Ponzi scheme warning signs

Ponzi schemes come in various forms, but there are commonalities that can help you identify them.

A promise of unnaturally high returns

This is the biggest of warning signs. Investments tend to kick off returns that fall within long-term historical averages. They don’t often outperform those averages to a significant degree, and when they do, there tends to be a unique scenario — the pandemic, the tech bubble of the early 2000s — acting as the root cause.

The high returns are exactly what make Ponzi schemes so seductive. But if something sounds too good to be true, it usually is.

A convoluted investment strategy

Ponzi schemes aren’t usually all that complex. One investor’s money is used to pay off others as a way of maintaining the illusion that returns are being paid.

But the strategy presented to investors is often described as being overly complicated, giving the impression that the person presenting it is the only one who understands — or needs to understand — what’s actually going on.

A legitimate investment opportunity involves transparency. Any questions you have about an investment should be met with real answers, not “You let me worry about that.”

Difficulty in receiving payments

Unfortunately, this indicator doesn’t usually start flashing until people have already invested. It can, however, help you get out of an investment before getting cleaned out.

If an expected payment is missed, Ponzi scheme perpetrators often try to calm investors by promising higher returns in the future as a means of back payment. Never accept this. If a scheduled payment doesn’t come through, don’t dig yourself in deeper by providing more capital.

Suspicious sales tactics

You should be wary of anyone who promises you the moon with an investment.

Be especially cautious of individuals who use high-pressure sales tactics, something most legitimate investors or investment brokers won’t need to resort to. And don’t be swayed by photos of fancy clothes, expensive vehicles or luxe offices. Just because someone understands Photoshop or leaned on a Mercedes long enough to take a selfie doesn’t mean they have anything to offer.

Confirm that the person or business selling to you is registered with your province’s securities regulator.

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Why people fall for Ponzi schemes

One of the primary reasons investors can find themselves taken advantage of by Ponzi schemes is that the returns being promised, while enticing, aren’t so ridiculous that they immediately raise suspicion. A 13% monthly return on a used car scheme, for example, wouldn’t sound that unreasonable to many people who knew lots were empty across the country during COVID-19.

But a desire for easy money is only part of the picture. Cendri Hutcherson, associate professor of psychology and the Canada Research Chair in Decision Neuroscience at the University of Toronto, says Ponzi schemes play on one of humanity’s most pressing desires: a need for certainty.

“We know that people really hate uncertainty, and they really hate the possibility that they might lose,” Hutcherson says.

“If there's anything that's totally implausible about these schemes, it’s that they're essentially offering you a can't-lose proposition. They're saying, ‘We can guarantee you that you will be safe, that your money will be fine.’ And of course, we know from markets that it's very hard to guarantee that you'll find something consistent unless it's a very small amount of return on your money.”

Motivated reasoning

One would assume that when investors begin growing suspicious of an investment, they would all immediately rush to get their money back. But a psychological quirk prevents some Ponzi scheme victims from freeing themselves from their predicaments.

“There's a lot of research that shows that people engage in what's called motivated reasoning,” says Hutcherson. “Essentially, this is paying much more attention to the things that we want to be true, especially once we've actually committed to a course of action.”

As she explains, once people make a decision, they often focus on information that confirms they’ve chosen correctly rather than having to potentially second guess their actions.

And when you see you’ve made an error, “you essentially discount it, you don't pay attention to it, you avoid thinking about it.” Hutcherson says. “It's scary to think that we might have just made a mistake.”

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Who’s at risk?

Staff Sgt. David Kim of the RCMP’s Toronto Integrated Market Enforcement Team says Ponzi victims tend to fall into two categories: the overconfident, who believe their investing acumen and connections have created for them a unique investment opportunity, and the naive, who don’t understand that the returns being offered are suspiciously high.

Kim says an investor taken in by a 2021 Ponzi scheme involving safe deposits did not think the 8% yield he was promised was unreasonable. Regular returns on safe deposits, however, have been less than 1% for the past 10 years.

Older individuals with reduced cognitive abilities are common targets, but those with less reliable social support networks to turn to for second opinions and advice find themselves victimized as well.

There’s also evidence that people who are in mental distress are more vulnerable.

“People who are motivated by emotion will tend to take risks in order to feel better. If you're really struggling in life, and somebody comes along with the promise of making things better, making things more stable, you're much more likely to find that a really attractive proposition,” Hutcherson says.

What to do if you think you’re a victim of a Ponzi scheme

Investors should always alert authorities if they suspect they’ve been drawn into a Ponzi scheme, says Kim. That includes both your local police force and the Canadian Anti-Fraud Centre.

A Ponzi scheme’s victims can seek restitution for their losses through civil or criminal court, but there is no guarantee that they will succeed in either arena. Kim says data from policing organizations on the success of these efforts is limited.

Even though skepticism is encouraged when investing with someone new, it’s important to keep in mind that just because an investment doesn’t pan out, it doesn’t mean you’ve been fleeced.

“Investors should always make investment decisions based on the knowledge they could lose the invested capital,” Kim says.


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Clayton Jarvis is a mortgage reporter at Money.ca. Prior to joining the Money.ca team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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