cpd types

In January 1920 a young Italian immigrant called Charles Ponzi set up a business called the Securities Exchange Company to trade in international postal reply coupons. He promised big returns and, indeed, his initial investors did make money.

In November 1920 he was sentenced to five years imprisonment on eighty-six counts of mail fraud. The scheme which bears his name to this day is a classic whereby early investors are paid their 'profits' from money supplied by later investors. Any scheme like this is , of course, doomed to failure as there isn't an infinite number of new investors so eventually the cash dries up and the later investors lose their money. The life of such schemes is often extended because many participants who receive a pay-out often reinvest it in the hope of receiving an even bigger reward.

It may be gratifying to the late Mr Ponzi to know that, even in the modern era, such schemes still exist using currencies which don't actually exist in tangible form. One such is OneCoin a Ponzi scheme promoted by the self-styled 'cryptoqueen' Ruja Ignatova.

In 2016 Ms Ignatova launched OneCoin in the UK and it sold like hotcakes. Millions of pounds were invested on the promise of big returns. Part of the genius of the scheme was that OneCoin was sold using MLM – Multi Level Marketing which can be likened to a pyramid scheme. The essence of MLM is this: I sell a product to A and B and take a small cut. A and B then sell the product to C and D and E and F and I take a small cut as do A and B, C and D. New recruits E and F bring in more salespeople to sell on and so forth so the sales force grows exponentially. Theoretically an entire population could be recruited in this way.

One major criticism of such schemes is that only a few early adopters make any real money out of them. The early recruiters can generally make serious money, later ones receiving only small commissions linked to their sales whereas the early recruiters get a cut of everything. Companies such as Amway and Herbalife use this quite legitimately but it is easy to abuse.

OneCoin used MLM to sell virtual coin to investors on the promise of big rewards and so the money rolled in. Big rewards were promised for OneCoin investors but how these were actually going to be generated was always unclear – deliberately so one assumes.

OneCoin had one major problem. In order to function a virtual or crypto currency has to be backed by a blockchain. A blockchain uses cryptography to keep exchanges secure and provides a decentralized database, or "digital ledger", of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded. A blockchain helps to reduce fraud because every transaction is recorded and distributed on a public ledger for anyone to see. Bitcoin is the best known example of a cryptocurrency backed by a blockchain. Running a blockchain requires an enormous amount of computing power and is, consequently, very expensive to operate.

OneCoin did not have a blockchain – in fact it had nothing at all behind it except a lot of enthusiasm and some highly dubious numbers provided by employees of OneCoin without any external verification. In short it was a gigantic Ponzi scheme. Nobody is really sure how much money was invested – estimates range from €4bn to €15bn.

The trick, if you are the promotor of such a scheme, is to exit early preferably with as much cash as possible and to disappear before too many questions are asked. Whilst the MLM process was recruiting more and more investors for OneCoin Ms Ignatova was travelling the world promoting OneCoin at massive arena events pulling in hundreds of new investors. She was spending her wealth buying the mandatory big yacht and properties in Sofia and the Black Sea resort of Sozopol. But questions had begun to be asked – particularly about a long promised exchange where OneCoin could be turned into cash and answers were promised.

In October 2017 she was to address a gathering of OneCoin promoters in Lisbon but she never turned up. In fact the last trace of her is that two weeks after the Lisbon event she boarded a Ryanair flight from Sofia to Athens and then dropped out of sight. No one knows where she is.

In November 2019 her brother Konstantin Ignatov admitted his role in the OneCoin crypto-currency fraud. He pleaded guilty to several charges, including money laundering and fraud. He reached a plea bargain deal with the US authorities. In 2019 Manhattan federal jury found lawyer Mark S. Scott guilty of helping Ruja Ignatova launder $400 million.

Sadly this is an old style fraud on a new style platform but it is not the only one. The best known scam of this type is probably Bitconnect. This promised investors incredible returns of over 90% if they left their money in. Too good to be true? Not according to Bitconnect – they had a special trading bot that was so infallible it could not lose – oh really? An estimated 1.5 million people lost their money in the Bitconnect scam – many their life savings. A suicide hotline was set up for former investors.

It is easy, with hindsight, to mock people who have been foolish or gullible enough to believe the claims of high returns, fast access to wealth and no possibility of failure. Schemes that promise such good things must ,one would think, be automatically suspect. And yet there seems to be a never ending supply of people willing to believe in the tempting prospect of riches. One of the ways OneCoin held investors was by enrolling them in a sort of 'club' which sought to bond them into the OneCoin 'family'. Doubters about the scheme were badged as 'haters' – a tactic used by many cults and similar groups to use peer pressure to stifle dissent. In this way investors were discouraged from asking for their money back and encouraged to recruit more people into the OneCoin 'family'.

It does not take too much to spot these schemes, even with their 21st century twist. The promise of high reward, the lack of any solid evidence of stability, the razzamatazz and hype surrounding the promotion of the scheme, the difficulty of getting any money out all point one way – and yet – and yet…

There are always those who think their lives will be changed by wealth, that money will solve their problems, that it will make them happy and whilst that temptation exists there are those who will promise to deliver and will – but only to themselves.

Ruja Ignatova is still either in hiding or possibly dead – no one knows. The promoters of Bitconnect have largely escaped punishment. The chaos and misery they have left behind them has largely been forgotten, except by the victims, as the world deals with a much bigger problem.

John Taylor is an author for accountingcpd. To see his courses, click here.

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