Pyramid scheme: Wikis

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The unsustainable exponential progression of a classic pyramid scheme

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. Pyramid schemes are a form of fraud.

Pyramid schemes are illegal in many countries including Albania, Australia,[1] Brazil, Bulgaria, Canada, China,[2] Colombia,[3] France, Germany, Hungary, Iceland[citation needed], Iran[4], Italy,[5] Japan,[6] Malaysia, Mexico, Nepal[citation needed], The Netherlands,[7] New Zealand,[8] Norway[9], the Philippines,[10] Poland, Portugal, Romania,[11] South Africa,[12] Sri Lanka,[13] Switzerland, Thailand,[14] the United Kingdom, and the United States.[15]

These types of schemes have existed for at least a century some with variations to hide their true nature and there are people who hold that multilevel marketing, even if it is legal, is nothing more than a pyramid scheme.[16][17][18][19]

Contents

Concept and basic models

A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula which is used for profit. The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the "business" expands.

Such "businesses" seldom involve sales of real products or services to which a monetary value might be easily attached. However, sometimes the "payment" itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials, and information. The flaw is that there is no end benefit. The money simply travels up the chain. Only the originator (sometimes called the "pharaoh") and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Individuals at the bottom of the pyramid (those who subscribed to the plan, but were not able to recruit any followers themselves) end up with a deficit.

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Matrix schemes

Matrix schemes use the same fraudulent non-sustainable system as a pyramid; here, the participants pay to join a waiting list for a desirable product which only a fraction of them can ever receive. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse. Such schemes operate as a queue, where the person at head of the queue receives an item such as a television, games console, digital camcorder, etc. when a certain number of new people join the end of the queue. For example ten joiners may be required for the person at the front to receive their item and leave the queue. Each joiner is required to buy an expensive but potentially worthless item, such as an e-book, for their position in the queue. The scheme organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. Organizers can further profit by starting a scheme with a queue with shill names that must be cleared out before genuine people get to the front. The scheme collapses when no more people are willing to join the queue. Schemes may not reveal, or may attempt to exaggerate, a prospective joiner's queue position which essentially means the scheme is a lottery. Some countries have ruled that matrix schemes are illegal on that basis.

Connection to multi-level marketing

The network marketing or multi-level marketing business has become associated with pyramid schemes as "Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure." [20] and the fact while some people call MLMs in general "pyramid selling"[21][22][23][24][25] others use the term to denote an illegal pyramid scheme masquerading as an MLM.[26]

The FTC provides guidelines for determining whether an organization is a legal MLM or an illegal pyramid scheme such as: 1) substantial sales of products or services to end users, 2) commissions paid only on product usage, not on new enrollments, 3) company buys back the inventory of terminating participants, and 4) if the product has inherent value for its standard price. [27]. Some believe MLMs in general are nothing more than legalized pyramid schemes[28][29][30][31] making the issue of a particular MLM being legal or not moot.

Notable recent cases

The Malaysian SwissCashTM

Swiss Mutual Fund originally mentioned on its website that it was created after World War II in 1948 by the Cheviot family of France, with operations based in Berne, Switzerland. After 48 years (1996), the firm moved to the Commonwealth of Dominica due to changes in financial regulations in Europe. However the Swiss Embassy in Kuala Lumpur has stated the following:

"The Swiss Mutual Fund (1948) and or Swiss Cash are not registered companies in Switzerland. Until proof of the contrary, the Embassy doubts that the remarks about these funds and their historic links to Switzerland as outlined on their original website are genuine. The original website is indeed registered in the USA and the contact telephone number is from New Jersey (USA)."

This information was also corroborated by the Swiss Embassy in Singapore. On December 13 2006, Swiss Mutual Fund (1948) S.A. was struck off the Commonwealth of Dominica's Register of International Business Companies. The current version of the Swiss Mutual Fund website no longer includes any information about the company's history. At June 2007, the Securities Commission, Malaysia's capital markets regulator, has already taken action against the promoters of Swiss Cash. The website went offline on August 27, members could not log into the website. According to internet rumours, the website was down due to a hurricane, and would be back on 25 Aug. It did not come back online on August 25. Afterward, few similar websites were up. But no official announcement from Swiss Mutual Fund proved whether those websites were from Swiss Mutual Fund. Those websites only had a front page, and could not be logged into. Internet rumors said website down was due to upgrade and maintainence, and would be back at 1 Sep 2007. Nothing happened on 1 Sep. Internet rumors said Swiss Mutual Fund would be back on 15 Sep 07. Nothing happened on 15 Sep. On Sept 17, the Financial Supervision Commission of the Commonwealth of Dominica released a press release which confirms that Swisscash is not a registered or incorporated company and does not have any established business in the island nation.

Internet

In 2003, the United States Federal Trade Commission (FTC) disclosed what it called an internet-based "pyramid scam." Its complaint states that customers would pay a registration fee to join a program that called itself an "internet mall" and purchase a package of goods and services such as internet mail, and that the company offered "significant commissions" to consumers who purchased and resold the package. The FTC alleged that the company's program was instead and in reality a pyramid scheme that did not disclose that most consumers's money would be kept, and that it gave affiliates material that allowed them to scam others.[32]

Others

In early 2006 Ireland was hit by a wave of schemes with major activity in Cork and Galway. Participants were asked to contribute €20,000 each to a "Liberty" scheme which followed the classic eight-ball model. Payments were made in Munich, Germany to skirt Irish tax laws concerning gifts. Spin-off schemes called "Speedball" and "People in Profit" prompted a number of violent incidents and calls were made by politicians to tighten existing legislation.[33] Ireland has launched a website to better educate consumers to pyramid schemes and other scams.[34]

On November 12, 2008 riots broke out in the municipalities of Pasto, Tumaco, Popayan and Santander de Quilichao, Colombia after the collapse of several pyramid schemes. Thousands of victims had invested their money in pyramids that promised them extraordinary interest rates. The lack of regulation laws allowed those pyramids to grow excessively during several years. Finally, after the riots the Colombian government was forced to declare the country in economical emergency in order to seize and stop those schemes. Several of the pyramid's managers were arrested, and these are being prosecuted for the crime of "illegal massive money reception."[35]

November 2008: The Kyiv Post reported on November 26, 2008 that American citizen Robert Fletcher (Robert T. Fletcher III; aka "Rob") was arrested by the SBU (Ukraine State Police) after being accused by Ukrainian investors of running a Ponzi scheme and associated pyramid scam netting $20 million in US dollars. (The Kiev Post also reports that some estimates are as high as $150M USD.)

See also

References

  1. ^ Trade Practices Amendment Act (No. 1) 2002 Trade Practices Act 1974 (Cth) ss 65AAA - 65AAE, 75AZO
  2. ^ Regulations for the Prohibition of Pyramid Sales
  3. ^ http://news.bbc.co.uk/1/hi/world/americas/7736124.stm
  4. ^ Key GoldQuest members arrested in Iran Airport
  5. ^ Legge 17 agosto 2005, n. 173 (in Italian)
  6. ^ 無限連鎖講の防止に関する法律 (in Japanese)
  7. ^ Sentence by the High Council of the Netherlands regarding a pyramid scheme
  8. ^ Laws and Regulations Covering Multi-Level Marketing Programs and Pyramid Schemes Consumer Fraud Reporting.com
  9. ^ http://www.lovdata.no/all/tl-19950224-011-004.html#16
  10. ^ [1] Investors in Philippine Pyramid Scheme Lose over $2 Billion
  11. ^ Explozia piramidelor Ziarul Ziua, 12.07.2006
  12. ^ [2] Pyramid Schemes
  13. ^ Pyramid Schemes Illegal Under Section 83c of the Banking Act of Sri LankaDepartment of Government Printing, Sri Lanka
  14. ^ ข้อมูลเพิ่มเติมในระบบธุรกิจขายตรงและธุรกิจพีระมิด by Thai Direct Selling Association (in Thai)
  15. ^ Pyramid Schemes Debra A. Valentine, General Counsel, Federal Trade Commission
  16. ^ Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. Wiley. pp. 235. ISBN 0471272426. 
  17. ^ Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. pp. 168. ISBN 0470387963. 
  18. ^ Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13-19. 
  19. ^ Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. 2. Sage Publishing. pp. 880. ISBN 0761930043. 
  20. ^ Pyramid Schemes, May 13, 1998" Federal Trade Commission
  21. ^ Edwards, Paul (1997). Franchising & licensing: two powerful ways to grow your business in any economy. Tarcher. pp. 356. ISBN 0874778980. 
  22. ^ Clegg, Brian (2000). The invisible customer: strategies for successive customer service down the wire. Kogan Page. pp. 112. ISBN 074943144X. 
  23. ^ Higgs, Philip; Smith, Jane (2007). Rethinking Our World. Juta Academic. pp. 30. ISBN 0702172553. 
  24. ^ Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. pp. 4. ISBN 0566082810. 
  25. ^ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. pp. 36. ISBN 1844801624. 
  26. ^ Blythe, Jim (2004). Sales & Key Account Management. Cengage Learning Business Press. pp. 278. ISBN 1844800237. 
  27. ^ Facts for Consumers; Multilevel Marketing Plans Federal Trade Commission
  28. ^ Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. Wiley. pp. 235. ISBN 0471272426. 
  29. ^ Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. pp. 168. ISBN 0470387963. 
  30. ^ Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13-19. 
  31. ^ Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. 2. Sage Publishing. pp. 880. ISBN 0761930043. 
  32. ^ FTC Charges Internet Mall Is a Pyramid Scam Federal Trade Commission
  33. ^ Gardaí hold firearm after pyramid scheme incident Irish Examiner
  34. ^ National Consumer Agency Ireland
  35. ^ Colombians riot over pyramid scam. Colombia: BBC news. Nov 13, 2008. http://news.bbc.co.uk/2/hi/americas/7726069.stm. 
  • The Fraudsters - How Con Artists Steal Your Money Chapter 9, Pyramids of Sand (ISBN 978-1-903582-82-4) by Eamon Dillon, published September 2008 by Merlin Publishing, Ireland

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