The alleged financial scam involving I Monetary Advisory (IMA) of Mohammed Mansoor Khan of Bengaluru has hit thousands of people, most of the middle and lower-middle classes who dreamt of huge profits from their hard-earned money. The programme appears to have been a Ponzi scheme about which there were indications earlier, but were either ignored by the authorities or were hushed up. The people behind the apparent fraud seems to have exploited the faith of most investors who were looking for 'halal' investment.
A basic characteristic of a Ponzi scheme is the paying of 'profit' or returns to earlier subscribers from the subscription amount from subsequent subscribers, without the backing of a sustainable business model. There may or may not be a business of product or service sales involved in the programme and the subscribers may or may not believe the profit is generated from such a business, according to Wikipedia.
Multi-level marketing, binary sales programmes, and pyramid schemes are all Ponzi schemes in which the purported profits are generated from the subscription amount of newer members. The name Ponzi scheme came from Charles Ponzi who defrauded hundreds with such a scheme as far back as the 1920s. Ponzi apparently had been inspired by the 1880s Ladies Deposit scam in which Sarah Howe served three years' jail term.
The Madoff scam that hit the US in 2008 following the arrest of New York-based stockbroker Bernard Madoff is considered the mother of all Ponzi schemes. The scam in part is considered to have triggered the 2008 global financial meltdown along with the subprime crisis. Madoff attracted thousands of investors promising high returns without risk. He had a fairly well-known and for some time successful stockbroking firm as cover for the scheme. According to some estimates, investors lost close to $35 billion to the fraud.
The IMA scam has many similarities with the Heera gold scam in which Hyderabad-based businesswoman Nowshera Shaikh was arrested last year for allegedly luring investors with huge 'halal' profits from an international gold business.
Investopedia describes a Ponzi scheme as a fraudulent investing scam promising high rates of return with little risk to investors. Both Ponzi schemes and pyramid schemes bottom out when the flood of new investors dries up and there isn't enough inflow to be distributed.
The key characteristics of a Ponzi scheme are the following:
- A promise of high returns at near-zero risk;
- High-intensity marketing to keep adding new subscribers to the scheme so that the older ones could be paid;
- There might be a consistent flow of returns irrespective of market conditions in the initial period that helps boost public confidence in the scheme;
- The scheme relies on a constant flow of new subscribers;
- There may or may not be the sale/purchase of a product or service associated with the programme;
- The advertised business is often a cover than something to generate serious profit for a sustainable activity;
- By their very nature Ponzi schemes will eventually bottom out because a point will be reached when no more new members are available in a community to join the scheme;
- Though technology has increased the reach of such schemes, the basic concepts remain the same, used by Howe and Ponzi.
- There will often be some amount of secrecy involved in the transactions and the perpetrators are particularly wary of law enforcement authorities getting involved.