Differentiating risk factors of Ponzi from non-Ponzi frauds
| Published date | 07 October 2019 |
| DOI | https://doi.org/10.1108/JFC-07-2018-0075 |
| Pages | 993-1005 |
| Date | 07 October 2019 |
| Author | Vasant Raval,Vivek Raval |
Differentiating risk factors of
Ponzi from non-Ponzi frauds
Vasant Raval
Department of Accounting, Creighton University Heider College of Business,
Omaha, Nebraska, USA, and
Vivek Raval
Department of Accounting, University of Illinois at Chicago College of Business
Administration, Chicago, Illinois, USA
Abstract
Purpose –This paper aimsto analyze the attributes of Ponzi schemes (“Ponzis”)to determine whether they
are a unique classof financial fraud.
Design/methodology/approach –The authors apply the disposition-basedfraud model to classify and
differentiate the attributes of Ponzis. This classification exercise helps comprehend the distinct drivers of
Ponzis.
Findings –Fraud risk factors of Ponzis are different from those involved in other financial frauds. Four
propositionsabout risk and risk mitigation measures are developed.
Research limitations/implications –The research approach used is conceptual, not empirical.
However, the insights from this exerciseshould inform how different Ponzis are from other financial frauds
and why they should be treatedas a separate class for prevention and enforcement. Inturn, this may trigger
an interestin empirical research focused on the unique risks of Ponzis.
Practical implications –Knowledge of risk factors unique to Ponzis will permit a consideration of
customized risk mitigationmeasures to prevent or detect Ponzis. Enforcement actionscan also become more
effectivebecause of a distinct risk-based classificationof Ponzis.
Social implications –The prevention of damage from Ponzis hinges upon how well prospectivevictims
are educated to becomeaware of signs of Ponzis. This should lead to the more effective protectionof investors
from victimizationfrom Ponzi schemes.
Originality/value –Theimplicit understanding that all financial frauds are alike and that the risk-
factors involved are substantially the same across all classes of fraud is challenged. This
revelation opens opportunities to add value through focused research on Ponzis as a distinct class of
fraud.
Keywords Fraud, Disposition-based fraud model, Fraud risk, Ponzi
Paper type Conceptual paper
Introduction
Investors want positive returns. As a result, explicit or implicit promises of positive
returns from those who wish to attract capital are not uncommon. The Ponzi, an
investment fraud in which the fund entity promise s an attractive return to the investor,
rests on the premise of misrepresentation and violation of (fiduciary) trust (Lewis,
2012). Often, such promised returns are unsustainable because of the cash flows of the
firm, which depend on:
the inflow of new investment (minus the redemptions); and
the gap between actual and promised returns on the investment.
Risk factors of
Ponzi from
non-Ponzi
frauds
993
Journalof Financial Crime
Vol.26 No. 4, 2019
pp. 993-1005
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2018-0075
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