Victimisation of investors from fraudulent investment schemes and their protection through financial education
| Date | 11 October 2022 |
| Pages | 1305-1322 |
| DOI | https://doi.org/10.1108/JFC-07-2022-0167 |
| Published date | 11 October 2022 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Kamakhya Narain Singh,Gaurav Misra |
Victimisation of investors from
fraudulent investment schemes
and their protection through
financial education
Kamakhya Narain Singh and Gaurav Misra
IEPFA Research Chair, Indian Institute of Corporate Affairs, Gurugram, India
Abstract
Purpose –The purpose of this study is to identify the significant demographic and socio-economic
characteristicsof individuals who are likely to invest in a fraudulent investment scheme.It also quantifies the
extent to which financial literacyhelps in reducing the odds of investments in such schemes. Basedon these
findings,it provides policy recommendations to regulators and governments.
Design/methodology/approach –This study uses nationally representative data from the “India
Assessment of Financial Capability 2018”survey. It further uses logistic regression with a binary outcome
variableto assess the individual-level odds of investmentsin fraudulent investment schemes.
Findings –This study concludesthat males between 40 and 59 years of age, who are well-educated(are at
least graduates), score low in financialliteracy, belong to the middle-income group, and SEC A3 households
are most vulnerable to victimization by financial fraudulent investment schemes. It finds that financial
literacysignificantly reduces the odds of investment intofraudulent schemes to the extent of 39.118%.
Originality/value –This study quantifiesthe extent to which financial literacy helps in reducing the odds
of individual investments in a fraudulent investment scheme. As financial literacy has a significant and
negative relationship with the likelihood of investment in such schemes, this study provides policy
interventions and recommendations to regulators and governments to safeguard the interest of individual
investors.
Keywords Ponzi schemes, Investment fraud, Financial literacy, Policy recommendation,
High yielding investment plans, Financial education, Financial crime
Paper type Research paper
Introduction
Investors generally desire higher returns on their investments. For centuries, individuals
across countries believed in this adage related to their respective utility functions. This
naturally occurring conception among individuals, exploited by fraudsters, has duped
investors and made them invest in spurious investment schemes called Ponzi schemes.
Fraudulent investmentschemes have been defined by various authors differently. However,
there does not seem to be a consensus in the literature on its definition. Titus et al. (1995)
proposed one of the most comprehensive definitionsof such schemes and stated that white-
collar economic crime:
[...] involves the misrepresentation of facts and the deliberate intent to deceive with the promise
of goods, services, or other financial benefits that do not exist or that were never intended to be
provided (p. 55).
For our study, under the definition of financial scam, we include fraudulent financial
schemes like Ponzi schemes, high yielding investment plans, unregulated deposit schemes
Victimisation
of investors
1305
Journalof Financial Crime
Vol.30 No. 5, 2023
pp. 1305-1322
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2022-0167
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
and collective investmentschemes, which collect the money with the sole purpose of duping
those investors.
The name Ponzi scheme was derived from an investment scheme perpetrated by
Charles Ponzi in 1920 in the USA. He had convinced investors that he could profitfrom
the price differentials of postal coupons and could help the investors benefitfrom
investment in his scheme. His investment mechanism was to buycoupons, available at
a discount overseas, and sell them in the USA on huge profits, offering 50% profitin 45
days and 100% profit in 90 days to the investors. After running successfully for a few
years, the scheme collapsed, causing a loss of about $20m in 1920 (equivalent to $258m
in 2021) (Weisman, 2020).
The origin of Ponzi-type schemescan be tracked to the Tulipomania of the 1600s in The
Netherlands, whichled to speculation on tulip prices resultingin a market crash in 1637. In a
Ponzi stylized scheme way back in 1879, Sarah Howe createda ladies’deposit bank (Ladies
Deposit Company),exclusively to help unmarried women to invest, with a promiseto double
the amounts in mere nine months.She offered interest rates of 2% per week on the deposits,
which were later adjusted to 8% per month. The size of this scam was about $500,000.
Bernard Madoff affected the biggest-ever Ponzi scam siphoning off billions of dollars from
investors. In 2009, for his crime, Madoff was not only sentenced to 150 years in prison but
also forced to forfeitan amount of $170bn.
India has been no exceptionto the menace of fraudulent financial schemes, and investors
have lost vast amounts of investment in these schemes. Some of the major schemes which
have duped millions of investorsin India include Sanchaita, Sharda, Peerless, Sahara, Speak
Asia, Gain Bitcoin, Rose Valley and AnubhavPlantations (Singh, 2020). As per an estimate,
investors in Indiahad lost more than $160bn by 2014 (Anand, 2014).
Fraudulent financial schemes may be construed as a global phenomenon, as they
affect investors both in developed and developing economies, causing losses amounting
to billions of dollars. Historically, some of the foremost perpetrators of Ponzi stylized
fraudulent investment schemes around the world include Johann Baptist Placht in
Vienna (1873), Jean Pierre Van Rossem in Belgium (1980), Dona Branca in Portugal
(1984), Adriaan Nieuwoudt in South Africa (1984), “Tenka Ikka no Kai”scheme in Japan
(1972), MMM company scam in Russia (1990), the “Caritas”company scam in Romania
(1994) and Performance Investment Products Corporation scam in the Philippines
(2007) among others.
Governments and regulatorsworldwide have taken various steps to enact different laws
and regulations to save investors. However, with the changing economic scenarios and
greater digitization, fraudsters have found newer ways to perpetrate their scams. In a
critical observation highlightingthe commonalities between the major cons of the 20th and
21st centuries, Welker (2019) states that while the scams in the 20th centurywere based on
the reputation of the perpetrators, the scams in the current century used unconventional
strategies and cutting-edge technology, which have helped in camouflaging any noticeable
financial inconsistency into the misinterpretation of complex systems. Another
commonality among scams of the 21st century is their perpetration for more extended
periods before theyget discovered by the investors/regulators.
Researchers worldwide have provided insight into the various factorsthat play a role in
conceptualizing a Ponzi scheme, characteristics of their perpetrators and investors,
psychological processes and other aspects related to such plans. However, in the Indian
context, there are limited studies on the characterization of fraudulent financial scheme
investors. This study explores the demographic and socio-economic factors of Indian
individuals that play a significantrole in their victimization. The current research has used
JFC
30,5
1306
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