A Ponzi scheme is an investment program and strategy where payments to existing customers are funded with deposits of new participants. The assumed return on investment can be high, while the risks are undisclosed. The risk in a Ponzi scheme is that the recruitment of new participants stays behind on the need to pay the existing customers. Therefore, a Ponzi scheme is sometimes referred to as a pyramid scheme.

The term Ponzi is derived from Charles Ponzi, an Italian who emigrated to the US and after several failing business ventures started trading and arbitrage in prepaid ‘international reply coupons’ between the USA and Italy. The scheme allowed IRCs to be bought in the issuing country and converted into more expensive postal stamps in the country of redemption. The scheme was untenable, and the bubble eventually burst. The underlying system has been used by numerous con men around the world to promise high profits while ‘robbing Peter to pay Paul’.

Although Ponzi schemes fail because new participants cannot be reimbursed, the top of the pyramid and the controlling minds of the scheme often still have a nest egg or some hidden assets. Victims in Ponzi schemes can therefore participate in federal clawback schemes or start civil cases against the management of the scheme. It is recommended to strategize appropriately for a clawback, because receiving payments that are funded by new participants potentially makes the receiver a complicit.