The harm and prevention of "Ponzi scheme"

2021-08-10

The "Ponzi scheme" causes endless harm


Compared with ordinary financial fraud, the "Ponzi scheme" has more victims, a wider range of influence, deeper damage, more concealment, and greater social harm.


One is the large number of victims. The inherent pyramid-shaped investor structure of the "Ponzi scheme" and the MLM method that deceives and pulls off the assembly line determines that the victim must reach a certain scale in order to effectively maintain the cash flow required by the scam. Therefore, the typical "Ponzi scheme" has a large number of victims. For example, Pangzi had 40,000 defrauded investors, and the Colombian "Pyramid scheme" characterized by illegal fund-raising had as many as 2 million victims. The number of people defrauded in the Madoff case is innumerable. In addition to the United States, the Madoff fraud case also spread to the United Kingdom, France, Switzerland, Spain, Japan and other countries.


Second, the amount of deceived is huge. The initiators of the "Ponzi scheme" never thought of repaying the principal of the investment, so they never worried that the amount involved in the case was too large, and the scammers believed that the increase in the amount of funds raised would help increase their visibility and attract more people. Investor participation. Therefore, the amount involved in the "Ponzi scheme" under the cumulative snowball effect is often higher than that of ordinary financial fraud. For example, Pangzi defrauded 15 million U.S. dollars that year, the Colombian illegal fund-raising case involved 800 million U.S. dollars, and the Madoff case reached an unprecedented 50 billion U.S. dollars.


Third, it has a wide range of social influence and many levels of influence. The number of people defrauded and the scale of the "Ponzi scheme" determine that its social impact far exceeds that of ordinary fraud cases. The level of its influence has shown a diversified trend. There are not only government officials and celebrities, but also financial investment practitioners, and the general public and retirees with lower risk tolerance. The social harm caused by this is also more serious. If it is not handled properly, it is likely to endanger financial stability and social order because of public sentiment. For example, the Columbia Pyramid scam has caused large-scale riots in some areas.


Fourth, it endangers investment confidence and financial stability. In view of the influence and harmfulness of the "Ponzi scheme", its blow to investor confidence is fatal. After each "Ponzi scheme", it will take a long time to repair the damaged financial order and restore it. Investors' investment confidence cannot be achieved overnight. Take the Madoff fraud case as an example. Due to the involvement of a large number of financial institutions, customers of financial institutions lose their trust in financial institutions, triggering large-scale chain lawsuits, and adding new injuries to Wall Street, which has been hit hard by the financial tsunami.


Fifth, the deceptive and concealed nature of deception makes it difficult for supervision and tracing. Sophisticated "Ponzi schemes" often use obscure investment techniques to make the way of making money seem plausible and feasible. With a stable excess return, it can effectively deceive ordinary investors and even professional investors. The insiders of the "Ponzi scheme" often control the core information of the group, use nepotism, and strictly guard the group's financial secrets, thereby reducing the risk of being exposed or investigated by the outside world. For example, the asset management department and the trading department of Madoff Company are located on different floors. Madoff keeps secrets about the company’s financial situation, and even never reveals to the relatives of the children of the company’s executives. All the accounts and documents of the investment advisory business are They were all locked in a safe by Madoff. The lack of transparency and various deception methods have made the "Ponzi scheme" often remain out of the eyes of regulators for a long period of time.


 


"Ponzi scheme" is well-prevented


It is foreseeable that the Madoff case is definitely not the last "Ponzi scheme", but lessons can be summarized and learned from the investor, market and regulatory levels, and a comprehensive screening and review mechanism can be established to prevent the occurrence of "Ponzi scheme", or At least reduce the harm of scams.


The first is that investors should learn and cultivate an understanding of the regularity of investment. The "Ponzi scheme" has a large number of loopholes in the anti-investment law: low risk, high return, and almost unaffected by the investment cycle. Investors can find these abnormal characteristics after careful screening, but most investors usually don’t care about the investment list, analysis process and profit path. They only care about the final profit and loss of the investment, which provides opportunities for scammers. . Think of many major international investment banks handing large sums of money to Madoff, just to get a return of about 10%, while their own funds have promised customers a return of 20% or 30%. Is this kind of investment again? The new "Ponzi scheme"?


Second, investors should establish risk prevention and management awareness. Investors must realize that no investment is completely risk-free. Any prominent name, even Buffett, is not beyond doubt. Investors should, as far as possible, choose to invest in qualified financial institutions under the supervision of regulatory agencies. Before investing, investors must effectively identify and evaluate the risk factors faced by the investment, classify the risks, and apply effective risk management methods. In the event of a risk outbreak, the evidence materials and capital and property should be preserved in time to avoid greater losses, or to prepare for future rights protection.


The third is to strengthen the market evaluation and supervision of the transparency of investment and financial management products. A key condition for the establishment of a "Ponzi scheme" is the lack of transparency to investors, that is, investors cannot verify whether the transactions or investments claimed by the scammers have actually occurred, and cannot verify the profitable ways and methods of the investments or transactions. . And cunning scammers mostly use private equity products, hedge funds, derivative products and other financial instruments that are outside the regulatory system to engage in "black box operations" with their characteristics of not publicly disclosing investment information. Therefore, in the supervision of investment and wealth management products involving the public interest, sufficient transparency requirements should be imposed. Although this requirement can be lower than that of publicly issued securities, at least fund managers and managers must fully disclose their investment strategies to investors , Profitable channels and important investment decisions.


The fourth is to improve the contractual supervision of investment and financial products by intermediary agencies. Although there are no mandatory information disclosure requirements for most private equity products and hedge funds, nor are they subject to official external supervision, through effective contractual arrangements, fund custodians and external audit institutions still effectively implement market supervision of investment and wealth management products. First of all, it should ensure that there is an independent third-party custody of fund assets to ensure that client funds, securities and other assets are not embezzled or misappropriated; secondly, it should be ensured that an independent professional audit institution regularly audits the operation of investment and financial products, and Provide fair audit reports to regulators and investors; in addition, intermediaries that have a trading relationship with the investment product (such as the major investment banks involved in the Madoff case) should perform due diligence obligations and carefully review the investment manager’s Credit, the feasibility of investment strategies and the risks that may be encountered in the investment.


From Shanghai Securities News January 22, 2009