Explained: What Is A Ponzi Scheme And How It Works

Businessman and actor Shilpa Shetty's husband, Raj Kundra, has come under the scrutiny of the Enforcement Directorate in connection with a money laundering case linked to a Ponzi scheme. The probe agency has seized properties worth ₹97.79 crore, including a Mumbai flat registered in Shilpa Shetty's name. 

What is a Ponzi scheme?

A Ponzi scheme is a type of investor scam where people are promised high returns on their investments. However, instead of earning profits, the money paid to earlier investors comes from new investors. This cycle continues until there are not enough new investors to pay returns, causing the scheme to collapse and many people to lose their money.

In reality, the fraudsters behind a Ponzi scheme do not actually invest the money as promised. Instead, they use the funds from new investors to pay off earlier investors, creating the illusion of returns. This cycle continues as long as there is a constant influx of new funds. However, when the scheme can no longer attract new investors or when existing investors try to withdraw their money, the scheme collapses, leaving many investors with losses.

How to watch out for Ponzi schemes

1. If the scheme is offering guaranteed returns with little or no risk (real investments carry some level of risk)
2. If there is pressure to make quick decisions that you are uncomfortable with
3. If there are negative reviews or complaints online about the company
4. If the scheme is using confusing or unfamiliar terminology, making it hard to understand
5. If there is a lack of transparency about how the scheme generates profits
6. If someone encourages you to keep the investment a secret
7. If there is difficulty getting valid paperwork or official documents related to the investment
8. If they are not letting you withdraw your funds, or offering higher returns to entice you to stay 

What to do if you have been scammed by a Ponzi scheme

1. Cancel all payments to the scheme.
2. Cut off all contact with the scammers.
3. Document any communications you have had with the company as evidence, including emails or letters.
4. Report the scheme to the authorities.
5. Be careful of potential identity theft or further scams, as scammers may sell your information to other fraudsters.
6. Beware of "fraud recovery fraud," where scammers pose as law enforcement or legal professionals offering to help victims recover their money for a fee.