Ponzi Scheme: A Violation Against Good Corporate Governance and
Islamic Concept on Investment
Astrie Krisnawati
Faculty of Economics and Business, Telkom University, Jl. Telekomunikasi Terusan Buah Batu, Bandung, Indonesia
Keywords: Ponzi Scheme, investment, Good Corporate Governance, Islamic shari’a.
Abstract: There have been many cases of investment fraud, both in a national and global scale, that use Ponzi Scheme
as the basis of calculation to attract a great number of investors. However, in the end it caused many victims
who suffered losses. The investment practice of Ponzi Scheme which is potentially harmful to investors is a
violation of Good Corporate Governance based on applicable state law, as well as a contrary to the principles
of investment based on Islamic shari’a, in which the concept of investment should essentially be beneficial to
all parties and should not harm anyone. The Ponzi Scheme-based business is rife in Indonesia. It is an ironic
phenomenon that most of Indonesia’s populations are Muslim. Applying a qualitative method through content
analysis of applicable rules and investment principles, this conceptual paper aims to describe and identify
violations of the Ponzi Scheme against legal regulation and Islamic shari'a of investment. This study found
that The Ponzi Scheme-based investment is a violation of Good Corporate Governance principles of
transparency, accountability, responsibility, and fairness, as well as a violation of Islamic law in terms of
ignoring the values of honesty and fairness by harming the investors and violating the rules on usury and
gambling.
1 INTRODUCTION
The business cases with the Ponzi scheme are not
only occurring recently in Indonesia. There have been
many big cases of Ponzi-scheme investment revealed
since several years ago, among others are the case of
agribusiness investment initiated by PT. Qurnia
Subur Alam Raya (QSAR), an investment
fundraising by Cipaganti Karya Guna Persada
Cooperative (KCKGP), gold investment scheme by
East Gold Mining Corporation (EGMC) and Virgin
Gold Mining corporation (VGMC), and the one
which is recently and famously revealed case is First
Travel.
QSAR was doing agribusiness by collecting fund
from investors and promised to return the investment
with high-rate profit within a short term. In reality,
however, QSAR is unable to pay the pledged capital
payback debt to the investors. QSAR debt reached a
value of 476 billion Rupiahs to 6,480 investors. And
finally on December 17, 2003 QSAR was declared
bankruptcy by the Cibadak District Court, West Java
(DetikNews, 2013).
Cipaganti initially offered investment
opportunities to the public to become a partner in the
transportation business it ran. The investment offer
was accompanied by a promise of a very high yield,
which was about 20%. Then, Cipaganti started to
expand agressively to other business areas that are not
its core competence, such as mining business. It then
complicated the financial situation of Cipaganti, so
Cipaganti found difficulty fulfilling its promises to
investors. Finally Cipaganti pursue the practice of
Ponzi Scheme and it led to corporate bankruptcy and
failure to payback to investors (Frensidy, 2014) .
EMGC and VGMC offered investment
oppotunities in gold by promising 10% -20% profit
per month to investors. Both are actually illegal
companies. Both do not even have gold mines in any
countries. The rotation system of funds it did was like
Multilevel Marketing (MLM) business. They kept
looking for new investors to cover the debt of
payback to their old investors. Finally, both
companies failed to pay to investors (DetikNews,
2015).
First Travel ran a business travel bureau for umroh
and hajj at a cheaper price than other travel agencies
bureau. Initially the business was running smoothly,
and managed to capture a lot of customers to reach
the number of 70,000 customers. But along the time,
Krisnawati, A.
Ponzi Scheme: A Violation Against Good Corporate Governance and Islamic Concept on Investment.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 181-186
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
181

First Travel began to find difficulties to dispatch
customers for Umrah and Hajj. Finally it was revealed
that the business run by First Travel was done with
the practice of Ponzi Scheme so it is known that
among 70.000 First Travel customers, only 14.000 of
them were successfully managed to depart umroh
and hajj, while the rest failed to depart and never get
the refund they have deposited. First Travel is alleged
to have a debt of 500 billion Rupiah. First Travel
business was declared collapsed. This case was
handled as a major criminal case, and currently the
three business owners of First Travel have been
detained by the police (Silitonga, 2017).
Those fraudulent investment cases show that
Ponzi-schemed businesses have been proven to bring
a great loss to society in large numbers. Businesses
with this pattern initially always seem very profitable
so as to attract a lot of investors with a huge
investment value. But it has been frequently proven
that business with this pattern will not last long, and
eventually involves the business owner in a criminal
law case.
The list of those cases can still be extended by a
row of many other fraud cases on investment scheme
in Indonesia. The Financial Services Authority (OJK)
stated that during the first quarter of 2016 there were
about 400 companies in Indonesia without license but
offering investment products to the public
(https://www.antaranews.com, June 5, 2016).
The fraudulent business practices are certainly not
allowed by Islamic laws. This is a very ironic
phenomenon in which most of Indonesia's
populations are Muslim, but Ponzi Scheme-based
business practice is rife in Indonesia.
Human beings are allowed to earn a living to meet
the needs of their lives without neglecting the
obligation to serve Allah. Earning a living to fulfil the
necessities of life is a human’s obligation, "Seeking
halal sustenance is obligatory after fulfilling the
fardhu (like prayer, fasting, etc.)" (Hadith Ath-
Thabrani & Al-Baihaqi). But the obligation to seek
sustenance must be done within certain limits set by
Allah SWT as He has said in the Qur'an (Al-Baqarah:
60), "Eat and drink the provision given by Allah, and
do not roam on the earth by doing damage."
An effort to strive for sustenance is doing
business. Business is lawful and permissible in Islam.
"There is no sin for you to seek the grace (sustenance
from the result of doing business) of your Lord"
(Qur'an, Al-Baqarah: 198). In another verse Allah
says, "Allah has justified the sale and purchase and
forbid usury." (Al Qur'an, Al-Baqarah: 275).
Although doing sale and purchase (commerce) is
a legitimate activity, but in practice there are often
violations in commerce that cause one or several
involved parties to suffer loss. Businesses are always
oriented to obtain maximum financial benefits. This
is what often leads to various frauds in commerce,
some of which are caused by business practices based
on the Ponzi scheme.
Ponzi scheme is a type of investment scheme that
tends to be fraudulent. In this investment scheme the
entire return on investment along with the dividend
and interest paid is not derived from the profits of the
business it carries on, but derives from additional
capital investments submitted by other new investors.
When additional new investments are insufficient to
pay back the investment returns to existing investors,
the business that runs on this investment scheme will
eventually collapse (Paulo & Gale, 2012).
The Ponzi scheme is also well known as a
pyramid investment scheme or "get-rich-quick". This
kind of business is also intensively promoted through
a member-get-member pattern just like multi-level
marketing (Sulaiman, 2016).
These such cases certainly do not only occur in
Indonesia, but have occurred in many other countries
in the world. The fraudulent investments that use the
Ponzi scheme have been originated in UK and US
since several years ago. The Ponzi Scheme is more
well-known as “The Pyramid Scheme” in UK. This
scheme had been an issue in UK since decades ago
and it is prohibitted by some legal regulations, i.e.
Part XI of the Fair Trading Act 1973, the Trading
Schemes Act 1996, Trading Schemes Regulations
1997, the Consumer Protection from Unfair Trading
Regulations 2008, and the Gambling Act 2005 (Paulo
& Gale, 2012). The Ponzi Scheme was also applied
in US by Madoff busines. The such scheme of
investment is also called as alternative investment,
and it is not registered with the US Securities and
Exchange Commission (SEC). (Evola & O'Grady,
2009). The Ponzi Scheme-based investment is not a
novel issue in Malaysia. The such investment scheme
was applied in Malaysia as “Swisscash-fund”.
Malaysian regulatory authorities have prohibitted it in
Section 210 of the Malaysian Capital Market and
Services Act 2007 (CMSA, 2007) (Sulaiman, 2016).
This fraudulent business practice has clearly
violated the various laws of the state in carrying out
ethical business practices and Good Corporate
Governance (GCG). The issue of corporate
governance (CG) was first raised around the early
1990s. It was marked by the release of Cadbury
Report in the UK in 1992. In the USA, corporate
governance awareness began to emerge after the
unfolding of Enron and Worldcom business fraud
cases around 2002. This prompted the issuance of a
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new legal regulation in the USA which is called as
Sarbanes-Oxley Act (SOA). Awareness to abide by
the rules of corporate governance leads to reforms in
legal regulations (Lazarides & Drimpetas, 2010).
Corporate governance is a set of rules established
to address agency problems, namely the conflict of
interest between shareholders (investors) as the
principals and managers who run the business as the
agents. Corporate governance is a controlling
mechanism that oversees managers to keep business
profits and shareholder gains properly (L’Huillier,
2014).
In addition, the business practices that bring harm
to many parties are certainly not in accordance with
the rules of commerce that have been established in
Islam as the words of Allah in the Qur'an, "O those
who believe, do not eat each other's treasures by the
false way (not true), except in the trades that apply
mutual willingness basis. And do not kill yourself.
Truly, Allah is Most Merciful to you. "(An-Nisa: 29).
Running a business is permissible in Islam, but
there are certain boundaries that should not be
violated. Islam regulates the way of doing business
justly so as not to harm all parties, as Allah says in the
Qur'an (Hud: 85), "Fill the measure and the scales
with justice, and do not harm human beings against
their rights and do not make evil on earth by doing
mischief."
In addition to emphasizing justice in business,
Islam also upholds honesty, as Allah says in the
Qur'an (Al-Anfal: 58), "And if you (Muhammad) fear
the betrayal of a party, then return the covenant to
them in an honest way, God does not love the one who
betrays." Allah really hates those who cheat in
business. This is contained in the Qur'an (Al-
Muthaffifiin: 1), "Woe to those who cheat (in
measuring and weighing)."
Many previous studies have conducted research
regarding investments based on the Ponzi Scheme.
All authors agree that the Ponzi-Scheme investment
practice is a form of infringement that harms
investors. However, none of them discussed the
Ponzi-Scheme-based investment from the viewpoint
of Good Corporate Governance and Islamic law
simultaneously. Whereas, Good Corporate
Governance and Islamic Law are sets of rules that are
aligned in regulating human life for the sake of the
world and the hereafter. Thus, this paper aims to
depict the violations committed by Ponzi-schemed
businesses against the rules set forth in the principles
of Good Corporate Governance (GCG) as well as
violations against Islamic law regarding the conduct
of business and investment. The discussion in this
study will be conducted through content analysis of
legal rules established by the law of the country and
the study of business rules that have been established
by Islam in the Qur'an and Hadith.
2 METHODOLOGY
This article is a conceptual paper. The study
conducted in this paper applies a qualitative method
through content analysis of applicable rules in Good
Corporate Governance principles from literature
review of previous studies and Islamic rules based on
Al Qur’an and Hadith. This content analysis is
conducted with an in-depth discussion of the Ponzi
Scheme linked to Good Corporate Governance
principles consisting of Transparency,
Accountability, Responsibility, Independence, and
Fairness. In addition, content analysis is also done by
discussing the verses of the Qur'an that regulate the
provisions of business practices and investments in
Islam. Discussing the verses of the Qur’an is aimed to
dig up information about parts of Islamic law that are
violated by Ponzi Scheme-based business practices.
3 RESULTS AND DISCUSSION
Companies around the world are currently
encouraged to implement the principle of Good
Corporate Governance (GCG) which is the best
practice of ethical business conduct. According to
Lazarides & Drimpetas (2010), one of the main things
regulated in the legal law is the protection of the rights
of shareholders and all stakeholders in the financial
markets. Corporate governance is one of the
frameworks required by investors to reduce the risk
of investing in businesses.
Good Corporate Governance is essential to
maintain long-term sustainability for financial and
capital markets and to maintain the sustainability of
the business itself. This is to ensure the efficient and
productive use of company assets for the benefit of
investors and all stakeholders (Sabbaghi, 2016). The
spirit of Good Corporate Governance is to protect the
rights of investors and all stakeholders. This is to
avoid frauds and any parties get harmed in running a
business. Thus, Ponzi-schemed investment practices
are not in line with the principles of Good Corporate
Governance because of the potential to cause harm to
investors.
The Ponzi Scheme is like a financial game playing
in capital economy. When the maturity of the debt has
been due, the business must seek new debt to pay
Ponzi Scheme: A Violation Against Good Corporate Governance and Islamic Concept on Investment
183

principal and interest of previous debt. This goes on
and on to keep the business continues (Al-Zoubi et
al., 2008).
Corporate Governance is now considered as an
important and key driver of business performance. It
is also increasingly recognized by regulators,
business actors, and capital market authorities (Pillai
& Al-Malkawi, 2017). Based on the general
guidelines of Good Corporate Governance Indonesia
issued by the National Committee on Governance
Policy, there are five basic principles of GCG
implementation: transparency, accountability,
responsibility, independency and fairness (KNKG,
2006).
Transparency refers to disclosure of information
that the company should deliver to the public, such as
financial and annual reports. In terms of transparency,
the Ponzi-schemed businesses usually cannot
disclose their financial reports, so that the profit
generated by the business is not clearly stated and the
company cannot give return to investors in a proper
way based on profit calculation. According to Evola
& O’Grady (2009), the business practice with Ponzi
Scheme is not transparent and the business can
continue to deceive investors by hiding behind the
desire of investors to gain an increase of profits
Accountability is a continuation of transparency,
in which the company performance must be clearly
demonstrated. Company performance should be
measurable with a clear calculation. In terms of
responsibility, the company should comply with
prudential principle and applicable regulations.
Mathematically, businesses with Ponzi schemes
are very difficult to survive for long periods of time,
unless they are supported by a steady increase in the
number of investors. But in such a business pattern,
the more the number of investors, the more likely it
will be to fail because this means the business will
have an exponentially inflated debt of investment
return (Carey & Webb, 2017).
In Indonesian term, the investment pattern in the
Ponzi scheme is called as "digging a hole to close a
hole". This is potentially detrimental to investors if it
turns out that the increase in the amount of new
investment is not as fast as the maturity date of
repayment to existing investors until the business
finally cannot afford to pay all debts and falls to
collapse. In this case, the Ponzi-schemed business
fails to comply with prudential principle. Thus,
applying the Ponzi Scheme is not allowed according
to the rules of Good Corporate Governance and
Islamic laws on business and investment.
Promotion of transparency and accountability is
an enabler to establish a comprehensive accounting,
tax and regulatory framework to reinforce Shari'a
capital market which is based on Islamic values. It is
also an effort to resolve problems of ethics and frauds
in business (Said et al., 2013).
The matters governed by GCG principles are very
much in line with the virtues of Islam. In this case the
values associated with running a business in
accordance with the Shari'a. Islam came down to
earth as a mercy and welfare for the whole universe
(Rahmatan lil Alamin). Islam also regulates the way
of doing business and investing with the aim of giving
benefit to all mankind. Therefore, Islam highly
upholds the value of justice and honesty, and
prohibits fraudulent business practices that harm any
party.
Fairness and honesty in business are repeatedly
emphasized in several verses of the Qur'an. In Surah
Al-Isra ': 35, Allah says, "And complete the measure
when you measure, and weigh it with the right scales.
That is the greater (for you) and the better of it. In
Surah Asy-Syu’ara’: 181-183, it is stated by Allah,
“Complete the measure and do not harm another; and
weigh with the right scales. And do not harm
mankinds by diminishing their rights and do not cause
harm to the earth.” Fairness is also emphasized in
another verse of the Qur'an, namely in Surah Ar-
Rahman: 9, "And enforce the balance fairly and do
not diminish that balance."
In Islam, the money invested in our business is a
mandate that we must safeguard as best we can to
deliver good results for investors. Businesses with
Ponzi-schemed investments are certainly not very
much aligned with this, because when the business is
collapse and we are unable to refund the funds
entrusted by investors to us, it means we have
betrayed the mandate given to us. This is contrary to
the word of Allah in the Qur'an (Al-Anfal: 27), "O
you who believe! Do not betray Allah and the Rasul
and do not betray the mandate entrusted to you while
you know."
Besides being a mandate, money invested in our
business is also our debt to investors. Debt is an
absolute obligation to be paid. Debt accounts issue is
fully regulated in Al Qur'an Surah Al-Baqarah: 280-
283, that if any transaction is made not in cash, then
the debt will arise, and that transaction must be
recorded in writing. The transaction should also
include at least two witnesses so that if one forgets,
the other can remind. Debt is a trust in which the
obligations arising therefrom must be fulfilled.
In addition, Islam also strongly prohibits the
existence of usury (riba) in business transactions.
Allah says repeatedly in several verses in the Qur'an
regarding the prohibition of usury. In Surah Al-
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Baqarah: 275 it says that, "Allah has justified buying-
selling and forbidden usury." In Surah Ali 'Imran: 130
Allah says, "O you who believe! Let not eat usury
doubled and fear Allah to make you lucky." In Surah
An-Nisa: 161 it is mentioned, "and because they
practice usury, whereas indeed they have been
forbidden from it, and because they eat the treasures
of people by unlawful means. And We provide for the
unbelievers among them a poignant penalty.”
Therefore, a justified investment in Islam is an
investment in the form of Musharakah, in which the
profit earned by investors is the result of profit or loss
sharing from the business run. Shari’a investment of
Musharakah system is an original Islamic instrument
that is based on return and risk sharing (Azmat et al.,
2016). The Ponzi-schemed investment is defined as
the scheme of investment that the return on
investment is not derived from the profits of the
business, but derives from additional capital
investments submitted by other new investors. In this
case, the Ponzi-schemed business does not comply
with Islamic regulation on investment which should
be based on profit and risk sharing. In terms of clearly
measurable risks, Ponzi Scheme-based business
practices are also closer to the practice of gambling.
The Ponzi Scheme-based investment is an investment
system which is similar to money game playing. It
certainly contains a very-high vagueness of business
transaction that is called al-maysiri. Thus, Ponzi
Scheme also violates Islamic law regarding gambling
as contained in the Qur'an at Al-Baqarah: 291 and Al-
Maidah: 90-91.
4 CONCLUSION
From this study, it can be concluded that businesses
with Ponzi-schemed investments have violated
several rules of Good Corporate Governance (GCG)
and Islamic Shari'a law. Ponzi-schemed businesses
are not in line with GCG principles, especially
transparency, accountability, responsibility, and
fairness. In the case of violations of Islamic Shari'a
law, Ponzi-schemed businesses fail to uphold the
values of honesty and fairness by harming the
investors and violating the rules on usury and
gambling.
This paper has limitations, one of which is the
study conducted is not specific in the case of certain
business firms that apply Ponzi-schemed investment.
Therefore, further research is expected to continue
this research with case studies that refer to particular
cases of Ponzi-schemed business, so that it can further
explain the detailed and specific violations committed
by the Ponzi Scheme on certain types of business, so
that the public can avoid it.
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