A Ponzi Scheme is Just a Trusted Liar With a Bank Account

Most people believe they could never fall victim to a Ponzi scheme. They assume they would be able to spot the fraud a mile away and be able to deflect it before they were in. As nice as it would be for that to be true, Diana Henriques, financial journalist and author of The Wizard of Lies warned conference attendees at the 2016 ACFE Fraud Conference Canada that Ponzi schemers can pull the wool over anyone’s eyes — even natural skeptics.

According to Henriques, in order to even begin a Ponzi scheme, the fraudster by definition must be trustworthy. “The people who run Ponzi schemes always inspire trust among their potential victims,” she said. “That ability to earn and keep the trust of others is as necessary to a Ponzi schemer as a beautiful voice is to an opera singer. If you haven’t got it, you need to go into another line of work.”

Henriques explained that to run a Ponzi scheme, you only need two things — people who trust you and a bank account. This worryingly easy formula can be used to explain why so many Ponzi schemes are able to occur. “From 2012 through 2015 a new Ponzi scheme surfaced about every five or six days in the U.S. alone,” she said. “Odds are someone woke up this morning thinking their money was safely invested and by next Tuesday they will discover that it has all been lost in some new Ponzi scheme.”

Most of our society requires some form of trust to continue operating, so it is impossible to eradicate the trust aspect that fraudsters use to operate. However, much could be improved in the realm of the second part of the Ponzi formula — a bank account.

When Bernie Madoff ran his scheme, nothing could be done to waylay the trust of his investors. However, like all fraudsters, he had to keep his money somewhere. He used a JP Morgan Chase bank account as his slush fund that was only flagged and frozen when his sons finally reported him. “That is one of the most troubling aspects of this already troubling case,” Henriques said.

Henriques thinks that ultimately, preventing and detecting Ponzi schemes falls on the shoulders of the banks. She said, “An alert, proactive compliance community in the banking industry can deny them that second essential tool.” She believes that intelligent and effective compliance can be achieved through two steps:

 1.       Drastically simplify your rule book

Use common sense rules and procedures. The most common excuse people use for noncompliance is that the rules are too complicated to enforce or too hard to understand. By making your compliance rules as simple as possible, people can’t plead ignorance and will be forced to follow them.

2.       Apply them to every individual equally

This means that they must apply to outsiders and every single person in the company without exception. The CEO should have to fill out an expense report the same way their assistant would and those reports should go through the same channels. Madoff’s bank saw him as one of their star customers, so he was given more leeway. No matter how large an investor or client, no one should be above the compliance rules.

Henriques said she feared that the low interest rates in the current market was a perfect breeding ground for Ponzi schemes. However, if anti-fraud professionals remain diligent and follow compliance to a T, hopefully less people will have to fall victim to fraudsters like Madoff.

You can see Henriques’ book come to life when The Wizard of Lies is portrayed in an HBO movie premiering later this year.