerian letter frauds” which combine the threat of impersonation fraud with a variation of an advance fee scheme in which a letter is mailed to offer recipients the “opportunity” to share in a percentage of millions of dollars that the author – a self-proclaimed government official – is trying to transfer out of his country. This article assesses the possibility of using anti-money laundering regulatory tools such as a “risk based approach” and “Know Your Customer” to protect victims of fraudulent investment schemes.

Design/methodology/approach

The paper was written by analysis of primary and secondary data and by utilising newspaper reports on different types of fraudulent investment schemes and the context in which they normally happen in practice. It has also utilized case studies and relevant examples to demonstrate different typologies of fraudulent schemes and the possibility of using anti-money laundering regulatory tools to regulate them.

Findings

The findings suggest that many people who fall victims of fraudulent investment schemes such as Ponzi and advance fee fraud are not gullible but lack knowledge of their sophistication and how they operate to defraud unsuspecting victims of their savings.

Research limitations/implications

The paper was largely a library-based research, and there were no interviews carried out to corroborate some of the data used in writing it. This minimises inherent bias in the use of secondary data sources to undertake a study.

Practical implications

The practical implication of the paper is to highlight the inherent risks in Ponzi and other fictitious investment schemes that are often cleverly conjured to exploit ignorance of the public and defraud them of their savings. It demonstrates that while financial institutions can use their regulatory tools such as KYC to safeguard financial markets from criminal exploitation, people should be vigilant to avoid falling victims of criminal exploitation and lose their savings.

Social implications

With globalisation, the market is awash with different types of investment opportunities, but people need to keep in mind that it has also created opportunities for criminal exploitation. Some opportunities that are being offered such as advance fee and other schemes are cleverly devised to exploit ignorance of the public. Therefore, this paper highlights the pitfalls which potential investors need to bear in mind when deciding on where to invest and how to invest their money.

Originality/value

Research on Ponzi schemes, advance fee fraud and misuse of letters of credit do not seem to have received proportionate scholarly attention as other forms of financial crimes. This paper, therefore, addresses a need in the market on many issues it relates.

Details

Journal of Money Laundering Control, vol. 20 no. 3
Type: Research Article
ISSN: 1368-5201

Keywords

Article
Publication date: 2 October 2017

Catherine Carey and John K. Webb

The purpose of this study is to elaborate on how schemers build and maintain trust essential for financial fraud that persists over many years. A Ponzi scheme is a form of…

1061

Abstract

Purpose

The purpose of this study is to elaborate on how schemers build and maintain trust essential for financial fraud that persists over many years. A Ponzi scheme is a form of financial fraud that involves repeated interaction with an increasingly large number of individuals over a long period time. This type of fraud involves the building and maintenance of each individual’s trust. All Ponzi schemes come to a dramatic conclusion. Either the schemer defaults on payments, or someone gets suspicious and the scheme is uncovered. Understanding how schemers build and maintain trust may help prevent or uncover the fraud earlier, limiting financial devastation endured by unsuspecting investors, as well as externalities inflicted on the financial system as investors lose trust.

Design/methodology/approach

This study combines an understanding of trust accumulation from multiple disciplines in the existing literature to build a comprehensive model of trust creation and maintenance in Ponzi schemes.

Findings

This study finds that key characteristics of both the trustor and trustee contribute to long term financial arrangements. Schemers prey on individuals with specific characteristics that indicate they are more trusting. Trusting individuals are less likely to conduct due diligence to detect fraud. Prevention and detection of fraud are made more difficult by convincing, yet false, mimicry used by schemers to signal trustworthiness.

Originality/value

Bringing together multiple views on trust allows creation of a comprehensive model of trust that captures key characteristics of unsuspecting investors and schemers who prey on them in financial fraud.

Details

Journal of Financial Crime, vol. 24 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

Book part
Publication date: 25 June 2016

Melissa S. Baucus and Philip L. Cochran

Investigate how leaders of illegal organizations build and maintain positive reputations and how the deaths of these firms impact groups of external stakeholders.

Abstract

Purpose

Investigate how leaders of illegal organizations build and maintain positive reputations and how the deaths of these firms impact groups of external stakeholders.

Methodology/approach

We conduct a forensic analysis of nine firms in eight different countries by leaders who appeared to be highly successful corporate citizens but who turned out to be operating illegal Ponzi ventures.

Findings

These illegal firms built positive reputations by engaging in activities that enhanced perceptions of their firms’ perceived quality, gaining certifications and approvals from influential external individuals/organizations, engaging in philanthropic activities, and affiliating with high-status actors. Death of these nine firms had profoundly impacted external stakeholders resulting in investor devastation, a toxic environment of mistrust, damage to reputations of anyone affiliated with these illegal firms, and a major earthshake to the philanthropic community.

Research limitations/implications

Extends Rindova et al.’s (2005) research on how leaders use signals of quality and prominence to build reputations in the context of illegal organizations. Philanthropic activities are added as a reputation-building mechanism used by illegal organizations. The results draw attention to the need to examine how the death of illegal organizations affects a variety of external stakeholders, both individuals and organizations.

Practical implications

Leaders of illegal firms can be quite successful in building positive reputations and this success exacerbates the negative consequences that occur when the firms collapse.

Originality/value

Provides a qualitative study of reputation building and the extensive impact on stakeholders of the dissolution of illegal ventures.

Details

Dead Firms: Causes and Effects of Cross-border Corporate Insolvency
Type: Book
ISBN: 978-1-78635-313-9

Keywords

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