The perception and regulation of pyramid and Ponzi schemes, as
specific forms of investment fraud, vary significantly around the globe today.
Although no jurisdiction is immune from them, in some jurisdictions, they
are among the top targets of financial supervisory agencies (e.g., United
States), in others they are rather crimes perceived to be primarily in the
bailiwick of public prosecutors (e.g., Germany). This difference is then
reflected in the publicized records of detected cases.
Special concerns apply to emerging financial systems that not only lack
efficiently functioning sector-specific regulations and properly empowered
agencies that could react in due time, but because of the comparatively lowest
financial literacy of the populace - the potential investors - are also the most
vulnerable to these types of financial pathology. It is not only that in these
countries disgorgement of illegally obtained profits, fair funds or anything
similar is unheard of, but typically no recovery could be expected in the often
equally dysfunctional bankruptcy proceedings either that normally follow the
schemes' collapse. The systemic risk that may be generated by schemes of
magnitude similar to the Albanian pyramid schemes comes on top of all that.
China, faced with the consequences of the recent Ezubao scheme, is only now
to decide which path to take, though unfortunately the same could be said
also as to many of Central and Eastern European jurisdictions as well.
In light of these considerations, this paper aims to show that
comparative law has what to offer in this domain by sketching a select
number of schemes from China, Europe, and the United States together with
their characteristic regulatory solutions. The central argument is that
combating pyramid and Ponzi schemes cannot be left only to such classical
branches of law as criminal, tort or contract law. Rather, they should directly
be targeted by financial regulations, be in the purview of adequately
empowered agencies and their investigation and prosecution ideally be
entrusted to a specialist body (e.g., the UK Serious Fraud Office). Training
of staff of these is inevitable as well because detection of schemes requires
specialist expertise in finance as no scheme could be sold unless it looks like
a legitimate business; a task that hardly could be entrusted to prosecutors
trained to prosecute conventional crimes and to be adjudicated by generalist
judges. Education of the investing public on top of that is as well a must.
These tested tools notwithstanding, as sketched by the article, even some
developed financial systems lack adequate regulatory responses, let alone the
emerging ones.
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