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Ponzi Schemes and Laundering - How Illicit Funds Are Acquired and Concealed

NCJ Number
FBI Law Enforcement Bulletin Volume: 50 Issue: 11 Dated: (November 1981) Pages: 5-11
V P Doherty; M E Smith
Date Published
7 pages
Two types of white-collar crime -- Ponzi schemes and laundering of illicit funds -- are explained so that law enforcement officers understand the complexities of the crimes and the point at which illegal activities occur.
The Ponzi scheme (also known as the pyramid sales scheme) is a type of chain referral recruiting system in which the victims are sold the right to sell others a specified product. Their real profit is earned primarily by recruiters developing new recruits who find even more recruits; the sale of services or products is merely a cover. Taking its name from an enterprising schemer in the 1920's, the Ponzi game has at its core the implication that an investor will recoup his original investment by simply inducing two or more prospects to join. However, some investors will inevitably drop out of the scheme, and those at lower levels of the pyramid will lose their investments. For police, establishing criminal liability is complicated when corporate entities are involved, making auditing difficult, expensive, and time consuming. Separating the victim from the promoters, especially since it is in the victim's best interest to transfer losses to others, becomes problematic, and useful victim testimony is limited. Public education to expose the games is perhaps the most effective preventive tool. Laundering money is another crime which is difficult to detect and prosecute. Laundering involves finding some feasible legal source to use as a cover for illegally gained money, so that income taxes can be paid and the money becomes respectable. Potential covers for laundering can be domestic business capable of absorbing large volumes of cash and having relatively fixed expenses so that income can fluctuate greatly without arousing suspicion. Foreign laundering can be accomplished by depositing illegal money in secret bank accounts overseas and then bringing it into the country as a 'loan.' Licit and illicit monies are mingled so that detection and auditing are difficult. Law enforcement officials have recently adopted new methods for detecting laundering, such as sampling and ratio analysis (which involves review of liquidity, operations, profitability, and leverage). Investigators may use flow charting of companies' corporate and ownership structures to detect laundering. Because this technique illustrates the complex relationships of such schemes, using it may help to build a successful prosecution case. Nine footnotes are included.