A family friend was offered an 'investment opportunity' returning 10% per month (120% per year) by someone in his church. Fortunately, the friend, who runs a successful mechanics' business, knows a bit about finance and refused.

Sadly, the person who tried to get him interested had already forked out $100,000, and was planning to fly off overseas for an overseas investment seminar costing $17,000.

At 10% per month (120% a year!), the rate of return is too good to be true! It smells like a classic Ponzi scheme.

How Ponzi schemes operate

Let's call the victim Joe Blow. The crooks can pay Joe $10,000 a month using his own money. They can pay Joe for seven months, if they steal only $30,000 of his original $100,000. That way they keep Joe happy and encourage him to recruit other people.

If Joe recruits Joanne Blow for the scheme at $100,000, then the crooks can keep up his payments and give her some money as well. Joe and Joanne will be praising the scheme to the skies, and will be able to show all their friends their blossoming bank statements.

Maybe more people will join. So long as the money keeps flowing into the scheme, payments can still be made to investors. However, the burden of future payments also keeps growing. The scheme inevitably collapses once people stop joining.

What's the bottom line?

The scheme will ultimately run out of 'new investors' or run out of money. The scheme will collapse and investors are unlikely to get back even their original investment capital.

Joe, the first to join, got $110,000 over the life of the scheme, which works out at 10% per year, not the 120% promised. The rest of the people all lost money. David, the last one to join, suffered most. He put in $100,000 and received only $40,000 before the scheme collapsed, so he lost $60,000. And the crooks? They got $180,000 for nothing.

Danger awaits the inexperienced

Your church group may offer you many wonderful things, but it is not the place to hunt around for investments. Fraudsters and operators of unlawful investment schemes sometimes target church groups in order to find their victims.

Victims tend to be people who do not know much about investing, and so turn to others whom they know and trust. In some cases, church members have innocently encouraged each other to put money into fraudulent or unlawful schemes.

When the schemes collapse, ASIC sees first hand the financial ruin, personal distress and breakdown of relationships between friends, neighbours and members of their church.

Original Article: 10% per month (120% per year) - where do you get it?