What is a Ponzi scheme?
A Ponzi scheme is an investment fraud. The organisers say your money is working in some profitable business: imports, land, farming, crypto, “AI trading”, anything. In reality there is no business, or it cannot produce the promised profit. The “profit” paid to earlier investors is really the money deposited by newer ones.
The name comes from Charles Ponzi. In Boston in 1919–20 he raised money from thousands of people by promising a 50% return in 45 days. The story was trading postal reply coupons; in fact earlier investors were being paid with newer investors’ money. The scheme collapsed in August 1920.
Say a familiar figure in the neighbourhood tells you, “Leave Tk 50,000 with me and I’ll pay you Tk 5,000 profit every month.” Rafiq does, and for three months the Tk 5,000 really arrives. Delighted, he brings in his siblings and office colleagues. What Rafiq does not know is that his “profit” came from exactly those new people’s deposits. The numbers are only an example.
Why it matters to an investor
- Being paid regularly does not prove a real business: a Ponzi scheme pays reliably at first, because building trust is the whole trick.
- Latecomers lose the most: when the scheme collapses, those who joined late usually do not even get their original money back.
- The damage is not only financial: because it spreads through people you know, family ties and friendships suffer too.
- Spotting it early is the real protection: getting money back after a collapse is very hard, so the defence is recognising it before you join.
Why it has to collapse
A Ponzi scheme has no income of its own, so every month’s promised profit needs fresh money every month. The more people join, the more people must be paid, so even more new money is needed. There are only so many people in any town or country, so sooner or later the flow of new money slows.
Then two things happen together: new money dries up, and as rumours spread, existing members all try to withdraw. Organisers first stall with “server problems” or “new rules”, then the office shuts. Often the organisers have already moved a large share of the money away.
Famous cases and Bangladesh’s experience
The best-known large example is Bernard Madoff. In the US, he took investors’ money for many years by showing steady, “unusually smooth” returns; losses on paper were put at tens of billions of dollars. In 2009 he was sentenced to 150 years in prison. Educated, wealthy investors fall for Ponzi schemes too.
In Bangladesh the form has changed but the pattern has not: MLM and deposit-taking societies in the 2000s, then some heavy-discount e-commerce schemes in 2021. According to The Daily Star, a Bangladesh Bank assessment identified 25 e-commerce platforms through which about Tk 6,050 crore was transacted in the four months from March to June 2021; new customers’ advance payments were being used to fill older orders, and many customers received neither the goods nor a refund.
Signs to recognise
- High returns described as “risk-free”. In reality, higher return comes with higher risk.
- The same smooth profit month after month, whatever the markets are doing.
- A vague or “secret” explanation of where the money goes, and no licence from any regulator.
- Delays and excuses when you try to withdraw, or offers of “more if you stay a little longer”.
Worked example
- Say a scheme takes Tk 10,000 each from 100 people, Tk 10 lakh in total, promising 10% profit a month. There is no real business.
- Paying the profit takes Tk 1 lakh a month. In just 10 months, the whole Tk 10 lakh collected has gone on “profit”.
- But the 100 members are still owed their original Tk 10 lakh. That can only come from new members, who must also be paid 10% a month.
Result: what the scheme owes grows every month, so it needs ever more new money just to survive. As soon as new money slows, it collapses, and the last to join lose the most. The numbers are only an example.
Common mistakes
- Thinking “I’ve been paid for three months, so it must be real”. Paying early is exactly how a Ponzi works.
- Joining with the plan “I’ll get out early”. Nobody knows when it will collapse, and then everyone tries to leave at once.
- Not checking because someone you know or respect is involved. They may have joined without understanding it either.
- Rolling the “profit” back into the scheme, so the amount at risk keeps growing.
If nobody can explain, and you cannot check, which real income the profit comes from, assume it may be someone else’s deposit.