White-collar crimes continue to occur around the world and they affect everyone. While a specific street crime might have one or two victims, white-collar crimes have a large number of victims, and on certain levels, some are so shocking that they actually may affect all members of society. They are of various types. But this research only presents an in-depth analysis of Ponzi scheme, while discussing the historical antecedents and developments of Ponzi schemes. The research also includes discussions about the functions performed by the government agencies, the state and federal law enforcement agencies in combating the crime, while analyzing the complex relationship existing between the agencies in the fight against Ponzi schemes.
Historical Antecedents of Ponzi Schemes
The evolving nature of white-collar crimes committed worldwide remains a puzzle. This is due to their nature where some involve a number of criminals masquerading as lenders. These criminals offer people opportunities in terms of investments into such hidden activities claiming above-average returns in the future (Zgheib, 2015). However, this is not always the case, especially when people are unaware of such consequences. One such white-collar crime is a Ponzi scheme, a crime committed to deceive people of their investments (Cross, 2014). SEC (2009) defines it “as an “investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”
All Ponzi schemers need an ongoing flow of money to survive. And they have to maintain and polish the trust of old investors over time. This way they entice new investors to invest more and promise them above-average returns. In reality, no product or actual investment exists. The scheme organizers siphon the largess like leeches.
Historical Developments of Ponzi SchemesNamed after Charles Ponzi, the first perpetrator who defrauded individuals through postal stamps in 1919, this crime includes the famous and well-respected names of Allen Stanford, Bernie Madoff, Paul Burks and many others.
Charles Ponzi persuaded investors to invest in an international postage stamp program. He paid off earlier investors with the funds given by the new ones. This way he brought more investors. The federal court convicted and sentenced him for seven years as a “common and notorious thief” (Zuckoff, 2005, p. 305). Today, his legacy is not as a common criminal, but as a notorious white-collar criminal.
Another large-scale perpetrator was from a Wall Street pillar Bernie Madoff who affected nearly five thousand investors and amounted to approximately $64.8 billion (Dempsey, 2010, p. 319). Starting in the early 1990s, he marketed his scheme as one of the biggest investment opportunities to have with clients waiting him for a year to invest with him (Payne, 2012, p. 150). It was a privilege to have Madoff investing on an investor’s behalf. Investors sent him millions. But instead of investing those millions, he deposited the money in his bank account in Chase Manhattan (Payne, 2012, p. 150). Madoff perpetrated this fraud as a trader who allegedly uses a “split-strike conversion strategy” (Frankel, 2012). This is a legal investment strategy combining the purchase of stocks with the use of options to hedge against the risk that the price of the stocks will decline. Madoff claimed to have used this strategy to achieve uniform and higher returns for many consecutive years. He promised 11% yearly return over the period of 15 years, with only 13 losing months, losses than one “feeder fund” paid out (Frankel, 2012). Madoff was arrested in December 2008 and pleaded guilty to this largest Ponzi scheme on March 12, 2009. He was sentenced to 150 years in prison in connection to the largest, longest, and most widespread Ponzi scheme in history.
Today, Ponzi schemes now are so widespread in the United States. In 2012, In a recent case, Paul Burks, the founder of ZeekRewards, perpetrated one of the largest Ponzi schemes in penny auctions where millions of people were defrauded. Since then, the police uncovered over 500 more cases of Ponzi schemes (Ferrell & Fraeddrich, 2017, p. 517). But these three remain the largest in history.
Issues and Problems the Police and Law Enforcement Officers Face
The evolving nature of Ponzi schemes elaborate a network that gives law enforcement officers hard times in pursuing the perpetrators. Given their complex structures, elaborate plans, and how perpetrators commit Ponzi schemes present a difficult scenario for the law enforcement agencies to trace the masterminds behind such crimes.
Why it is difficult to detect the perpetrators of Ponzi schemes? There are several reasons behind this. The most important one, as Tony Tinker (1985, p. 39) observes, is that Ponzi schemes “represent extreme and unusual circumstances atypical of the mundanities of everyday investing. They are in the same league as the most audacious and extravagant confident tricks.” Another important reason is that the majority of such businesses are established on genuine grounds while others remain fictitious (Lewis, 2015).
They also use well elaborate and strategic networks (Lewis, 2015). The perpetrators of Ponzi schemes do not limit themselves to a single country. They are now global. Going global hide their identities and, ultimately, giving law enforcement officers hard time to track and convict those behind such crimes. Sometimes they work like this: Their main office is in another country, while the perpetrators are in another region to hide any instances of trail. This makes it difficult for the police to locate the real individuals behind the scenes..
Another issue the police face is that Ponzi schemes are multi-layered. This means they have hidden levels where specific individuals have a role to play. In as much as law enforcement officers have specialized skills to detect and counter fraudulent elements, they still face many challenges. One of the main challenges is relevant to the lack of coordination between law enforcement officers and the business society. As pointed out earlier, investors say nothing about any such scheme as long as they are hauling profits and returns. This lack of coordination hampers countermeasures to reduce fraud related activities (Sharma, 1998). Effective coordination between businesses, government agencies and the police will reduce such fraudulent schemes and make investigations successful..
General Structures of Ponzi Schemes
Twenty-first century crimes are structured in a way to facilitate seamless activities aimed at sustaining their fraudulent operations. In this way, they are able to conceal their identity while defrauding people. Ponzi schemes are of no exception. The structures that the perpetrators use to operate are diverse. The basic structure works like this: New investors pay off the old investors. As long as new investors are coming into the scheme, it keeps growing. But when the influx of new investors runs out, the Ponzi scheme collapses (Hens & Rieger, 2016).
The perpetrators can offer returns based on investment under structures such as joint-stock company, hedge funds, commercial banks, or simple pool of assets (Hens & Rieger, 2016). At the same time, they employ many similar techniques to pitch their fraudulent Ponzi scheme, to identify target groups, to obtain public relations, and to build trustworthiness. The invasive effects that such Ponzi scheme have if left undetected, from lack of trust in the financial institutions to across-the-board economic, social, and political damage (Hens & Rieger, 2016). Thus, there is always a need for strong governmental responses at all levels to stop these scammers and protect investors.
Functions Performed by Local, State, Federal Agencies and Private Securities in Combating Ponzi schemes
SEC has brought several charges against Ponzi schemes based on the licensing/registration provisions and the antifraud provisions of the Securities Act. The Securities Act of 1933 and Securities Exchange Act of 1934 provided the framework for regulation of the U.S. securities industry (Dempsey, 2011). It has established clear provisions that forbid and punish those undertaking certain financial activities (offering securities and collective investment schemes) without any proper licensing and registration from the financial supervisory body. These provisions apply to deposit taking, securities intermediation, and public offering of securities and collective investment schemes at all local, state, and federal levels (Hillman, 2003).
In practice, the authorities most often addressed Ponzi schemes through civil actions at all these levels, based on the breaches of several provisions of the securities laws and obligations, mainly those requiring registrations of public offerings, registrations/licensing of broker dealers and the antifraud provisions (Hillman, 2003). The SEC usually seeks emergency relief first including temporary restraining orders, freezes the assets, and appointment of receivers. Courts hear the cases immediately and in practice are very receptive to SEC requests.
Relationships Between Police, Law Enforcement Agencies and Private Security in Combating Ponzi Schemes
as much as this type of crime seems difficult to combat, the current landscape in the criminal justice system has made it much easier for law enforcement officers use different methods to end its spread, as well as curtailing its growth efforts. These efforts bore fruit due to the relationship that various segments have, with a common goal of reducing crime. In a natural business environment, there are various roles that the public, government, police and private security firms play in their efforts to combat these types of crimes (Hillman, 2003). For instance, the public plays a great role since this is the most critical area due to their susceptibility to fraud of any nature. In many circumstances, the investors or the public often try to invest in genuine businesses which may at point turn to be fictitious businesses or investments aimed at luring and defrauding people. The investors and their private securityare therefore enrolled in certain associations to reduce instances of crime.
The police, depending on the level of crime involved, also spearhead this effort. The relationship is intertwined in that the police can only investigate certain criminal acts, arrest some suspects, and conduct perpetrator’s trials and final conviction. These activities are under the jurisdiction of the police, and as such, state agencies, law enforcement agencies and other oversight bodies must collaborate with the police in order to reduce white-collar crimes. In as much as they work in harmony, private security employed by businesses also offer support that is visible along the chain. The fight against white-collar crime is the responsibility of the various government agencies, oversight bodies, law enforcement agencies and the police in place. Their relationship is also critical to ensure that such crimes are reduced, perpetrators arrested and convicted to deter other possible forms of crime. This is because they are becoming more popular due to returns, nature and magnitude. It is therefore important for institutions involved in crime prevention to come into realization that fraud exists, they evolve and use much more sophisticated ways. This would increase more surveillance measures, integrity in business registrations and monitoring, in order to prevent fictitious investments from unlawfully gaining or defrauding the public.
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