What Are Ponzi Schemes? Are They Illegal in Singapore?

Last updated on March 25, 2022

Over the years, Singapore has seen a rise in the number of people who fall victim to scams, and it remains a prevalent issue. Of the many types of scams known to exist, investment schemes that are branded as “no-risk, sure-win” are perhaps one of the most convincing and tempting.

Some of these schemes do not have any legitimate returns-generating activities. Instead, they use funds received from newer investors to pay returns owed to earlier investors. These investment scams are otherwise known as Ponzi schemes.

In this article, we will discuss:

What is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investment scam that promises high returns for little to no risk. In reality, the scammer does not invest the money received but pockets most of it. The scammer may also make it appear like great returns are being generated by using the remaining funds obtained from new investors to pay earlier ones.

Because the scheme heavily relies on the recruitment of new investors, this means that when there is an insufficient number of new recruits, or when many investors wish to cash out, there may no longer be enough capital to repay existing investors. If so, the scheme collapses, and it becomes impossible for investors to subsequently retrieve their money.

The world’s most infamous Ponzi scheme

One of the largest Ponzi schemes in history spanned nearly 20 years, and saw an overwhelming US$64.8 billion stolen. It was a textbook Ponzi scheme, and was orchestrated by Bernie Madoff, a well-known Wall Street investment advisor.

Madoff ran a reputable investment firm, which he eventually used as a front for his crimes. He attracted investors by promising them high returns on their investments. However, instead of investing his clients’ money, Madoff deposited the exorbitant amounts of money from the investors into his personal account. He paid “returns” to earlier investors by using the money obtained from investors who joined the scheme later.

When a large number of his clients wanted to cash out their investments, Madoff was unable to keep up with the withdrawals. His scheme gradually began to unravel, and Madoff was forced to use the remaining US$234 million from the scheme to repay favoured clients. He confessed to his sons that the business was “one big lie”, and they reported him to the authorities shortly after.

Madoff was sentenced to 150 years in prison for fraud, money laundering and a number of other crimes. He was also ordered to forfeit US$170 billion in assets as restitution to his victims.

What are the differences between a ponzi scheme, a pyramid scheme and multi-level marketing?

Pyramid schemes are network and chain referral schemes in which members recruit newer members with the promise of earning easy money. Under the guise of an entry fee or a member fee, newer members are made to pledge and pay the organisation upfront. The funds from these lower-level members are then funnelled to those of higher positions in the organisation.

Ponzi schemes and pyramid schemes are somewhat similar as money can be made only through the constant recruitment of new members. However, the distinction lies in what is offered to victims of each scheme. With Ponzi schemes, victims are lured in by lucrative and unrealistic investment opportunities. In contrast, pyramid scheme victims are offered easy money by recruiting more people into the scam.

Pyramid schemes are also often compared to multi-level marketing schemes (MLM) as both schemes are reliant on networking and chain reactions. For example, in MLM companies, members are encouraged to recruit new members and often receive incentives for every new connection. Yet, while multi-level marketing focuses on selling actual products or services on a commission basis, pyramid schemes do not carry any goods, but fixate solely on the recruitment of new members.

That said, the operation of both pyramid and MLM schemes is strictly prohibited in Singapore, unless the scheme has been exempted from this prohibition (such as those operated by master franchises and insurance businesses). Section 3 of the Multi-Level Marketing and Pyramid Selling (Prohibition) Act states that anyone found guilty of promoting or participating in such non-exempted schemes is liable to a maximum fine of $200,000 and/or an imprisonment of up to 5 years.

Are Ponzi Schemes Illegal in Singapore?

Running a Ponzi scheme is, without a doubt, illegal in Singapore. Though there is no specific law pertaining to the execution of Ponzi schemes, offenders are primarily charged with a cheating offence. Depending on the circumstances and nature of the case, the offender may also face charges for other related offences.

Under section 415 of the Penal Code, cheating occurs when a person faudulently or dishonestly deceives the victim to deliver property or money to any person, or consent that another person retains his property or money.

As a result, when a person intentionally lies to another party to cause that party to transfer them money for “investment purposes”, despite knowing that they are unable to make good on their promised returns, their conduct can be considered cheating. The penalty for cheating is a fine and/or imprisonment for a maximum of 3 years.

Past Ponzi Schemes in Singapore

Man scams 17 people of S$500K

From May to June 2015, Joel Soon Yong Hao masterminded a Ponzi scheme that cheated 17 victims of an estimated S$550,000.

Soon claimed to be the chief executive and founder of Scarlett Strategies, a firm that supposedly provided event management services to wealthy clients. He convinced victims to invest in Scarlett Strategies with the promise that they would be able to receive a 40% profit of what they invested within a week. He also tricked existing clients into recruiting more people by telling them that more investments would mean greater returns.

In actuality, however, Scarlett Strategies did not exist and there was no business to generate the promised returns. Instead, Soon would use the money from one investor to pay another.

Soon was convicted of 20 charges, which included multiple counts of cheating and driving offences unrelated to the Ponzi scheme. Accordingly, he received a collective sentence of 5 years, 2 months and 12 weeks’ imprisonment.

A housewife’s ponzi scheme that scammed 53 people of millions

In another case of Ponzi schemes in Singapore, housewife Leong Lai Yee cheated some 53 people of a total of S$35.4 million.

She operated two separate Ponzi schemes.

In one of them, Leong claimed to buy properties from sellers who were going bankrupt, and resold them at a profit to foreign buyers keen to invest in Singapore property. She declared her ploy to be “risk-free” to investors and lied that she worked with a banker, who was privy to such prime properties, as well as a lawyer who could help with the completion of the property transactions.

Leong never once disclosed any information on the properties to her victims, and would use some of the money she cheated to repay her investors as “returns”.

The second Ponzi scheme involved business funding. Leong told victims that she provided business financing for start-ups, and businesses with short-term financing. She persuaded her victims to invest money in exchange for monthly returns of 7-9%.

For masterminding the Ponzi schemes and using the money to finance her personal expenses, Leong pleaded guilty to 51 counts of cheating and using the benefits of her criminal conduct, with another 806 similar charges taken into consideration. She was sentenced to 14 years of imprisonment.

What Are Some Signs that an “Investment Opportunity” is a Scam?

It is important that you know and can recognise the tell-tale signs of a Ponzi scheme to protect yourself from such scams. In short, some red flags of a potential scam are:

Investment opportunities promising high returns with little to no risk;
Investment strategies that are vague or secretive;
Schemes that are advertised on social media or messaging platforms; and
Schemes that offer referral commissions or “limited-time” offers.

Realistically, “no-risk, sure-win” investment opportunities do not exist. Furthermore, it is unlikely that legitimate and trustworthy investment schemes would be advertised on social media or messaging platforms.

Be wary of people who use pressure tactics to sell investment schemes to you. You may also be told that you will be offered incentives if you refer others to the scheme, but do note that most legitimate investment schemes rarely utilise such tactics.

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Like all other financial endeavours, it is important to be careful and not rush into committing your money — you don’t want to become a victim of a Ponzi scheme. Ensure that you fully understand what you are getting into and consider getting a trusted third-party opinion if you remain unsure.

Additionally, you may verify if a firm is authorised to provide financial investment services through the Monetary Authority of Singapore’s (MAS) Financial Institutions Directory. The MAS also provides an Investor Alert List, a non-exhaustive list of unregulated investment entities that you may cross-check with.

If you believe you have put money into a Ponzi scheme, refrain from investing more money into the scheme and make a police report.

When it comes to retrieving your money, there are civil and criminal courses of action available. Under the civil route, for example, you may consider suing the investment scammer for fraud or misrepresentation, or file a civil claim in which the court can order for restitution to be made. On the other hand, when you opt for the criminal route and file a police report, the court may order the scammer to make compensation to you.

However, be aware that neither route can guarantee that you will get any money back. This is because recovery of your money is still dependent on whether the scammer can be found and whether they have any money left to pay you (and the other investors).

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Alternatively, if you have been charged with offences tied to running a Ponzi scheme in Singapore, consider consulting a criminal defence lawyer. A lawyer will be able to assess your circumstances and offer sound legal advice, as well as represent you in court to achieve a fair outcome for your case.