Why Self-Directed IRAs Create An Illusion of Value That Facilitates Ponzi Schemes

One of the unique characteristics of self-directed IRAs ("SDIRA") as an investment vehicle is the complete absence of record keeping or audit responsibility on the part of the self-directed IRA custodian ("Custodian").  Because SDIRA investors are permitted to put monies in non-traditional investments, like a promissory note or real estate, and the Custodian is not legally required to verify the value of the investment, the Ponzi Scheme masterminds direct their victims to utilize SDIRAs. In fact, most fraudsters require the Ponzi scheme victims to utilize only a specific Custodian for their "investment." By requiring their victims to use a SDIRA,  perpetrators of Ponzi Scheme are able to hide their fraud more easily and for longer periods of time. The reason for this is that the Custodian is under no duty to verify the value or even the actual existence of the investment. Inexperienced investors, who do not understand the intricacies of  SDIRAs, would not know that their SDIRA account statement does not indicate the actual current value of their investment but may be  a value provided by the fraud promoter.

Many victims of Ponzi schemes may not question the value or even existence of their investment.  It is only when the Ponzi scheme ends or the investor seeks to liquidate the investment that they learn that the SDIRA account statement of value is illusory. This lack of oversight by the Custodian actually facilitates a fraudulent enterprise by giving the investor a false sense of security about their investment thus extending the life of the Ponzi scheme by avoiding investor scrutiny.

Tomorrow we will be discussing the type of investments held in SDIRAs and why they are so attractive to con artists facilitating investment schemes.