Pyramid scheme

Concept and basic models

In a pyramid scheme, an organization compels individuals who wish to join to make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative-whether or not they are any work, the organization’s membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.

Such organizations include sales or services. Without creating any goods or services, the only revenue streams for the scheme are recruiting more members. The behavior of pyramid schemes follows exponential growthquite closely. Each level of the pyramid is much larger than the one before it. For a pyramid scheme to make money for everyone who enrolls in it, it would have to expand indefinitely. This is not possible because the population of Earth is finite. When the scheme inevitably runs out of new recruits, lacking other sources of revenue, it collapses. Because in a geometric series, the biggest terms are at the end, and they are most likely to be in the lower levels of the pyramid.

In a pyramid scheme, people in the upper layers. Since at any given time, the most participants in the pyramid scheme will not make any money. In particular, when the scheme collapses, they will be paid to join the scheme. Therefore, a pyramid scheme is characterized by a few people making the large amounts of money. For this reason, they are considered scams. ^[2]

The “eight ball” model

Many pyramids are more sophisticated than the simple model. These recognize that recruiting a large number of others can be difficult to seemingly simpler model is used. In this model, the goal is to increase the number of people living in poverty. The scheme requires a person to recruit two others,

Prior instances of this scheme have been referred to as ” Airplane Game ” and the third-party label as “captain”, “co-pilot”, “crew”, and “passenger” to denote a person’s level. Another instance was called “Original Dinner Party” which labeled the third as “dessert”, “main course”, “side salad”, and “appetizer”. A person on the “dessert” race is the one at the top of the tree. Another variant, “Treasure Traders”, variously used gemology terms such as “polishers”, “stone cutters”, etc.

Such schemes can be referred to as “gifting circles” with money being “gifted”. Popular schemes such as “Women Empowering Women” ^[3] do exactly this.

Whichever euphemism is used, there are 15 total people in third oven (1 + 2 + 4 + 8) in the scheme-with the Airplane Game as the example, the person at the top of this tree is the “captain”, the two below are “co-pilots”, “the four below are” crew, and the bottom eight are “passengers”.

The eight passengers must pay (or “gift”) a sum (eg, $ 5,000) to join the scheme. This sum (eg, $ 40,000) goes to the captain, who leaves, with everyone remaining moving up one tier. There are two new captains so the group splits in two with each group of passengers eight new passengers. A person who joins the scheme as a member of the board of directors and a third party. Therefore, the participants in the bottom three thirds of the pyramid lose their money if the scheme collapses.

If a person is using this model as a scam, the confidence trickster would take the majority of the money. They would do this by filling in the first three (with one, two, and four people) with phony names, they would pay the first seven payouts, at eight times the buy-in sum, without paying a single penny themselves. So if the buy-in were $ 5,000, they would receive $ 40,000, paid for by the first eight investors. They would continue to buy in the real world, and would like to extend the scheme as long as possible.

Although the “captain” is the person in charge, they have the ability to pay their way to the traveler. captain again, this is a second payout.

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 can only be received. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse. Such schemes operate as a TV, games console, digital camcorder, and so on. when a number of people join the end of the queue. For example, ten joiners may be required to leave the queue. Each joiner is required to buy an expensive but useful item, such as an e-book, for their position in the queue. The scheme organizer profits because of the cost of joining the cost of sending the item to the person at the front. Organizers can further profit by starting with a tailshill names that must be cleared before. The scheme collapses when no more people are willing to join the queue. Schemes may not reveal, but may be expected to exaggerate, a prospective joiner’s tail position, a condition which is essentially a scheme. Some countries have ruled that matrix schemes are illegal on that basis.

Relation to Ponzi schemes

While often confused for each other, pyramid schemes and other schemes . They are related in the sense of both pyramid and Ponzi schemes are forms of financial fraud. ^[4] However, pyramid schemes are based on network marketingwhere each part of the pyramid takes a piece of the pie / benefits, forwarding the money to the top of the pyramid. They fail simply because there are not enough people. Ponzi schemes, on the other hand, are based on the principle of “Robbing Peter to pay Paul” -airly investors are paid their returns through the proceeds of the investments. In other words, a person in the middle of a person who has been in the middle of a person, keeping part of it Thus, such schemes as the Anubhav teak plantation scheme (teak plantation scam of 1998) in India can be called Ponzi schemes. Some Ponzi schemes can depend on multi-level marketing for popularizing them, thus forming a combination of the two.^[5]

Connection to multi-level marketing

Some multi-level marketing (MLM) companies operate as pyramid schemes and consumers often confuse legitimate multi-level marketing with pyramid schemes. ^{[1] [6] [7] [8]}

According to the US Federal Trade Commission MLM, unlike pyramid schemes:

“have a real product to sell.” ^[9] “Not all multilevel marketing plans are legitimate.” If the money is made on your sales to the public, it can be a legitimate multilevel marketing plan. it’s probably not a pyramid scheme. ” ^[10]

Pyramid schemes, however, can be used to produce products, but they often use the product to hide their pyramid structure. ^[7] While some people call MLMs in general “pyramid selling”, ^{[11] [12] [13] [14]} others use the term to denote an illegal pyramid scheme masquerading as an MLM. ^[15]

The Federal Trade Commission warns, “It’s not really a question of where do you come from?” the products. ” ^[16] It states that your research is your best tool and gives you eight steps to follow:

1. Find-and study-the company’s track record.
2. Learn about the product.
3. Ask questions.
4. Understand any restrictions.
5. Talk to other distributors. Beware of shills .
6. Consider using a friend or adviser as a neutral sounding board, or for a gut check.
7. Take your time.
8. Think about this plan suits your talents and goals. ^[16]

Some commentators contend that MLMs in general are nothing more than legalized pyramid schemes. ^{[17] [18] [19]}

Legality

Gifting Clubs that could be legitimate confused with illegal pyramid schemes or Ponzi schemes. CRA Tax Act [2] and the Criminal Code Enforced by the RCMP [3] which defines how a pyramid scheme is illegal. They make certain gifting clubs legal or illegal. In Canada, a gifting club is compliant with the CRA windfall criteria [4]and adhere to the eight criteria, then the gifting is legal and not declared as income. Most clubs of gifting clubs call this loophole when in fact it is the law. The second legislation, the Canada Criminal Code, is enforced by the RCMP. The criminal code characterizes a pyramid or ponzi scheme as illegal because it promises unrealistic returns [5] on an investment. The investor is committed to continuing their investment and returns without realizing that the returns are not available and their investment gone. Again, this is illegal. Gifting clubs that do not promote an investment, which has a structure that is compliant with both the Canada Tax Act and the Criminal Code may be legal. It is incumbent upon the potential participant to investigate any club they want to be associated with.^[20] [21]

Pyramid schemes are illegal in Many other countries or regions Including Albania , Australia , ^[22] [23] Austria , ^[24] Belgium , ^[25] [[Brazil], China , ^[26] Colombia , ^[27] Denmark , the Dominican Republic , ^[28] Estonia , ^[29] Finland , ^[30]France , Germany , Hong Kong , ^[31] Hungary , Iceland , Iran ,^[32] the Republic of Ireland , ^[33] Italy , ^[34] Japan , ^[35] Malaysia , Maldives , Mexico , Nepal , the Netherlands , ^[36] New Zealand , ^[37] Norway , ^[38] Peru , Philippines , ^[39]Poland , Portugal , Romania , ^[40] Russian Federation , Serbia , ^[41] South Africa , ^[42] Spain , Sri Lanka , ^[43] Sweden , ^[44] Switzerland , Taiwan , Thailand , ^[45] Turkey , ^[46] Ukraine , ^[47] the United Kingdom , ^[48] and the United States.^[7]

Franchise fraud is defined by the United States Federal Bureau of Investigation as a pyramid scheme. The FBI website states:

Pyramid schemes-also referred to as franchises or referral schemes -are marketing and investment frauds in which an individual is offered to distributorship or franchise to market a particular product. The real profit is earned, not by the product of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. ^[49]

Notable recent cases

The 1997 rebellion in Albania was partially motivated by the collapse of Ponzi schemes ; however, they were widely referred to as pyramid schemes in their prevalence in Albanian society. ^{[ quote needed ]}

In 2003, the United States Federal Trade Commission (FTC) disclosed what it called an Internet-based “pyramid scam.” Its complaint states that it would pay a fee to join a program that called itself an “internet mall” and purchase a package of goods and services such as the Internet mail, and that the company offered “significant commissions” to consumers who purchased and resold the package. The FTC alleged that the company was a pyramid scheme that did not disclose that it was more likely that it would be kept alive. ^[50]

WinCapita was a scheme run by Finnish criminals that involved about € 100 million. The scheme started in 2005. ^{[ citation needed ]}

In early 2006, Ireland was hit by a wave of diagrams 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”. ^[51] Ireland has launched a website to educate consumers to pyramid schemes and other scams. ^[52]

On November 12, 2008, riots broke out in the municipalities of Pasto , Tumaco , Popayan and Santander of Quilichao , Colombia after the collapse of several pyramid schemes. Thousands of victims have invested their money in pyramids. The lack of regulation laws allowed those to grow excessively over several years. Finally, after the riots, the Colombian government was forced to declare the country in a state of economic emergency to sixteen and stop the schemes. Several of the pyramids have been arrested, and are being prosecuted for the crime of “illegal massive money reception.” ^[53]

The Kyiv Post reported on 26 November 2008 that American citizen Robert Fletcher (Robert T. Fletcher III; aka “Rob”) was arrested by the SBU (Ukrainian State Police) after being accused by Ukrainian investors of running a Ponzi scheme and associated pyramid scam netting US $ 20 million. (The Kiev Post also reports that some estimates are as high as US $ 150 million.) ^{[ Citation needed ]}

In the United Kingdom in 2008 and 2009, a £ 21 million pyramid scheme named ‘Give and Take’ involved at least 10,000 victims in the south-west of England and South Wales. Leaders of the scheme were paid for and served in the amount of $ 500,000 in compensation and costs in 2015. The cost of bringing the prosecution was $ 1.4 million. ^[54]

Throughout 2010 and 2011, number of autorités around the world Including the Australian Competition and Consumer Commission , the Bank of Namibia and the Central Bank of Lesotho -have Declared TVI Express to be a pyramid scheme. TVI Express, operated by Tarun Trikha from India, has been recruited by hundreds of thousands of investors. ^{[55] [56] [57] [58] [59]} In 2013, Tarun Trikha was arrested at the IGI Airport in New Delhi. ^[60]

BurnLounge , Inc. was a multi-level online music store founded in 2004 and based in New York City. By 2006 the company reported 30,000 members using the site to sell music through its network. In 2007 the company was sued by the Federal Trade Commission for an illegal pyramid scheme. The company lost the following in 2012, and lost appeal in June 2014. In June 2015, the FTC began returning $ 1.9 million to people who had lost money in the scheme. ^[61]

In August 2015, the FTC filed a lawsuit against Vemma Nutrition Company , an Arizona-based dietary supplement MLM accused of operating an illegal pyramid scheme. In December 2016, Vemma agreed to a $ 238 million settlement with the FTC, which banned the company from “pyramid scheme practices” including recruitment-focused business ventures, deceptive income claims, and unsubstantiated health claims. ^[62] [63]

See also

• Gift
• Ponzi Scheme
• Claims of Social Security in the USA as a pyramid scheme
• Aman Futures Group
• Burnlounge
• The Cobra Group
• Holiday Magic
• Make Money Fast
• New Rich (college)
• Qnet
• Success University

References