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The difference between Ponzi schemes and pyramid schemes

White-collar crimes in South Carolina include several nonviolent felonies the offender commits for personal gain. They take their name from the white-collar workers who tend to commit them, often by taking advantage of their position. An example of a white-collar crime is a Ponzi scheme, which often gets confused with pyramid schemes.

Definition of Ponzi scheme

The Ponzi scheme takes its name from Charles Ponzi, an Italian swindler who lived in Boston during the 1920s. Ponzi ran a plot involving international reply coupons that immigrants to America could include in letters sent back to their home country.

The recipient would then exchange the coupon for postage stamps in that country, which could be sold for a profit in America. However, the scheme began to fail, and Ponzi had to recruit investors to keep it going. Long after he could no longer legitimately pay profits to investors, he simply kept recruiting them.

Modern Ponzi schemes operate in much the same manner, relying on new investors to keep the scam running. One promises the investor a high return with minimum outlay and little risk, and there may or may not be a physical product. The profit gets paid to the old investors through the funds from new investors.

Definition of pyramid schemes

Pyramid schemes often involve a product or service that requires an initial fee up-front or requires the seller to buy the product. Similar to a Ponzi scheme, the pyramid scheme relies on financial contributions to pay the sellers along the chain. However, it depends on the new sellers of the product or their efforts to recruit others below them and earn a commission in return.

An MLM, or multi-level marketing, business is essentially a pyramid scheme concept that might appear legal in this form. Since members know the structure in advance, it can be hard to prove one is a scam. The downside is that only those at the top can earn the most profit. These structures soon fail, however, because they can add only so many new recruits to benefit those at the top.

White collar crimes take advantage of unsuspecting people and often cost them thousands of dollars. For this reason, the government takes white collar crimes seriously. Anyone charged with one needs a good defense attorney.


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