Pyramid schemes

Pyramid schemes seem too good to be true - because they are.
 
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01.What is a pyramid scheme?

pyramid pricing lead

Have you heard from friends about a secret investment circle or a club or game where you invest $5000 and get $40,000 back?

What about art investment where the artworks seem terribly overpriced and the investment income is related to the number of people you recruit, not the art itself?  Or the ads on telegraph poles that offer amazing opportunities? Get rich NOW! Work from home! Ring me and find out how!!!!

Be careful, as these could be pyramid schemes and you are risking your money if you invest in them.

Pyramid schemes are illegal schemes that promise big returns on your money. They rely on the recruitment of new members so the people at higher levels of the pyramid earn money. The problem is, there needs to be an endless supply of members for the scheme to keep operating. 

There are different types of pyramid schemes, but they all have one thing in common. The main source of income is the recruitment of members, rather than the sale of products or services.  Usually, new members will pay money to join and they receive payments depending on the number of members they recruit. Sometimes there are products or services that are sold as part of the scheme, but they tend to be worth very little or they are not related to the returns that are promised.

Ponzi vs pyramid schemes

Ponzi schemes are similar to pyramid schemes. They are investment schemes where you invest a sum of money and then get "interest payments" or "dividends" which are designed to make your investment look like it's earning very high rates of interest. In reality the payments come out of your own and other investments and rely on new investors coming in so there is enough money to keep paying the earlier investors. Ponzi schemes often last longer than pyramid schemes because participants keep re-investing their money believing that the high returns will continue.

People often hear about these schemes from friends, neighbours, family members or community members. There is usually a sense of urgency and excitement and even if the returns sound like they are too good to be true, people don’t like to feel like they are missing out. Unfortunately, when they do collapse, friendships and family relationships can be ruined. Adding to the distress is the possibility of facing a penalty for promoting or even being involved in a pyramid scheme - it's a maximum of $220,000 for an individual and $1.1m for a corporation.

Warning signs

  • You are told about a 'business opportunity' to join in a group where you make money by recruiting new members.
  • The group might look like a game or a buying club, or it might be promoted through a chain letter.
  • There might be some goods or services to make it look legitimate but their value is low and they don't seem to be related to the high returns you have been promised.
  • Or the goods seem to be grossly overpriced compared to what you think they would be worth at an ordinary retailer.
  • You have to pay a large up-front fee to join the group.
  • The promoter is at pains to tell you “This is not a pyramid scheme”.
  • You are promised instant wealth or a new type of earning that is different to traditional ways of earning money.
  • You are discouraged from asking questions.

Is there a difference between pyramid schemes and multi-level buying schemes?

Multi-level marketing schemes (MLMs) have business models that look a lot like pyramid schemes. Many are promoted through emails or on telegraph poles or on social media. Often the big sell is that you can work from home and earn a lot of money. You might have to sit through a long sales pitch or video before you are told exactly what product or service you will be selling. 

The promoters of MLMs encourage participants to set up distribution networks with their friends or colleagues and they pay commissions based on sales by the participants, by their distributors and by their distributors’ distributors, and further down the chain. So the set-up is very much like a pyramid.

The difference between dodgy MLMs and real MLMs is that in legitimate marketing schemes, your income is related to the sales of products or services. Sometimes it’s a bit hard to see the difference. Here's what you can look out for:

  • Customers are buying real products or services - think about whether you would actually want to pay good money for that product or service.
  • Commissions should come from sales, not from recruiting new distributors.
  • Find out what other distributors think - see if you can speak to any.
  • Find outwhat your trusted friends and family think - provided they are not already involved.
  • Do you have to act too quickly? If you can’t take time to think about it and read documents (if any are available) then alarm bells should ring.

If you are concerned have a look on the internet to see if there are any warning signs about the particular business.

Examples

pyramid pricing example

We have heard of an example in northern NSW where women were offered the chance to join a 'gifting circle', paying $5000 to enter the circle as a 'seed'. Eventually, if other levels of seeds were recruited, the seed could become a sapling, then a blossom, then a lotus. The lotus would receive $40,000 and leave the circle, but more circles would have to be created, with each seed aiming to become a lotus.  

In December 2012 in Oregon in the US, a group of naturopaths in a gifting circle were required by the Department of Justice to pay back the funds they received, with one also paying a fine of $15,000. This one was apparently called Operation Abundance, but there are other similar schemes with  names such as Womens’ Gifting Circle and Women’s Financial Collective. In August 2013 two Connecticut women were sent to prison for promoting similar schemes over a number of years.

In 2013 the Federal Court of Australia imposed penalties totalling $200,000 against three people involved in a pyramid scheme called TVI Express Oz that had been advertised on websites and on Facebook. Participants paid a membership fee of $330 and received a 'travel certificate' and the opportunity to receive commission payments for recruiting other people into the scheme. The Court found that the travel certificates were almost impossible to redeem and were of little to no value. The only way a person could earn income from their participation in the scheme was from recruiting new members. Therefore it was a pyramid scheme.

There are lots of names to look out for that have been used in pyramid schemes in the past. Airplane is a scheme that was doing the rounds in the 1990s, where the levels were called captain, copilots, crew and passengers. There is also one called the Original Dinner Party, where the levels are  dessert, main course, side salad and appetisers. Aussie 2 up, 8-Ball and Treasure trove are others. Chain letters requesting money also do the rounds from time to time.

What should you do?

  1. Use your common sense. If you don't understand how the investment works, steer clear. Remember that participating in a pyramid scheme or promoting a pyramid scheme is illegal. So you might not only lose your money, you might be fined too.
  2. Search the internet to see if you can find any complaints about the business.
  3. Ask your friends and family for advice (except if they are already involved).
  4. Seek independent legal and financial advice.
  5. Take your time to think about it and do your research.

And - if it sounds too good to be true, it probably is.

If you think you have been asked to join a pyramid scheme, you should contact the Scamwatch at the ACCC or your state or territory fair trading or consumer affairs agency.

Contacts

Scamwatch 1300 795 995
ASIC 1300 300 630
NSW Fair Trading 13 32 20
VIC Consumer Affairs 1300 558 181
Qld Office of Fair Trading 13 74 68
SA Consumer and Business Services 13 18 82
WA Dept of Commerce 1300 304 054
TAS Consumer Affairs and Fair Trading 1300 654 499
NT Consumer Affairs 1800 019 319

 
 

 

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