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Ponzi schemes vs. pyramid schemes

Both pyramid schemes and Ponzi schemes are examples of potential fraud, often referred to as white-collar crime. How do they work, what makes them similar and what makes them different?

Essentially, a Ponzi scheme takes the money that new investors put in and pays it to the older investors. They're told these are returns on the investments, but they're not. It's just money from other investors. The problem is that the scheme will eventually fall apart and the most recent investors will have lost their money, which was given to others who invested before them.

A pyramid scheme is similar to a Ponzi scheme in that money is taken from new participants and given to older participants. The big difference, though, is that people who recruit new people into the scheme then get commission payments. This gives them incentive to expand the scheme. Often, people try to make a pyramid scheme appear to be a multi-level marketing program.

At their core, these are very similar schemes, and they're implemented in similar ways. The biggest difference is that pyramid schemes have commissions and a bit more versatility regarding what they're based around, whereas Ponzi schemes are focused on investments that offer incredible returns.

It is important for those who have been accused of fraud or any type of financial schemes to know what allegations they face. After all, everyone has the right to a fair trial. Knowing what allegations have been leveled against you can help you work with your attorney to determine the best legal defense options and decide how to proceed.

Source: Federal Bureau of Investigation, "White-Collar Crime," accessed Jan. 17, 2018

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