Perils of Ponzi: Regulators need to stop Ponzi schemes before they gain momentum, especially in developing countries (source: IMF)


ONE hundred and fifty years after Charles Dickens wrote in Little Dorritt about London investors succumbing to the fraudulent investment schemes of Mr. Merdle’s bank, trusting victims are still tempted by such get-rich-quick swindles.

Ponzi schemes, which lure investors by paying high returns from other investors’ money, thrive even in developed countries. The sophisticated regulatory framework in the United States did not prevent the rapid growth and collapse of Bernard Madoff’s $65 billion scheme in late 2008 or the subsequent collapse of several others during the global financial crisis.

But the impact of Ponzi schemes has been greater in countries with weaker regulatory frameworks. This unfortunate pattern is illustrated by the case of Albania in 1996, when riots resulted in the fall of the government and even deaths, and by more recent cases. For instance, Jamaican schemes caused losses as high as 12 1/2 percent of GDP and spread to a number of other Caribbean jurisdictions. The collapse of schemes in Colombia, which had taken in an estimated US$1 billion, was followed by riots and violent protests in 13 cities, and the government was forced to declare a state of emergency. A scheme in Lesotho lost the money of about 100,000 investors, many of them poor and highly vulnerable. The damage these schemes can inflict requires a determined regulatory response to shut them down at an early stage, before they gain momentum. Regulators and receivers allege that these and the other operations mentioned below are Ponzi schemes, although in many of these instances court cases are still pending.

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