You receive what you’re told are the first proceeds from an investment a short time after making it. While everything appears to be on the up and up, the money was not actually from a return on an investment. It came from another investor. This is the principle a well-known fraud called a Ponzi scheme works on.

Understanding Ponzi schemes

A Ponzi scheme occurs when a malicious individual uses money from new investors to pay bogus returns to earlier investors or repay investors who want their money back. The money doesn’t actually generate profits; it simply flows from one investor to the next until there’s nothing left.

At first, everything seems legitimate. The fraudster conveys the impression that the investment is yielding high, even quick, returns and the money is easily accessible. But then, one day, the scammer is no longer able to answer requests to withdraw money from the investment, especially if they’re having trouble recruiting new investors. They may even up and vanish with the funds. It’s often at this point, when it’s too late to get your money back, that the scheme is uncovered.

Victim testimonial (in French only)

Red flags

To protect yourself from potential Ponzi schemes, it’s important to know how to recognize them. Here are some red flags to look for to avoid this type of fraud:

  • You’re promised quick, high returns at zero risk.
  • You’re told that your money will be pooled with a closed or “hand-picked” group of investors.
  • You’re offered “exclusive” investments.
  • The individual or firm offering you the investment opportunity isn’t registered with the AMF.
  • You’re given little documentation, or documents are difficult to obtain.

Jean-Louis’s story

Jean-Louis puts $1,000 into an investment offered by Luc. A week later, Luc sends Jean-Louis a cheque for $100. He explains that it comes from the return generated by his $1,000 investment.

No money has, in fact, been earned on the investment. Luc has used a portion of Jean-Louis’s investment to pay a bogus “return” to him. In doing so, he hopes to get Jean-Louis to sink more money into the investment or convince his friends and family to invest, as well. Meanwhile, a substantial portion of the money Jean-Louis pays to Luc is used by Luc for personal expenses. One day, Luc disappears with the money invested by Jean-Louis and his other victims. In this story, the only person who makes money is Luc.

Tips and advice to avoid this type of fraud

  • Make sure firms or individuals that contact you are in the Register of firms and individuals authorized to practise and contact them using their contact information in the register, rather than the information they give you. When in doubt, contact our Information Centre.
  • Take some time to think things through before investing any money. Don’t let yourself be pressured.
  • Ask for official documents, such as a prospectus and financial statements.
  • Ask questions. Make sure you fully understand the features and risks of the investments you’re being offered.
  • Be cautious. Don’t fall for promises of high returns for no risk.

What to do in the event of fraud

Anyone can be a victim of fraud, so don’t beat yourself up. Investment scams often rely on promises of exceptional returns.

  • Refer to the You’re a victim of fraud? page to find out what to do, and contact the AMF if the fraud involves purported investments.
  • You should also break off all communications with the person or persons involved and stop sending money.

Be careful: Fraudsters often target their victims more than once. They may contact you claiming to be a lawyer, financial institution or firm specializing in financial fraud cases and offer to recover the money you lost.