Everything You Need to Know About the PONZI Scheme

30 December 2020

– what is it, how does it work, legal repercussions, biggest PONZI scheme in Romania and how to avoid it –

What is a PONZI scheme and how does it work?

A Ponzi scheme is a type of fraud that involves attracting a large number of investors who are tricked into believing that they are investing in a company or a product that does not actually exist. The profits of older investors are paid from the funds brought in by the new investors. Neither one nor the other knows that the whole business is based on the continuous attraction of new investors and on the existing investors’ profit reinvestment. Some of the funds attracted in the scheme constantly go to those who set up the fraud.

As the Ponzi scheme develops, organizers pay the promised gains to the older investors. On one hand, they want to certify the good faith of the business for the new and potential investors, and, on the other hand, to prove to older investors that the profit really exists and that their decision to invest was a good one.

Paying profits to older investors has 2 effects. The first one is that the business’s validation in the perception of the participants ensures a constant or even an increasing flow of funds.

The second one is that, once the profit is paid, the investors are convinced by the organizers not to withdraw their money, but to reinvest them, all for an even higher profit.


What does the success of a PONZI scheme depend on?

The success of a Ponzi scheme depends on 3 factors:

– the existence of a constant flow of new investments and investors, which gives organizers the opportunity to pay profit to the older investors;

– investors continue to believe in the existence of the assets in which they have invested;

– the investors do not request the full reimbursement of the amounts of money due to them, all at the same time.

When this flow is interrupted or when investors request the full or concomitant repayment of their funds, the scheme falls apart and the entire fraud is exposed.

The promise of large gains in a short term, with little or no risk, is what attracts people to invest in such a scheme. For the sake of gain, they either ignore the fact that they don’t know much about the object of their investment, or they do not have the financial education or the necessary competence to ask questions.

If there are, however, curious people who want to know more about how their money is invested, the organizers’ answers have some common features. They often talk about offshore investments, future trading or high-yield investment programs. Other times, they claim that the investment strategy is secret and, therefore, cannot be disclosed.

In order to not raise suspicions, the organizers of the scam send account statements or statements containing the so-called value earned by investors.


Disclosure of fraud and legal repercussions

The collapse of a Ponzi scheme fraud occurs when the flow of new investors is stopped, when participants withdraw or wish to withdraw large sums of money, when organizers run away with the funds available at that time or when the crime is revealed by the press, authorities or from inside.

According to our partners from the act Botezatu Estrade Partners law firm, in the Romanian legislation, a Ponzi scheme type financial fraud has consequences for the author or authors within the following legal classification:

The crime of fraud in aggravated form, provided in art. 244 (2) Criminal Code states that:  Fraud committed through the use of false names or qualities or other fraudulent means shall be punished by imprisonment of 1 to 5 years.

The crime of money laundering through the ways provided in art. 49 (1) a) and b) of Law 129/2019 for preventing and combating money laundering and terrorist financing states that: It is a crime of money laundering and it shall be punished by imprisonment of 3 to 10 years .

  1. the exchange or transfer of assets, knowing that they come from the commission of crimes, for the purpose of hiding or concealing the illicit origin of these goods or in order to help the person who committed the crime from which the assets originate in order to evade prosecution, trial or execution of the sentence.
  2. the concealment or hiding of the true nature, source, location, provision, movement or ownership of the assets or of the rights over them, knowing that the assets come from crimes commission.

Depending on the specific way of appropriation of funds by the author or authors of the fraud, from the company’s patrimony through which the Ponzi scheme is carried out, the offense of embezzlement sanctioned by art. 295 in the Criminal Code with imprisonment from 2 to 7 years, could be as well retained in their charge (Appropriation, use or trafficking by a civil official, in his interest or for another, of money, securities or other assets that he manages or administers), even if the company is a private one (according to art. 308 of the Criminal Code – embezzlement is incriminated even in the private sector, a situation in which the limits of punishment are reduced by 1/3).

In any case, when a person commits several crimes, he or she will be sanctioned according to the Penal Code for a competition of crimes, meaning that penalties will be established for each crime and, to the punishment established for the most serious crime, an extra 1/3 of the sum of the other established punishments is added.

Regardless of the types of offenses committed by the perpetrators, they will be obliged to cover all damages (including funds invested by the frauded persons) and any other damages caused by the crime, which the victims claim in criminal proceedings by civil actions. In other countries, not only the organizers of a Ponzi scheme fraud are obliged to return the money collected, but also the investors who benefited from it, even if they did not know that the money came from a scam and even the charities to which the beneficiaries donated part of the obtained funds.



This type of financial fraud is named after Charles Ponzi, an Italian swindler who operated in the US and Canada in the early twentieth century. The fraud he set up lasted for 1 year and the estimated losses were more than $20 million in 1920, the equivalent of about $196 million in 2019.

In short, Ponzi promised its customers impressive earnings from the difference between the purchase price of some postal coupons in one country and their exchange and sale price in another country. It’s just that, in reality, the Italian paid its investors’ profit with the money of those who had just entered the business.

There is evidence to suggest that Charles Ponzi did not invent this type of fraudulent investment scheme. Between 1869-1872, Adele Spitzeder of Germany and in 1880, Sarah Howe of the United States committed two frauds that followed the same principles. Even Charles Dickens described such fraudulent investment schemes in 2 of his novels, in 1844 (Martin Chuzzlewit) and in 1857 (Little Dorrit).

The extent of the fraud that the Italian Charles Ponzi set up and carried out for 1 year, with losses that today would exceed 200 million dollars, led to the naming of this type of financial fraud after him.


Ponzi scheme in Romania

In Romania, the biggest scam based on a Ponzi scheme was the famous Caritas game, which was set up by a former accountant and operated for about 2 years, between April 1992 and August 1994. The attracted investments exceeded the value of 1 trillion ROL, the equivalent of up to 5 billion US dollars.

The scale of the scam called “a self-help game” was huge. Mugur Isărescu, the governor of the National Bank of Romania, estimated that a third of Romania’s money was circulating through Caritas at one point, while The Economist wrote in 1993 that at that rate, Caritas’ turnover would exceed Romania’s gross domestic product in short time.

To this day, the number of depositors remains uncertain, but it is within millions. The whole country was gripped by the game fever and the chance of a huge win. The profit was 8 times the value of the amount invested, after only 3 months from the deposit. The list of winners was published in a local newspaper, while the television and prominent figures of the time praised Caritas’ success, thus strengthening people’s confidence in the mechanism based, in fact, on a Ponzi scheme.

The beginning of the end was in October 1993, when the payment of profits was postponed for the first time, due to so-called errors found in documents. In January 1994, the disaster became almost certain, but it was again blamed on an external factor: the cash register was robbed and, therefore, the winners’ profit payments were postponed again.

“Caritas is closing. Players will receive their money back” was the title of an article in the newspaper that, until then, published the names of the winners. The article was written by the founder of Caritas and followed by protests, hunger strikes and 450 million US dollars worth of debts.

Ioan Stoica was arrested on August 24th, 1994. In 1995, he was sentenced to 7 years in prison for fraud, but after the 2 appeals he made, his sentence was reduced to only 1 and a half year. He was released on June 14th, 1996.

Caritas was not the only scam based on a Ponzi scheme in Romania, but it was the biggest.

Why did the authorities in our country allow the existence of this so-called “self-help” game? The press wrote about the authorities’ fear of violent demonstrations and protests, but also about the political support received by the founder Ioan Stoica and the fact that, among the investors at Caritas, were influential people from all levels, many of them receiving their profit earlier than they should have.


How not to be scammed by a Ponzi scheme

There are a few things you should pay attention to in order not to fall victim to fraud based on a Ponzi scheme.

First of all, if a proposal to invest sounds too good to be true, then, most likely, it is not.

If the profit is high and the risk is low, it’s the first signal that it could be a scam. No big gain can be achieved without appropriate risks.

The socio-economic context influences all players in an economy, including investment programs and related earnings. Another thing to look out for is whether the profit earned or promised changes or not, in time.

If the investment strategy is “secret” or “too complex to be explained” and proven, if the necessary documents are difficult to be obtained or are delayed, if the financial company to which you have entrusted your money is not certified or authorized by the competent authorities, be careful! The chances of being the victim of a fraud are very high.