Too Good to Be True: The Ponzi Scam

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One of the most common financial frauds is the “Ponzi scheme,” which promises “guaranteed” high returns, higher than those offered by other financial institutions and businesses. To pay the original investors, payments from new investors are usually used to pay profits to the scheme’s operators and pay a return to prior investors. This cycle continues until the scheme can longer find new investors or if too many investors try to cash out their investment. In almost all cases, investors lose everything.

Thailand is no stranger to Ponzi schemes, especially in real estate and currency/stock investments. It got so bad in the 1980s that the government stepped in with a strange-sounding law called “The Emergency Decree on Borrowings which Constitutes Fraud to the Public B.E. 2527”, also known as the Anti-Ponzi Law.

Ponzi Schemes

The Anti-Ponzi law primarily covers offences that are like a classic Ponzi scheme, where someone publicly presents a scheme with a guarantee of attractive returns higher than traditional investments. It sets a maximum interest rate anyone can offer to investors as that offered by financial institutions which are currently capped at 3% per year. Any type of investment offering a return over this could fall foul of the Anti-Ponzi law.

Generally, to be found guilty, a defendant must know or should have known that the money received from recent investors was to be diverted to compensate earlier investors and knowingly failed to conduct a legitimate business activity capable of generating the promised returns.

You only need to show that the scheme, directly or indirectly, lured ten or more people into the offering. Whether the scheme operator made a profit from the scheme is irrelevant, and the court will find a case if it finds that funds were transferred between different investors to pay a promised return.

The Anti-Ponzi law has a big stick – for each investor who fell victim to the scheme, the perpetrator will be charged with one count of fraud. If convicted, the court can sentence the scheme operator from five to ten years imprisonment, a statutory fine of anywhere between THB 500,000 and THB 1 million, as well as an additional fine of THB 10,000 for each day the perpetrator committed the offences and for each investor defrauded. Those sentences can be imposed concurrently for each count. An unlucky defendant could even potentially be sentenced to over two hundred years imprisonment.

The Anti-Ponzi laws also deem it an offence if the defendant refuses to disclose information relating to their business.

Strict Liability offences

In addition, the Anti-Ponzi law also sets out two types of strict liability offences. This means the defendant is liable for committing an action, regardless of what their actual intent was when committing the act. Regardless of intentions, they can be found guilty.

The first offence deals with foreign exchange fraud committed against the public, and the second offence is where the perpetrator operates a business, receives at least THB 5 million in investments from more than 10 people, and then pledges a return on this investment over the set maximum interest rate.

The defence to these strict liability provisions is that the scheme or business could have generated a return at the advertised rate, but there was an unforeseeable decline in economic activity or other causes that made the business unable to yield the promised return. Covid seems the “usual” excuse these days.

What to do if you have lost it all?

Ponzi schemes take on many forms, from property investments with so-called “guaranteed returns” to business investments with supposed foolproof profits.  These Ponzi schemes and other fraudulent activities could also fall under other regulations that have different proof and legal considerations. Nevertheless, this little-understood law packs a big punch and is a stern warning to scammers. It may not get your money, but it’s a good start in the process.

As always, “if it sounds too good to be true, it probably is” remains true.

If you believe you have been defrauded or would like to find out more about regulations surrounding investment fraud, you can contact us at [email protected] or use the contact form provided.

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