Ponzi schemes, named for a 1920s fraudster, are scams in which investors are lured into participating in a investment deal with the promise of high returns with little or no risk. However, rather than actually investing the money, the fraudster simply recycles the investment back to the investors and claims that the money is the return. This can bankrupt victims and rob them of any extra money they have.

Generally, Ponzi schemes operate in a vicious cycle. As initial investors ask for their returns, the fraudster draws in new investors. These new finances are then given to the original investors as returns. As the investors see returns, they are more likely to feed additional money into the scheme. The fraudster skims money from the trade as he or she juggles the investors’ finances.

The U.S. Securities and Exchange Commission, or SEC, is responsible for investigating and prosecuting people who commit Ponzi schemes. This is to both prevent future schemes as well as help victims regain as much money as possible. However, the SEC is unable to detect and prevent every case of fraud, so it is your responsibility to beware of Ponzi schemes and other forms of fraud.

There are several different warning signs of Ponzi schemes that you should remain aware of if you are looking to invest. These signs include:

• The promise of high returns with little-to-no risk
• Secretive investment professionals who refuse to explain their process
• Problems with receiving official investment paperwork
• Non-licensed sellers
• Investments that have not been registered with the SEC
• Returns that do not fluctuate with the market
• Problems with receiving your returns

If you suspect that you are a victim of a Ponzi scheme, or if you are aware of other types of fraud, you should not wait until it is too late before informing the government of your doubts.