Sacked workers are falling victim to investment scams which falsely promise big returns on redundancy payouts, the City regulator warns today. Millions of pounds in compensation risk being sucked into Bernie Madoff-style Ponzi schemes uncovered by the Financial Services Authority (FSA).
The Serious Fraud Office (SFO) and the City of London Police have mounted high-profile investigations of pyramid and other fraudulent schemes in the wake of the recession. The FSA says that a high number of schemes in the City are being exposed as bogus because the credit squeeze means the funds can no longer meet the interest payments.
Margaret Cole, head of enforcement at the FSA, said there was "enormous concern" about the threat to redundancy payments. She said there was a "psychology" drawing redundant employees to falsely attractive schemes that offer to pay 10 times or more than the current 1 per cent interest rate on savings. "Unfortunately, that means they [redundant workers] are more susceptible to looking for ways to build their savings again and that tends to be the more vulnerable end of the market," she said.
The business scams the FSA is seeing tend to be of a higher value than historically seen, she added. "They might be the unauthorised Ponzi scheme or the equivalent but because of the credit crunch the people involved are not able keep it afloat at the moment. The ones we are seeing are at an advanced stage."
One senior officer has called the scams "mini-Madoffs", a reference to the disgraced US fund manager, now on remand in prison, who has already admitted profiting from a £30bn pyramid investment fraud – or Ponzi scheme – which paid investors returns from their own money, or cash paid by subsequent investors, rather than from the scheme's profits. The SFO has offered advice on how to avoid falling victim to a Ponzi scam. Richard Alderman, director of the SFO, said: "Clearly, in view of our interest in Bernie Madoff and Sir Allen Stanford [the Texan financier accused of fraud], people are talking to us about red flags for hedge funds, because, as the stories unravel, it is very interesting to understand the structure of what happened and what could have been picked up by people through due diligence."
Most Ponzi schemes, named after Charles Ponzi, who became notorious for using the technique in America in the 1920s, claim to offer 20 per cent returns and collapse quickly; Madoff's returns were a steady 10 per cent.