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The Case Study Of The Financial Fraud

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1: The Similarities And Differences Of The Ponzy And The Pyramid Scheme:

Ponzi scheme is the business of forgery. It is a swindling of investment that assures high rates of payment in return (Baucus 2014). It also displays that there is a very little possibility to risk for the investors.  It is a type of white-collar crime, on which some designated personality takes money from new investors to make payments to the old investors. The money is not actually invested and that is why the scheme collapses and the investor who subsidizes money for the scheme finally loses his money. A pyramid scheme is a type of business structure, which enlists members with the assurance of service or payment promise to register candidates into this scheme (Sheffrin 2013). Enlisted members increases in number and further recruitment becomes unsustainable thus the scheme fails to accumulate profit and faces closure.  Pyramid scheme is an illegal business and it is hard to detect but it has been seen that the scheme can be identified the lack of retail sales (Kolk 2016). Investors purchase and load their inventory with automatic purchases at regular intervals but the products do not sell because their selling value is less than the prices on which they have brought the product. Ponzi scheme is harmful to the society not only because not only they lose customer support but also have to confront financial loss. The financial industry has experienced this kind of financial misdemeanor called Ponzi scheme (Johnson 2012). 

Pyramid scheme and Ponzi scheme are often mistaken to be the same. Pyramid structure, as earlier has been discussed cannot be detected easily whereas Ponzi scheme can be detected easily ( Ramaseshan 2015).  Pyramid is an explicit scheme because in this case an individual has to pay money for a chance where other individuals can pay the money. Ponzi scheme is implicit scheme as it requires an individual to fabricate in order to gather participant for their scheme. According to Nashat, Abdullah and Abdullah 2014, Pyramid scheme authorities need to work actively as they know that they have to gather or hire new participants and sell products in order to make their scheme workable. In Ponzi scheme individual contributes money to a manager who assures them that they will get higher money value in return. The person who carries out this kind of business controls the whole operation but in pyramid scheme is formulated so that the primary schemer hire investors who in return will hire other investment makers and this process goes on(Kumar, Ravi and Mahapatra 2015).

In this scheme, the investment chances are offered as incentive structure where they have a right to trade a product. A Ponzi scheme is a fraud scheme which is indicated as crime but pyramid is said to be a deceptive business which is supporting an unsustainable practice and also manufacturing of any product and service. Pyramid scheme creates an organizational structure by recruiting more and more investors so that they can expand their business (By and Burnes 2013 ) Ponzi is not a business. It is a type of investment firm and which collapses when there are no new investors. Ponzi is basically a scheme opted by the brokers. In a Ponzi scheme there is no existence of a real business, it is a scheme that is used in any industry where investments are made but in pyramid scheme there is an existent business (Frankel 2012). Bernard .L. Madoff and R. Allen Stanford are the two schemers who volunteered in Ponzi scheme.

Ponzi scheme and pyramid scheme are the similar looking mode of forgery.  They share similar kind of characteristics. In both the cases the individuals like financiers and business personality's dupe oblivious individuals who mistakenly make investments in order to get the extraordinary amount in return (Lee and Fargher 2013). Investors in both Ponzi and pyramid schemes gets targeted basically because they are rich and are capable of paying a large amount of money.  According to Young and Kumar, S., 2016, the money is taken from the investors in the name of making an investment which will after sometime increase into an amount which is double or may be triple of the amount which is invested. Unlike in regular investment the schemes promise that an individual can earn a consistent profit then he has to keep on allocating investors who are interested in making an investment (Rayman 2013). They are both self-sustaining schemes where the investors have to keep on increasing volunteers who will readily invest the amount for the scheme.  The inward flow of cash needs to match with the outward flow of the cash (Gonzalez-Perez  and Leonard 2013) . In both the cases the initiator of the scheme is the one who has committed the real crime, the participant are not guilty as long as they have invested unknowingly to the scheme.     


2: What Helps The Criminals Like Bernie Madoff To Survive And Thrive:

The “Madoff investment scandal” was one of the major cases of stock and securities deception, which was exposed in late 2008.  If the abilities or the conveniences of the white-collar criminals like Bernie Madoff, which helped them to carry out their fraudulent business is investigated, it can easily be found that a number of instruments ware influential in this regard. Even being a well-respected investment banker, Madoff persuaded thousands of investors to invest their savings with a false promise of consistent income in return. However, how did he or the other fraudulent businesspersons are able to do this. As discussed by Baer 2014, “Ponzi schemes typically pay returns of 20% or higher, and collapses quickly”. However, in the case of Bernie Madoff, a number of things worked in his favor. The following discussion may put some light on this matter.

As considered by Mandell 2015, Madoff swindled his depositors out of $65 billion and went unnoticed by the related state authorities for decades. It came into the limelight in 2008. Madoff used the idea of Ponzy Scheme. As discussed by Golden et al. 2012, the name “Ponzi Scheme” was originated from the Italian businessperson and a fraudulent artist “Charles Ponzi”. This is a special kind of investment and returns strategy. As opined by Greenberg and SzE 2013, Ponzi Schemes are operated by a central machinist, who uses the funds from new depositors to pay off the guaranteed returns to older ones. Here, the con men like Bernard Madoff, manage a fraudulent investment service. The investors are convinced to deposit their money to the “portfolio manager”. This manager guarantees the investors that they will be funded with a great return (Lai  2015). On the other hand, he makes the same promises to so many other investors and thus collects funds from them. Now, when the previous investors want their money or the return, "they are paid out with the incoming funds contributed by later investors" (Lewis 2013). Here, the manager of these funds are merely shifts the money from one investor to the other and abstains from any genuine investment activities.

In the case of Bernard Madoff, he admitted that he just transferred the money from one bank to the other. One of the main reasons that the con investors like Bernard Madoff can carry put their notorious business is their promise and the initial cases of high returns to the investors (Stephen and Galak 2012). Most of the clients of Bernard Madoff, were well-off, and they wanted to obtain a high and consistent return. So, they ware happily convinced and invested to the Ponzi Scheme of Bernard Madoff. it is the greed of the investors that lured them to invest in a high return scheme without any hesitation. Also in the case of Allen Stanford, another white-collar fraud, the investors were promised to high range of return with a 9.87% compound annual interest, which was much higher than the contemporary US average CD rates (Mullenix 2013). This lured the investors to invest in his scheme. As opined by Deason et al. 2015, the investors must notice such red flags, only then the con financers can be stopped to operate. As mentioned by Greenbergn and SzE 2013, the victims of such cases state that they believe such firms as the returns are amazing and they are always able to get their money back within few days of their claims.

One of the main reasons of flying off the white-collar criminal like Bernard Madoff, is their faculty of being well-versed in their operating sectors. Bernard Madoff’s advantage of being a former member of the financial industry helped him to nullify the threats of the financial investigations. He was in this industry for a long time and he was hardly unknown to the dos and don’ts of this sectors. Therefore, it can easy be believed that this 70-year-old commerce veteran knew unerringly what he was doing. As opined by Baucus and Mitteness 2016, the knowledge of the industry and the strength of education and confidence help them operate such a fraudulent business for a longer period.

As discussed by Edelbacher et al. 2012, it can often be seen that the white-collar criminals are mostly the trustworthy and the respectable figures. It makes the victims of the business believe that the operation is legitimate and there is nothing to be skeptical about. As opined by Golden et al. 2012, people tend to believe a person who looks professional and respectable in their outward appearance. In the context of Bernard Madoff, his appearance and the reputation of being a veteran financial advisor worked a lot for the smooth running of the business.

The fraudulent operations of Bernard Madoff or Allen Stanford works with great precision as long as the perpetrators are able to manage and make the new investors deposit in their schemes. As mentioned by Will 2012, often the offer self-effacing but secure return lures the investors more than the promise of high returns. Bernard Madoff and Allen Stanford, both made use of the market demand for financial security. Bernard Madoff did not promise high range interest and return to all of his investors rather he offered them a consistent earning. This helped him to arrange a number of willing depositors time to time. His Ponzy Scheme was just to transfer the money from one investor to the other. The consistent investment by the new investors helped them to ensure the constant return of money to the investors.

Sometimes the lack in the investigation set up helps the criminals like Bernard Madoff. as the Swiss bank stated that because of Madoff's reputation and experience as a financial broker, they believed him and opted for no prior investigation. The strong hold in the legal sectors also helps the frauds like Madoff's for a longer period than the other financial frauds. Both in the cases of Bernard Madoff and Allen Stanford, the “Securities and Exchange Commission” was extremely criticized for their failure of the early detection of the cases of Ponzy Scheme. People started to allege the firms long before, but the repeated investigations of SEC failed to detect any financial wrongdoings in the accounts of these firms. As opined by Baer 2014, as a number of SEC employees were involved in the investment business, the lack of proper objectivity fogged up the whole process of investigation and its aim. In addition to this, Bernard Madoff had a long-standing relationship with Securities Industry and Financial Markets Association (SIFMA) and the highly eminent lawmakers and regulators of Washington (Lewis 2013). This helped him a lot to avoid an unbiased and stringent financial audit and investigation. The Central Bank of Ireland has also stated that they failed to detect the massive fraud operation of Madoff and was duped by his scheme.

As estimated by Mullenix 2013, in Madoff's case, the business compelled to deteriorate when most of the clients ordered a total of $7 billion back in return. One of the USPs of Madoff’s businesses is that the customers were allowed to withdraw their money whenever they want and it fortunately revealed the biggest white-collar crime of the decade. It was in the second half of 2008, when the European investors began to withdraw their investment as a reaction of the worldwide recession.

As discussed by Walsh and Spalding Jr. 2012, there were a number of other notable Ponzi schemes witnessed by the history of the financial world, including Allen Stanford's who stole $8 billion and Tom Petter who duped the investors with almost $3.7 billion, “but as far as degree goes, Madoff wins by a landslide”.  


3: The Potential Measure To Tackle The Financial Crimes:

In the world where the internet has become an inseparable part of our everyday life, it has become very had to control the cases of Ponzy Scheme and pyramid scheme. As discussed by Schwieso 2014, Financial crime is one of the major global issues and it has to be addressed with a high priority. In a pyramid scheme the perpetrator attempts to earn money by recruiting agents as new members. The business talks about multi level marketing and selling of products or services. But in reality, “advocates of the investment use funds from new members to pay off the previous investors until in due course, the pyramid falls down” (Banks and Torres 2012). As opined by Banks and Torres 2012, these proposals usually guarantee significant returns in a very small period.

On the other hand, in the Ponzy Scheme, a financial fraud convinces the investors to invest in a fund, with the promise of a high return and consistent earnings (Walsh and Spalding Jr. 2012). Here, in this scheme, the perpetrator makes the investors believe that the fund will be invested in a legitimate business and the investors will be able to draw the legitimate return in any point of time. However, in reality, the fraud financial broker simply pays the previous investors their claims with the money accumulated from the investments by the new depositors. Thus without conducting any genuine business the fraudulent broker makes a huge earning (Baucus and Mitteness 2016).

Awareness among the customers:

Now, in most the cases it can be found that the investors do not possess a definite knowledge about the operation or nature of the schemes. This typically makes them fall under the pray of the fraudulent financial business operations. The investors have to be able to detect the characteristics of the schemes like Ponzy or pyramid. As discussed by Sullivan 2015, by identifying the warnings or the red flags the investors can save themselves from becoming a victim of financial crimes.

The promise of high and certain return with little or no risk should be identified as a red signal. Overly consistent and positive return is a hard thing to achieve. Therefore, the customers have to be conscious about such promises. Tall claims in the statements “no investor has ever lost a single penny of his investment with us” have to be detected as a warning sing in the investment sector. The customers should also be conscious about the businesses where the executors are not willing to divulge their business strategies. In the case of Madoff, as mentioned by Andrews et al. 2013, “He commonly refused to meet openly with investors, which gave him an "Oz" impression and amplified the allure of the venture”. It could work as a red flag for the investors but they denied to notice it.

Usage of internet:

In addition to this, the investors have to be careful about the usage of internet for the financial transactions. With the help of the internet, the execution of the pyramid scheme has become easier (Lagazio et al. 2014). Therefore, while making networking with any business set up through the internet it is important for the users to be extra careful. On the other hand, other financial crimes online theft can also be tackled with a bit more consciousness from the user end.

Hence, it can be said that to tackle the cases of the financial crimes, it is mostly important to generating awareness among the customers or the investors. As opined by Kundi et al. 2014, as they come directly in contact with the fraudulent and illegal investment schemes like Ponzy or the pyramid scheme, it is highly recommended that the generation of an extensive awareness and knowledge and alertness is the prerequisite for the success of the mission of tackling the financial crimes.

Whistle blowing:

To stop the financial frauds the “Whistle blowing process” can also become a fruitful method. The monitoring agencies like Securities and Exchange Commission, can introduce regular monitoring of the complaints or suspicion tickets raised not only by the customers but also by the employees of the concerned organization. As discussed by Edelbacher et al. 2012, any misdemeanor within the organization when detected by any internal unit (the employees) or an external unit (the stakeholders or the customers) will be informed to the relevant authority within minimal time. It will help the legal authorities address and detect potential criminal activities.     


Compliance standards:

As opined by Haq 2016, it is important to set certain compliance standards for the entire financial industry. It is difficult to lay a fixed standard for all financial activities, but certain compliance should be there so that the diversions can easily be detected and the required steps can be taken before the collapse of the system. The idea of the compliance standers means a set of legal specifications, policy and laws, which all the institutions operating in the financial industry have to follow. As opined by Sullivan 2015, it has to be a legal compulsion for them to abide by these set norms.

Know-Your-Customer (KYC):

As discussed by Andrews et al. 2013, it is important to prevent the cases of money laundering. One of the best processes to deal with it is to introduce the know-your-customer process within the organization. It will be helpful both in protecting the benefits of the customers as well as the organization. As opined by Edelbacher et al. 2012, “based on a professional relationship with customers, this is an important tool to achieve an appropriate level of Customer Protection”. Now, most of the organizations operating in the banking industry are following the strategy of “Know-Your-Customer (KYC)”.

Internal control and audit:

In addition to this, it is important to lay down rules for internal control to address the issues like financial crimes. As opined by Haq 2016, internal audit can be a rewarding instrument in detecting the monitory misconduct within an organization. On the other hand, the financial audit by the credible and registered and unbiased auditor can also help an organization to control the occurrences of financial misdemeanors. It is important for the companies to regularly review and amend their financial policies so that they would be able to address the modern and contemporary issues. As discussed by Baucus and Mitteness 2016, it is also important for the companies especially the companies that are operating in the financial sectors like banks or the insurance companies to provide regular and up to date training programs to their staffs so that they become capable enough to detect, avert and address the financial crimes.

Legal punishments:

As discussed by Baer 2014, to tackle increasing rate of the financial crimes worldwide the legal procedure of stringent punishment can be followed. Though most of the countries have legal guidelines to combat and control the occurrence of the white-collar crimes, the cases are only increasing. As mentioned by Haq 2016, in countries like, China, the white-collar crime can cause a perpetrator even capital punishment. There is a perpetual debate about the disparity of the sentencing in the white-collar crime case; the importance of a stringent punishment cannot be ignored. As opined by Edelbacher et al. 2012, the organizations as well as the customers should work closely with the state authority like the legal system of the country, law enforcement bureaus, the regulators etc. to share the finest practices and contribute to the current initiatives, which are intended to stop the risk of the financial crimes.  

Thus, avoid discussed methods and tactics can help in avoiding the further occurrences of the financial crimes like Ponzy schemes or the Pyramid schemes. However, without the extensive awareness among customers or the investors no process will be responsive enough to address the problem of financial crimes.  



Andrews, S., Polovina, S., Yates, S., Akhgar, B. and Bayerl, P.S., 2013, January. Tackling Financial and Economic Crime through Strategic Intelligence: The EMPRISES Framework. In Proceedings of the International Conference on Information and Knowledge Engineering (IKE) (p. 1). The Steering Committee of The World Congress in Computer Science, Computer Engineering and Applied Computing (WorldComp).

Baucus, M.S., 2014, December. Shortcut to Success: How Ponzi Entrepreneurs Establish & Grow Ventures Quickly. In Proceedings of the International Association for Business and Society (Vol. 25, pp. 260-267).

Baer, M.H., 2014. Confronting the Two Faces of Corporate Fraud. Florida Law Review, 66, p.87.

Banks, T. and Torres, T.J., 2012. Update on the Pyramid Scheme. The European Physical Journal C, 72(10), pp.1-6.

Baucus, M.S. and Mitteness, C.R., 2016. Crowdfrauding: Avoiding Ponzi entrepreneurs when investing in new ventures. Business Horizons, 59(1), pp.37-50.


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