Insights & Reports > Kroll Global Fraud Report

Charles Ponzi (1882 – 1949) was one of the greatest swindlers in American history, and his name now describes any scam that pays early investors returns from the investments of later ones. Successors are legion in the Caribbean and Latin America – in Colombia alone, forty firms are under investigation for such behavior. Ponzi claimed to be investing in postal reply coupons; more recent schemes have used structures such as off-shore banks, foreign exchange trading, pre-paid cards, and hedge funds. Although operating under different pretexts, the purpose and subsequent results have not changed. Ponzi schemes typically:

• Offer exceptional returns that consistently outpace the financial market;
• Guarantee principal investment;
• Boast of third party investment insurance;
• Pay generous commissions to attract investors;
• Lack transparency in financial statements and other financial information; and
• Involve untraditional investment portfolios making it difficult to understand how they make money.

Ponzi schemes have no exit strategy: once started they are doomed to fail, typically from running out of “marks”, a run on redemptions, or regulatory intervention. Suspicious regulators can find it challenging to gather evidence in multiple jurisdictions with different laws, especially with schemes operating as financial entities.

Charles Ponzi’s investors were outraged at his arrest. Has anything changed? Investors in David Murcia Guzman’s company rioted in the streets when the Colombian government shut it down as a pyramid scheme last year. Similarly, Jamaican investors were incensed over the closure of Cash Plus Limited. Many who were ruined, either blinded by faith or refusing to admit their foolishness, continued to regard the scheme operators as heroes.

Once you identify a Ponzi scheme, what next? Those following the money trail can find expense and frustration mounting, as fraudsters transfer money at the speed of light. In our experience, investigating Ponzi schemes and recovering assets requires specialized professionals. They can help you:

Act quickly: Time is on the side of the fraudsters. Records disappear and assets move, dissipate, or are further converted. Moreover, Ponzi schemes are expensive to operate. Their longevity is negatively correlated to the amount of possibly recoverable funds, as over time money is paid out as alleged investment returns or to the fraudsters.

Take control: Taking control of a Ponzi entity – including books and records, bank accounts, local assets, and office premises – as quickly as possible, through a court appointment of an experienced receiver, trustee, or liquidator is of primary importance. It also permits recognition by foreign jurisdictions for international tracing, freezing, and forfeiture of assets.

Prove the fraud: Scheme operators typically transfer funds to foreign jurisdictions, including infamous offshore ones, and rely on banking secrecy laws, bearer bonds, and nominee shareholders and directors to hide ill-gotten gains. Proving the fraud is essential for tracing, freezing, and recovering these funds, but such books and records are often incomplete. An experienced investigator can find other evidence, interview witnesses, and make local and foreign inquiries. Similarly, a forensic accountant can identify an asset trail from banking and other third party financial records. Proving the fraud to the courts with such evidence allows for the identification and tracing of funds without the fraudster’s knowledge. Experienced legal counsel is instrumental in obtaining the appropriate court orders.

Victims beware: Fraudsters often setup new entities to “hit the mark again” in the recovery of assets. This can include soliciting victims to contribute funds towards a recovery effort that never happens, or petitioning their own companies into bankruptcy and appointing friendly liquidators to pillage the estate further, destroy evidence, and feign investigations.

The best defense against a Ponzi scheme is to steer clear. If caught up in one, an investigation needs experienced professionals to avoid quickly going off track and running up excessive costs with limited success.

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Glen E. Harloff (CGA CFI) is a managing director in financial advisory services in the Caribbean and Latin America specializing in forensic accounting and investigations, litigation consulting, and financial due diligence. He has been involved in numerous forensic investigations relating to publicly traded and privately held companies, and to domestic and offshore financial institutions. Prior to joining Kroll, he was a member of the Royal Canadian Mounted Police where he conducted complex national and international white-collar crime investigations.

David A. Holukoff (CA CFE) is a managing director in financial advisory services in the Caribbean and Latin America, specializing in business restructuring, insolvency, asset tracing and litigation support. He has extensive experience in managing, evaluation, restructuring, and liquidating businesses in crisis throughout Canada and the Caribbean, including in the oil and gas industry, offshore banking, domestic banking, mutual funds, manufacturing, and telecommunications. Prior to joining Kroll, he was Vice-President with an international accounting firm.

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