Illegal Pyramid Schemes / Recruitment Scams
What is a Pyramid Scheme?
Pyramid schemes, also referred to as "chain referral", "binary compensation" or "matrix marketing" schemes, are marketing and investment frauds which reward participants for inducing other people to join the program.
Ponzi schemes, by contrast, operate strictly by paying earlier investors with money deposited by later investors without the emphasis on recruitment or awareness of participation structure.
Pyramid schemes focus on the exchange of money and recruitment. At the heart of each pyramid scheme there is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment.
For each person you bring in you are promised future monetary rewards or bonuses based on your advancement up the structure. Over time, the hierarchy of participants resembles a pyramid as newer, larger layers of participants join the established structure at the bottom.
They say you will have to do "little or no work because the people below you will". You should be aware that the actual business of sales and supervision is hard work. So if everyone is doing little or no work, how successful can a venture be?
The marketing of a product or service, if done at all, is only of secondary importance in an attempt to evade prosecution or to provide a corporate substance. Often there is not even an established market for the products so the "sale" of such merchandise, newsletters or services is used as a front for transactions which occur only among and between the operation's distributors.
Therefore, your earning potential depends primarily on how many people you sign up, not how much merchandise is sold.
Pyramid schemes are not the same as Ponzi schemes which operate under false pretences about how your money is being invested and normally benefit only a central company or person along with possibly a few early participants who become unwitting shills.
Pyramid schemes involve a hierarchy of investors who participate in the growth of the structure with profits distributed according to one's position within the promotional hierarchy based on active recruitment of additional participants.
How are Pyramid Schemes Disguised?
These illegal money-making ventures are modified and adapted to suit the victims. They may be disguised as games, chain letters, buying clubs, motivational companies, mail order operations, or investment organizations.
Because of the similarity in structure to legitimate multi-level marketing plans, which survive by making money off product sales to actual customers, not new recruits, pyramid schemes may occur when you are offered a distributorship or franchise to market a particular product. Your investment contract will also authorize you to sell additional franchises.
For each person you bring into such a company, you receive, or are promised, future monetary rewards or bonuses based on the number of people below you (commonly referred to as a "downline") which ( and this is the key factor in pyramid schemes ) are unrelated to the sale of the product to consumers. The real profit is earned, not by the sale of the product, but by the sale of new distributorships.
Promoters of pyramid schemes stress the selling of additional franchises for a quicker return on your investment. Investors, therefore, expend their energies selling franchises rather than the product. At some point, the supply of potential investors is exhausted, leading to the inevitable collapse of the pyramid. The sale of the actual product often fails because it is overpriced or no real market exists for it.
Once the number of actual product buyers diminishes new recruits will focus primarily on recruiting others into the system without any realistic expectation that they can profit from retailing alone.
This lack of actual retail sales may be hard to determine as many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.
Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices.
Legitimate multilevel marketing plans actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM's may pay commissions to a long string of distributors, but these commission are paid for real retail sales, not for new recruits.
Such incentive purchases, which are tied to a higher distributorship level position in the "business opportunity ", lead participants to stockpile or give away unneeded product purchases, all the while chasing the elusive rainbow of imminent success. Often the costs of even long term participation far exceed the payments received.
One indication of a pyramid structure is one which pays override commissions on more than five levels of participation. Even the largest corporations can not stretch the markups on products beyond the hierarchy of sales person, branch manager, district manager, regional manager and national manager without becoming uncompetitive with standard retail outlets.
According to Jon M. Taylor of www.pyramidschemealert.org the suggested retail prices for MLM products are almost always too high to be competitive because huge margins have to be built in to allow for commissions to be paid to down-line distributors for item sales without compromising the company's overly generous profits.
This need to avoid retail competition is achieved by the marketing of unique or miraculous new products which are unavailable elsewhere or presented as cutting edge technology accessible only to those with the vision to appreciate its benefits to humanity or the American Way.
Many pyramid schemes will also advertise that they are in the "pre-launch" stage, yet they never can and never do launch.
Why do Pyramid Schemes Fail?
Pyramid schemes are inherently injurious to consumers because as a mathematical certainty, they are doomed to collapse. As in the case of chain letters that require a payment, only the people at the very top make any money.
The only way anybody can make money through a pyramid scheme or chain letter is if participants in levels below them are defrauded into giving money based upon a rapidly diminishing promise of eventually getting something in return.
Eventually they must break down because the pool of possible recruits becomes exhausted and recruitment stops. Those at the bottom of the pyramid, the vast majority of the participants, lose money because there is no one below them.
They won't get their money back or earn their promised fortune because no one is beneath them in the pyramid adding new money to the pot. All pyramid schemes will begin to die when later recruits don't sign on in numbers large enough to pay off the earlier recruits.
An infinite number of people is the weak link in the required "endless chain" of new participants. In order for a pyramid scheme to profit, there would have to be a never-ending supply of potential, and willing, participants.
In reality, however, the supply of participants is limited, and each new level of participants has less chance of recruiting others and a greater chance of losing money.
The diminishing odds of making money with a pyramid scheme make it a losing proposition because each time a new level rises to the top, a new level must be added to the bottom, each one at least twice as large as the one before.
Pyramid schemes are based on simple mathematics: many losers pay a few winners. A nine-level pyramid, which is built when each participant gets six "friends" to join, would involve over ten million people!
Who are the Victims of Pyramid Scemes?
Most pyramid schemes seem intent on exploiting people with limited means and limited knowledge of business such as individuals who have little experience in direct sales, distributorships, or franchise enterprises or who have limited money or credit with which to establish their own businesses.
They rely on widespread ignorance of basic mathematics. Participants are promised large rewards for putting up a certain amount of money and then recruiting the next level of members. But the schemes always collapse because the supply of potential recruits quickly runs out, making many participants both victims and perpetrators.
Many victims of these scams sell first to their friends. When the supposed money-making opportunity goes belly up, most lose not only their money —but also their friends. The Pentagono promotions have apparently targeted deaf people in some states while the main focus appears to be on senior citizens in others.
Why Would Anyone Pay to Join a Pyramid Scheme?
They're sold to investors with the assurance that they are perfectly legal, approved by the IRS or a CPA, and that they are definitely "not" a pyramid scheme. Promoters may even flaunt the fact that they are illegal and are therefore secret and exclusive. This adds to the allure and mystery of this larcenous, but seemingly harmless, act.
Pyramid promoters are masters of group psychology. At recruiting meetings they create a frenzied, enthusiastic atmosphere where group pressure and promises of easy money play upon people's greed and fear of missing out on a good deal.
It is difficult to resist this kind of appeal unless you recognize that the scheme is rigged against you.
When the expected wealth does not materialize, participants often blame their own lack of recruiting skills for the failure, rather than the original promoters who have benefited most, and almost exclusively, from their deception.
The pyramid promoter is likely to persuade the investor that he is "getting in early" and that he should consider himself at the top of the matrix. Most participants don't envision themselves anywhere near the bottom layer of the pyramid.
Even the greediest person on the planet would probably see that if one is near the bottom layer it will be very hard to get new recruits. They have to see themselves near the top in order to envision the immense wealth, from minimal effort, that is going to come their way.
The con artist at the top views each new investor as a predicable set of revenues and expenses, with the revenues flowing directly to him. He happily pays out commissions for the recruitment efforts of others.
Investigators say pyramid schemes come in waves of three to six years and rise during times of economic boom by playing upon the greed and envy among those who are eager to participate in moneymaking ventures.
As the losers rarely advertise the truth of their folly, the myth of their success resurfaces with each new outbreak.
Legal Aspects of Pyramid Scams
Pyramids are deceptive and participants in a pyramid, whether they mean to or not, are deceiving those they recruit. Few would pay to join if the odds stacked against them were fully explained.
Because pyramid sales plans are by their very nature deceptive, they are illegal. There is a real risk that a pyramid operation will be closed down by police and the participants subject to fines and possible arrest.
Since most MLMs are outright scams, please take a moment to sign the global anti-MLM petition here.
In Canada, the Competition Act explains the differences between multi-level marketing and pyramid selling, and sets out the responsibilities for operators and participants in these types of plans.
Multi-level marketing, when it operates within the limits set by the Competition Act, is a legal business activity, while pyramid selling is a multi-level marketing plan that incorporates various deceptive marketing practices, making it a criminal offence under the Competition Act.
When it comes to pyramid schemes it is illegal to:
|pay money for the right to receive compensation for recruiting new participants;|
|require a participant to buy specific products before he/she is allowed to join the plan;|
|sell unreasonable quantities of the product or products to participants (this practice is called inventory loading); and|
|refuse to allow participants to return products on reasonable commercial terms.|
People who break the law relating to multi-level marketing or pyramid selling can be convicted and sentenced to a fine or a prison term. Amendments to the Act passed in 1999 now allow the court to impose a fine of up to $200,000 or a prison term of up to one year, or both, for a less serious offence. For a more serious offence, the court may set its own fine or a prison term of up to five years, or both.
The Bureau conducts its investigations in private and keeps confidential the identity of the source and the information provided. However, if someone has important evidence about an offence under the Act, that person may be asked to testify in court.
Sometimes, no clear line separates illegal pyramid schemes from legitimate multilevel marketing programs. To differentiate between the two regulators in the U.S. evaluate the marketing strategy (e.g., emphasis on recruitment versus sales) and the percentage of product sold compared with the percentage of commissions granted.
A business venture that meets all three of these descriptions is an illegal pyramid:
- You must make an investment to get the right to recruit others into the program...and
- When you recruit another person into the program, you receive what the law calls "consideration." That usually means money, but can be anything of value...and
- Your new recruits must make an investment to get the right to recruit, and they receive "consideration" for getting others to join.
An investment includes any money paid to enter the venture. Though it may be called a "membership fee" or "bookkeeping charge," the law still considers it to be an investment. And an inventory of products you must buy to re-sell is also considered to be an investment. Giving of your time or talents, or buying demonstration samples at cost is not considered to be an investment under the law.
Pyramid Scheme Situation in the U.K. involving Gifting Scams
While Women Empowering Women does not, according to Government lawyers, appear to contravene current UK legislation on pyramid schemes or multi level marketing, because it does not involve any trading of products or services, nor have any form of company structure or control, this loophole clearly defies the intent of these laws which simply failed to anticipate such a format.
Until now, intensive efforts to find legislation that could stamp out gifting clubs have failed because the schemes appear to sidestep various financial regulations in a number of ways: new members are required to sign statements stating that they are making an unconditional gift to another woman, thereby avoiding the aspect of investment which would bring them under the auspices of the financial services authority; gifts are capped at £3,000, the upper limit for inheritance tax-free gifts; and they escape advertising standards authority censure by using only word of mouth and leaflets passed between individuals.
Past cash pyramids have violated the rules due to their company structure - although usually after the scheme originators have scooped the cash leaving the victims to rue their gullibility. The problem is that in this case there appears to be no one person or company behind it which can be brought to task or investigated.
However, all schemes where money changes hands may be subject to the general criminal law on fraud, theft, and deceit. Anyone with evidence that such a criminal offence may have been committed should report the matter to the police.
Estimates of numbers of women who have joined WEW run into the tens of thousands, though pinning down the number is difficult because WEW lies outside the financial regulatory environment, with recruits found through informal networks of friends and families. The ringleaders and ultimate benefactors though are few and represent only tens out of the thousands.
Legally, these schemes are difficult to crack but the Government is currently looking at how they are dealt with internationally, particularly in the USA where they are more common. They indicate that they are examining all avenues for protecting the public.
There has just been a Review of Gambling and the Dept for Culture, Media and Sport (DCMS) will be undertaking follow up work considering whether WEW type "gifting" schemes could be regulated under gambling legislation and existing lottery laws, if suitably amended.
Just a Little for a Lot
Webco promotion flyers tell you that when you join, you will be in position number three. You sign up ten new participants who sign ten more who sign ten more, etc, until there are 1,000 participants in your down line. The proposed theory is that the 1,000 participants in your downline will send you a $10 non-repayable loan, a total of $10,000, when you reach the number one position in the structure.
A Leg Up on the Others
International Metals and Trade Corporation operates a "Binary Compensation Program" in which members pay to play. You pay $288 to join, $200 of which is a down payment on future purchases from the company's catalog.
"It's so easy. All you do is bring in two people who become legs of your marketing cell. They bring in two more, who bring in others and the larger your cell becomes, the more cash you receive every month! You can't lose!"
"When 12 people have joined, you get $400. When 36 have joined, you receive $800 and when 50 have joined, $1,175. You can operate a total of eight business centers at one time, for a potential monthly income of $18,528."
They falsely claim that: the Attorney General has approved this program; the Better Business Bureau endorses it; and that a Harvard University study has also endorsed such pyramid-type offers.
The Allure of Gold
For two years, American Gold Eagle offered a "Gold Matching Program" to the public: participants placed a $200 down payment on $800 worth of gold and paid the balance by receiving commissions after recruiting new participants.
The original participant would pay the $200 and then recruit two separate "investment groups" into the Gold Matching Program (much like cells in hierarchical organizations, with the original participant at the top and with two branches diverging from the center, each branch containing three recruits).
For every group of three that joined the matching program, the original participant received a $300 commission toward the purchase of the laid-away gold.
After recruiting two groups (six individuals), the original participant could take the gold but are encouraged to roll over the $600 credit into a new recruitment arrangement that offered a higher ceiling on future enrollment commissions.
After being issued cease and desist orders the corporation failed amid problems with vendors which resulted in the end of gold deliveries and a swelling of anger by representatives seeking to realize the fruits of their recruiting efforts.
The promoters moved on, leaving over five hundred complaints unresolved with losses of $370,000.
Undaunted by past troubles, they soon offered people the opportunity to participate in the new "Gold Earning Program" ("Gold I"). Participants paid $200 toward a $400 gold coin then, by recruiting new investors, earned commissions toward the cost of the coin or payment in cash.
New charges found that Gold I emphasized recruitment of clients, not sales of products, and thus constituted an illegal pyramid scheme. They signed a settlement agreement with the state, agreeing to pay restitution to Gold I's participants and submitting to a permanent injunction against operating pyramid schemes and making unrealistic earnings claims.
Not letting an injunction stand in the way, they launched a new marketing plan, referred to imaginatively as "Gold II." Under Gold II, participants could purchase gold and jewelry from them and resell it, or they could join the "Binary Compensation Program."
To differentiate it from the earlier plans, and to at least give the impression of a legal MLM organization, they added more product lines (supplementing Gold I's gold coins with silver coins and gold jewelry), changed manuals, strengthened refund policies, and supposedly attempted to emphasize product sales over recruitment.
It appears recruitment was more rewarding though, for within just three years 96,000 participants had paid $43,000,000 to join Gold II, which had disbursed $25,000,000 in commissions. The product line produced sales of 12,628 coins, with a gross profit from the coins of only $552,620.
The district court sentenced the owner to 135 months in prison and his wife to 121 months. Allowed to remain free until the sentence started, they created the "Freedom I" program, disappeared, and presumably are still at large.
Upper School Charm
The Oxford Savings Club has business addresses in Amsterdam and Antigua, West Indies. Their promotional materials say that a loan of from $25 to $2,500 to Oxford Savings will earn 10% interest compounding monthly for ten years.
The promotional materials also provide that they have a "Profit Sharing" plan where they will pay you 1% of the amount loaned to them from your referrals down through five levels, every month.
"This is MLM at its best. Everyone makes money, whether they recruit or not."
Buy Your Way to the Top
A group named Equinox operated a multi-level marketing company which offered distributorships for products including water filters, vitamins, nutritional supplements, and skin care products. Their distributors ran classified ads in the "Help Wanted" sections of newspapers which implied that a salaried position was being offered.
When you responded to the career ad you were instead given a sales presentation designed to recruit new distributors. They said you could earn money by selling products or recruiting but emphasized that the real way that distributors make money is through recruiting, not through sales.
You were encouraged to purchase $5,000 worth of products so you could enter the program at the manager level, to rent desk space for $300 to $500 a month, to subscribe to a phone line so you could begin recruiting others, and to attend seminars designed to train you.
The seminars cost between $300 and $1000 and stressed that you could make substantial amounts of money.
A very small percentage of distributors who became participants in the program actually made more money than they expended for front-end expenses, and the vast majority of people quit the program with little or no earnings.
While they purported to link compensation to retail sales, they really didn't focus on the products. The structure and operation of the program was geared such that financial gains were primarily dependent upon the continued, successive recruitment of other participants, and retail sales were supposedly not required to realize such financial gains.
The deceptive earnings claims were false and misleading and violated federal law. By furnishing you with promotional recruiting materials that contained false and misleading information, including the deceptive earnings claims, they supplied the means for you to break the law as well.
Do It For Others
Global Assistance Network for Charities
- The Vision -
To create a path to financial independence for ourselves and worthy causes.
A TRUE $$$ INCOME MAKER $$$
while funding your favorite cause or organization.
This pyramid scheme based in Arizona, promises that by joining, members will donate to worthy charities and at the same time "earn" well over $89,000 per month. Marketed primarily on the Internet, they post invitations at Internet newsgroups for others to visit their home page, e-mail or telephone requests for more information, and to ask for more information through a fax-on-demand phone number.
In order to join, you pay an initial fee of $70 and $50 per month thereafter. As a member you designate in excess of ten percent of your "earnings" to charity. These "earnings" though, are based solely on the number of people you recruit. There is no product —only a monthly newsletter distributed by them.
Freedom to Lose
The organization GIFT- "Given in Freedom" claims to be a humanitarian group of wealthy philanthropists who give away large amounts of tax-free money in the name of God.
In return for sponsoring three people, a person is 'gifted' an accumulation of tax-free money in an offshore trust account that will generate as much as $20,000 in interest payments annually.
It is a pyramid scheme because participants are required to sponsor three people, who in turn sponsor three people, etc..
The group does not request money up front. It does however ask for a copy of your driver's license and another piece of documentation such as a telephone or credit card bill. This information is then forwarded to an address in the West Indies. They also have a toll-free number to call for more information.
Police are concerned the fraud artists can use the information from driver's licenses to manufacture phony passports and credit cards. They can also use phone bills to charge calls and use credit card statements to charge purchases.
Learning to Lose
International police have been monitoring the activities of a company soliciting funds from investors through participation in a five-series "financial educational program" which claims to create wealth through education.
The multi-level marketing scheme, known as Investors International (II), was "conceived" by a Dr. RUDOLF VAN LIN (whose real name is believed to be Rudolf Alexander Victor LINSCHOTEN), the Chairman of Investors International Publishing.
The scheme involves the purchasing of a five-part "education service" array of cassettes, literature and videos on topics including offshore technology, government and tax havens.
In order to be able to purchase the next series, participants must first qualify with a sales quota. The quota is six sales in each series, which must be made under the guidance of an approved director.
You pay approximately $1,250 US for what is considered the first series or level. The first two levels consist of video tapes and audio cassettes which provide information that is considered nothing more than what could be obtained at a library.
Clients that reach level 3 are then invited to attend offshore seminars where they are advised that they will learn about international financial programs that are secret in nature and only available to investors who are able to invest large amounts of monies such as $5 million or $10 million.
It is during these seminars that the clients are informed of investment opportunities with Sabre Asset Management Corporation which, certainly from its description, is likely a "prime bank opportunity".
Levels 4 & 5 involve ten to fourteen day international seminars which offer "certification as an international financier and membership in the Society of International Financiers."
Investigation by authorities has established that IIP and SAMC have held cruise seminars and offshore seminars soliciting investors. One of the most current seminars was scheduled to be held in Fiji.
Information has also been received that they are currently establishing the multi-level marketing of IIP within Australia and soliciting investors into SAMC.
A review of this activity by the RCMP Economic Crime Branch suggests it has many of the properties of an illegal scheme pursuant to Section 55 of the Competition Act or possibly Section 206(1) of the Criminal Code.
The Competition Act regulates multi level marketing plans and specifically restricts involvement in a scheme of pyramid selling. The Criminal Code section makes it unlawful for a person who participates in a scheme involving the recruitment of other persons, to expect more in return than what was initially invested.
Using a "Guide To Success" that made grossly inflated earnings claims and saying that they possessed the "financial clout of a major corporation" and a "4,000-plus dealer network", the Five Star Auto Club lured people into a scheme which promised the opportunity to "lease your dream vehicle for free", regardless of the price of the vehicle, while earning a huge monthly income.
In exchange for payment of a fee of $395 plus $100 per month, you could become a "consultant" in a "VIP program" and make "projected monthly commissions of between $180 and $80,000 per month by recruiting other $100-a-month members", who in turn would recruit additional members themselves.
When five others had been recruited and these five people recruit an average of three others apiece, the company promised to lease you a vehicle valued at $15,000 for $100 monthly.
In reality, the auto leasing and roadside services were worth only a fraction of the $395 memberships. You could neither lease a "free" car, nor earn money from joining the scheme. Some 7,000 individuals lost an estimated $5 million as a result of joining.
Petition to Protect Consumers from the Legalization of Product-Base Pyramid Scheme Marketers
Take Action Now!
Call or write to your elected officials and urge them to reject the current effort of the Direct Selling Association to enact its industry-sponsored legislation that would serve to legalize all product-based pyramid schemes.
Points to make in your statement:
|The bills that are sponsored by the DSA both at the state and federal level create loopholes and exclusions that allow harmful, predatory, and deceptive marketing practices.|
|The clever and misleading wording of the bill gives the appearance of consumer protection, but in fact achieves the opposite.|
|The effect of the bills is to permit marketing practices that are currently prosecuted as pyramid fraud by state and federal authorities. Effectively, this proposed law would enable pyramid fraud to operate with the cloak of legitimacy.|
Call or write to your State's Attorney General to express your concern about the DSA-sponsored pyramid scheme legislation. Ask them to issue a statement about it.
Call or write to the Federal Trade Commission to express your concern about the DSA-sponsored pyramid scheme legislation.
Let PSA Know!
Please let Pyramid Scheme Alert know who you're contacting, and what their response is. You can email them copies of correspondence at "petitions at pyramidschemealert.org." (Take out the spaces and put in the appropriate symbols instead of the words. They're trying to cut down on spam.)