PONZI SCHEME - ECONOMY
News: Centre
will clamp down on Ponzi apps, says Finance Minister Nirmala Sitharaman
What's in the news?
● Stating
that the Centre will clamp down on Ponzi apps to protect investors’ hard-earned
money, Union Finance Minister Nirmala Sitharaman said that discussions were on
with the Information Technology Ministry and the Reserve Bank of India on the
issue.
Ponzi Scheme:
● A
Ponzi scheme is a fraudulent investing
scam which generates returns for earlier investors with money taken from later
investors.
● A
Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors.
● This
is similar to a pyramid scheme in
that both are based on using new investors funds to pay the earlier backers.
● It
relies on a constant flow of new investments to continue to provide returns to
older investors and when the flow of fresh investments runs out, the scheme
falls apart.
● These
are generally multi-level marketing schemes, however, Multi-level marketing
itself is not illegal in India because there is a product being sold. But direct
marketing companies cannot promote pyramid or money circulation schemes.
Legislation against Ponzi Scheme:
● Ponzi
schemes are banned under the Prize Chit
and Money Circulation (Banning) Act, 1978.
○ It
is a Central Act but the respective State governments are the enforcement
agency of this law.
● These
are also dealt with by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002.
● The
Banning of unregulated Deposit Schemes
Act 2019 has been enacted to prevent fraudulent schemes.