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HomeFeaturesPonzi scheme and pyramiding scheme: What you should know

Ponzi scheme and pyramiding scheme: What you should know

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An interview with Atty. Maria Concepcion Phua of Bahandi Group of Companies
Atty. Maria Concepcion Y. Phua, CPA, RFC, CWM, CIS, MBA
[email protected]

​Marichu obtained her Bachelor’s degree in Accountancy at De La Salle University, Taft Manila, her bachelor of laws degree from the University of San Carlos, Cebu City, and her Master’s degree in Business Administration (MBA) from Ateneo Graduate School of Business, Makati City. She also topped the 2007 Real Estate Brokerage Examinations, (5th placer). She finished courses accredited by the Association of American Financial Management based in the USA such as Registered Financial Consultancy and Certified Wealth Management. She is also a Certified Investment Solicitor (CIS) with license given by the Securities and Exchange Commission.

Her professional work experience includes various fields in auditing, accounting, banking, finance, insurance and law practice. She also joined the academe as one of the pioneer law professors at the College of Law of the University of Cebu in 2004 teaching taxation, business organizations and contracts and obligations.

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DNX: What do we need to understand about the Ponzi or pyramiding scheme?

Atty. Phua: Ponzi scheme is a type of investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

The organizers of this scheme often solicit new investors by promising to invest their funds in opportunities claimed to generate high returns with little or no risk.

According to the Philippine Supreme Court, in many Ponzi schemes, the perpetrators focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.

As a simple illustration, let’s assume that X solicits investments from A (on January 2020), from B (on March 2020), and from C (on May 2020) with a promise of very high returns/profits. To make the investment attractive, X will pay A the promised return on investment on March 2020 by using the funds contributed by B.

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Subsequently, X will also pay B the promised return on investment on May 2020 using the funds contributed by C, and the scheme will continue with the entry of new investors who will also contribute funds.

It is usually difficult to sustain the scheme over a long period of time because the operator of the Ponzi scheme (X in our example) needs an even larger pool of subsequent investors to continue paying the promised returns/profits to the early investors.

The idea behind this scheme is for the operator/perpetrator to collect his/her money from the second or third round of investors, and then he/she absconds before anyone else shows up to collect their respective returns/profits.

The Ponzi scheme is named after Charles Ponzi who carried out this scheme in the 1920’s and became well known throughout the United States because of the huge amount of money that he took in.

Pyramiding scheme is also another type of investment fraud which has some similarities with the Ponzi scheme. Under the Consumer Act of the Philippines, the term “pyramid sales scheme” means sales devices whereby a person, upon condition that he makes an investment, is granted by another person a right to recruit (for profit) one or more additional persons who will also be granted such right to recruit upon condition of making similar investments.

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The profits of the person employing such scheme are derived primarily from the recruitment of other persons rather than from the sale of consumer products, services and credit. Pyramiding schemes, which are focused more on recruiting members to make a profit rather than through sales, are deceptive because the system will certainly collapse due to market situation. The pyramid will eventually collapse, and the only persons who benefit from the scheme are those on top (of the pyramid) who have already profited from the recruitment fees.

DNX: What are the signs that you are being offered an investment opportunity that is bound to fail?

Atty. Phua

  1. The proposal /opportunity is too good to be true. There’s a promise of very high return/yield and least risk or no risk at all. This is contrary to the basic principle in investment, “High Risk, High Return. Low Risk, Low Return!”
  2. Quick gains over a short period of time. Time is basic element in Investment.. For an Investment to grow, it needs time.
  3. The person offering the opportunity cannot identify the risks involved.
  4. Investments are never risk-free. If risks are not identified, then the investment is bound to fail since risks cannot be managed if these risks were not identified at the onsight.
    Incomplete and questionable documents/data

    – business plan backed up by solid data — if investment pertains to a business/es

    * Approval or licenses from government/regulatory agencies
  5. Use of names of people enjoying the quick gains (employing the “herd mentality”) and creating the urgency to invest now.
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