Ponzi schemes and the roles of trust creation and maintenance

Date02 October 2017
Pages589-600
Published date02 October 2017
DOIhttps://doi.org/10.1108/JFC-06-2016-0042
AuthorCatherine Carey,John K. Webb
Subject MatterAccounting & Finance,Financial risk/company failure,Financial crime
Ponzi schemes and the roles of
trust creation and maintenance
Catherine Carey
Department of Economics, Western Kentucky University, Bowling Green,
Kentucky, USA, and
John K. Webb
Department of Justice, White Collar and Economic Crimes Unit,
Middle District of Tennessee, Nashville, Tennessee, USA
Abstract
Purpose The purpose of this study is to elaborate on how schemers build and maintain trust essential for
nancial fraud that persists over many years. A Ponzi scheme is a form of nancial fraud that involves repeated
interaction with an increasingly large number of individuals over a long period time. This type of fraud involves the
building and maintenance of each individuals trust. All Ponzi schemes come to a dramatic conclusion. Eith er the
schemer defaults on payments, or someone gets suspicious and the scheme is uncovered. Understanding how
schemers build and maintain trust may help prevent or uncover the fraud earlier, limiting nancial devastation
endured by unsuspecting investors, as well as externalities inicted on the nancial system as investors lose trust.
Design/methodology/approach This study combines an understanding of trust accumulation from
multipledisciplines in the existingliterature to build a comprehensivemodel of trust creationand maintenance
in Ponzischemes.
Findings This study nds that key characteri stics of both the trustor and trustee contribute to long
term nancial arrangements. Schemers prey on individuals with specic characteristics that indicate they
are more trusting. Trusting individuals are less likely to conduct due diligence to detect fraud. Prevention
and detection of fraud a re made more difcult by convincing, yet false, mimicry used by schemers to
signal trustworthiness.
Originality/value Bringing together multipleviews on trust allows creation of a comprehensive model
of trust that captures key characteristics of unsuspecting investors and schemers who prey on them in
nancialfraud.
Keywords Trust, Financial fraud, Afnity, Trustworthiness, Ponzi
Paper type Research paper
1. Introduction
Financial fraud depends on trust. Schemers in nancial fraud understand and know how to build
trust and appear trustworthy. An illegal Ponzi scheme is one form of nancial fraud that depends
substantially on the sustainable trust of a large number of individuals. A Ponzi scheme occurs
when early investors are paid returns from funds provided by new investors, as opposed to being
paid from actual returns of a purported investment. In the conduct of a Ponzi scheme, most
investors are unaware that their trust has been misplacedandthattheyare participatingina
scam. And while not all Ponzi schemes start out as scams, once funds become misdirected in this
way, it becomes nancial fraud. Of course, investors do not know this until it is too late. Some
Ponzi schemes can grow very large and last for many years; however, all Ponzi schemes
eventually come to a dramatic conclusion. Either the schemer defaults on payments or someone
gets suspicious and the scheme is uncovered. Exposed Ponzis create lasting externalities from
losttrustthatimpactthenancial system, as well as the economy as a whole.
Roles of trust
creation and
maintenance
589
Journalof Financial Crime
Vol.24 No. 4, 2017
pp. 589-600
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-06-2016-0042
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm

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