Forensic accountants are warning that the economic downturn may be making investors vulnerable, especially to Ponzi schemes.

The scheme is an age old scam which was refined and used by Charles Ponzi in the 1920s; investors are promised high returns on their money but those returns are actually paid by the scammer out the investor’s own money or the money paid by other investors.

The most notorious recent example of a Ponzi scheme was the Bernard Madoff case in which the financier falsified a number of financial statements for a $50 billion pyramid scheme. He is currently awaiting trial in prison.

Charles Ponzi Invented the Ponzi Scheme In the 1920s

But this is only part of a growing trend in America and the UK. In America, for instance, there have been more than 300 criminal defendants in fraud investigation cases that totalled an $8 million loss with more than 100,000 victims of the fraud. The numbers in the UK are growing fast too.

Barry Draper, of Forensic Accounting Services, explains that: “Ponzi schemes become more prevalent during an economic boom because investors are always looking to get the best return on their money. But these scams become exposed during a recession, such as we are currently experiencing, when investors begin demanding the return of their capital.”

Mr Draper added: “Of course, by then, the original capital has long gone because it has been used to pay interest and dividends to new investors, all of which is fraudulent.”

He said that there are some key features of ponzi schemes for potential investors to watch out for.

Investors should be wary of schemes that are recommended by word of mouth, or which promise ‘exclusivity’. They should also be aware of promises of high returns with little risk, or returns that seem too good to be true. Invariably, they are.

Having invested funds, failure to get regular updates on how those funds are performing, or experiencing difficulty in receiving ‘returns’ on the investment, are also warning signs that the scheme is a scam. These warning signs may actually even mean that the funds are already lost with little chance of recovering them.