Abstract
This study discusses the similarities and differences between Ponzi and Pyramid schemes and the unparalleled example of Albania. In particular, this document treats the creation and collapse of a financial scheme in Albania, which had some characteristics of both Ponzi and Pyramid schemes, based on their definitions and examples. The study points out the factors that caused the creation of some financial intermediary entities in Albania, which resulted to be a massive fraudulent scheme; how they were developed; and the consequences for the country in terms of economic, political and social environment after they collapsed. The Case of Albania is an unprecedented case of a fraudulent financial scheme due to the magnitude of the population involved (57%) relative to the country’s economic size (liabilities of the scheme reached the equivalent of 51% of GDP); the chaos and the near civil war state as a result of the population’s violent protest; the state’s measures taken by the governments after the ruin of the economy; the quick recovery; and the process of reducing the impacts of the financial scheme collapse in the long run.
Highlights
The Case of Albania is an unprecedented case of a fraudulent financial scheme due to the magnitude of the population involved (57%) relative to the country’s economic size; the chaos and the near civil war state as a result of the population’s violent protest; the state’s measures taken by the governments after the ruin of the economy; the quick recovery; and the process of reducing the impacts of the financial scheme collapse in the long run
U.S Securities and Exchange Commission (SEC) through “Ponzi schemes” section (n.d.) [1] provides the following definition for Ponzi schemes: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors”
According to SEC, “Beware of Pyramid Schemes” (2013) [2]: “Pyramid schemes are a type of fraud in which participants profit almost exclusively through recruiting other people to participate in the program”
Summary
U.S Securities and Exchange Commission (SEC) through “Ponzi schemes” section (n.d.) [1] provides the following definition for Ponzi schemes: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors”. The similarities consist of both schemes promising extraordinary returns on investment capital They offer sustainable “earnings” and are self-supporting as long as the number of investors increases and cash outflows match cash inflows. Ponzi scheme and Pyramid scheme will have both the end of being insolvent Even though they are closely related, as they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public (U.S Securities and Exchange Commission, n.d.) [1], they have differences in the terms of structure and type of products that the schemers offer to their clients (U.S Securities and Exchange Commission, (n.d.) [1] (Table 1)
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