By Nethmi Dissanayake
Businesses allow ambitious individuals to pursue their dreams of success, both personally and professionally. By their very nature, businesses create better opportunities for society through products and services. So how do some (or, as it would seem, most) businesses turn into scams? Well, when a person is on their way to success, they have two options – working hard, smart, and honestly, day-in and day-out, or finding a shortcut to success. The latter part is where most scams are born.
A study by the University of Bristol in 2018 reports: “People place different subjective values on income from different sources and have different attitudes towards paying in the respective income taxes. People are less willing to pay taxes on the income that they have earned from entrepreneurial activity, which required extra effort, than on income that was derived from other sources.” Basically, business owners are reluctant to pay taxes on money that they themselves have earned through their businesses.
We often hear about pyramid schemes. They are something to be mindful of. A pyramid scheme is a scheme where a person makes a payment to get the right to recruit others to a business, following which he receives an income for each person recruited. The new recruits also make a payment in order to convince others to join in, and in return they receive money for such recruitments. This way, a hierarchy of participants is formed over time, portraying a pyramid, hence the name “pyramid scheme”.
Pyramid schemes are dangerous, and illegal too, as reported by the Central Bank of Sri Lanka. “Pyramid schemes have been made illegal in Sri Lanka in view of the potential danger they pose to the economy. Therefore, any funds earned by promoting pyramid schemes are liable to seizure and forfeiture, in the event such funds are used for the offence of money laundering or for financing terrorism.”
Brunch spoke with CIMA Lecturer Suran Patabendige for more on what a pyramid scheme is and the importance of financial literacy.
[caption id="attachment_139313" align="alignright" width="312"]
Suran Patabendige[/caption]
Most of them don’t even realise that they have gotten conned: Suran Patabendige
“It’s not that difficult to poison our youngsters’ minds, because they are living under a lot of stress and tension. So it is easier to attract them to this by showing this beautiful image of what their future will be if they join these businesses. Pyramid selling, multi-level marketing, network marketing – these fancy names refer to the same scheme, but a Ponzi scheme is a bit different from this,” Patabendige explained.
“I can explain how all these selling systems work by using a simple example. Imagine that I am going to start a new company to sell electronic gadgets. Then I am going to make a small bundle using a laptop, phone, and a nice watch. I’ll be able to sell these products keeping a profit of around Rs.150,000.
“Then my next step will be launching a well thought-out, well executed, brainwashing marketing campaign by using the very eye-catching tagline ‘Want to earn money by doing nothing?’. As soon as my targeted audience sees this post, they will reach out to me. Say that I was able to ‘recruit’ 10 people, I’ll tell them that I’ll be selling these products for Rs. 250,000, and then from there itself I have a profit of Rs. 100,000. Now the question is why would they buy these expensive products?”
He explained the reasons in two points: “They don’t know the real price of the products; the second reason is that I tell them to bring along four more people to promote these products to (one person will be bringing four other people), and that they will be getting 10% as a commission from each product the other four will buy. Then the children are obviously happy and very excited. Then 10 people become 40, 40 becomes 160, 160 becomes 640…”
“The catch here is that even though people who joined in on the first few rounds would be able to cover their costs, the ones who joined in later wouldn’t be able to. The sad truth is that most of them don’t even realise that they got conned. You have to be cautious when you live in this world, because even your close friends can pull you into this pit of downfall,” he added.
Patabendige shared a pertinent quote by Abraham Lincoln: “He said this to his son’s first teacher – it will take time, I know, but teach him, if you can, that a dollar earned is of far more value than five found…”
“You have to realise that this ‘I’ that I have used everywhere is all hypothetical,” Patabendige added, with a laugh. “I am not in on any of these crimes or schemes.”
Patabandige then spoke about the importance of financial literacy, explaining: “it is necessary to make important financial decisions. It can help with decisions on financial planning, debt, and investing. It equips us with the knowledge and skills we need to manage money effectively. Also, students should be taught how to handle money, both at home and in school.”
Risk taking and digging a grave for yourself are two extreme opposite ends of the line, he noted. Even when one takes risks, you have to be cautious and think about what might be the consequences of your actions.
[caption id="attachment_139315" align="alignright" width="328"]
Roshintha Perera[/caption]
If it’s too good to be true it’s probably not: Roshintha Perera
Executive digital marketer and entrepreneur Roshintha Perera shared her thoughts on pyramid schemes and how to identify them, saying: “Typically the founder of a company finds an initial group of people to buy whatever they’re selling to start the scheme. This first group of people is then asked to recruit more members in order to earn a portion of what new members invest.
“This then repeats when new members recruited are asked to recruit more members, in order to earn a portion of those new members’ investments. This continues with new members bringing in more and more people, so that part of all the new investments always funnels its way to the top. When the pyramid scheme grows, it becomes harder for new recruits to earn profits when recruiting new people (market saturation).”
Perera elaborated more on how pyramid schemes work: “They try their hardest to look like a genuine company just trying to sell their products to the customers. However, the truth behind most of the ‘Get rich fast’ companies involve making money in a typical pyramid fashion. By recruiting other people to ‘market your products’. Pyramid schemes usually disguise their entry fees as registration fees to enter the business, or as training fees.”
“Pyramid promoters would usually ask you to join a meeting that ‘not a lot of people get the opportunity to be in’. They hype up recruitment meetings by creating a fake atmosphere where they make promises of large sums of money and play with people’s greed and fear of missing out on a good deal. And they rarely ask you questions.
At these meetings, you’ll probably hear things like “This is an opportunity which will change your life”, “You need to think outside the box”, “You can earn x amount of money every month just by sitting at home doing absolutely nothing”, or “You can do this online without doing a 9-5 job”, she explained.
Perera further explained how you can prevent getting involved in a pyramid scheme, urging people to “be skeptical of plans that claim you will make money through continued growth of ‘multi-level marketing’ such as the commissions on sales made by new distributors you recruit, rather than through your own sales of products”.
She added: “Be careful regarding income or earnings claims. Many recruiters boast about the incredibly high earnings of a few top performers. Beware when presented with ‘testimonies’ from other distributors. These ‘success’ stories rarely reflect reality. Illegal pyramid schemes often sell products at prices well above retail or sell products that are difficult to value.
“Never sign a contract or pay any money to participate in a multi-level marketing programme, or any business opportunity, without taking your time and reading all of the paperwork. Talk the opportunity over with a spouse, knowledgeable friend, accountant, or lawyer.”
She further added: “Recent incidents involving a popular store selling phones at prices way below the market price showed us how illegal pyramid and Ponzi schemes can come crashing down at any time, and that many people can lose a lot of their hard-earned money if they invest in such suspicious businesses.
“If you decide to become a part of a pyramid scheme, remember that you are legally responsible for the claims you make about the company, its product, and the business opportunities it offers. Be sure to represent the opportunity honestly and avoid making unrealistic promises. If those promises fall through, remember you could be held liable,” opined Perera.
Always remember, “if it’s too good to be true, it’s probably not”, Perera concluded.
Perera and Patabendige both agreed that as pyramid schemes are growing in Sri Lanka, it is important for all of us, as citizens, to take a moment to educate ourselves.
Confusion over the definitions of pyramid schemes and their measurable harm has clouded efforts to control them. People who are involved in such schemes are duping both citizens and officials who are unprepared, and one pyramid scheme can always be replaced by another.
Therefore, in addition to the common person educating themselves, it’s also vital that businessmen and officials in the financial or banking sector join hands and assist law enforcement to protect consumers. We should be more vigilant and not fall for these traps.
Suran Patabendige[/caption]
Most of them don’t even realise that they have gotten conned: Suran Patabendige
“It’s not that difficult to poison our youngsters’ minds, because they are living under a lot of stress and tension. So it is easier to attract them to this by showing this beautiful image of what their future will be if they join these businesses. Pyramid selling, multi-level marketing, network marketing – these fancy names refer to the same scheme, but a Ponzi scheme is a bit different from this,” Patabendige explained.
“I can explain how all these selling systems work by using a simple example. Imagine that I am going to start a new company to sell electronic gadgets. Then I am going to make a small bundle using a laptop, phone, and a nice watch. I’ll be able to sell these products keeping a profit of around Rs.150,000.
“Then my next step will be launching a well thought-out, well executed, brainwashing marketing campaign by using the very eye-catching tagline ‘Want to earn money by doing nothing?’. As soon as my targeted audience sees this post, they will reach out to me. Say that I was able to ‘recruit’ 10 people, I’ll tell them that I’ll be selling these products for Rs. 250,000, and then from there itself I have a profit of Rs. 100,000. Now the question is why would they buy these expensive products?”
He explained the reasons in two points: “They don’t know the real price of the products; the second reason is that I tell them to bring along four more people to promote these products to (one person will be bringing four other people), and that they will be getting 10% as a commission from each product the other four will buy. Then the children are obviously happy and very excited. Then 10 people become 40, 40 becomes 160, 160 becomes 640…”
“The catch here is that even though people who joined in on the first few rounds would be able to cover their costs, the ones who joined in later wouldn’t be able to. The sad truth is that most of them don’t even realise that they got conned. You have to be cautious when you live in this world, because even your close friends can pull you into this pit of downfall,” he added.
Patabendige shared a pertinent quote by Abraham Lincoln: “He said this to his son’s first teacher – it will take time, I know, but teach him, if you can, that a dollar earned is of far more value than five found…”
“You have to realise that this ‘I’ that I have used everywhere is all hypothetical,” Patabendige added, with a laugh. “I am not in on any of these crimes or schemes.”
Patabandige then spoke about the importance of financial literacy, explaining: “it is necessary to make important financial decisions. It can help with decisions on financial planning, debt, and investing. It equips us with the knowledge and skills we need to manage money effectively. Also, students should be taught how to handle money, both at home and in school.”
Risk taking and digging a grave for yourself are two extreme opposite ends of the line, he noted. Even when one takes risks, you have to be cautious and think about what might be the consequences of your actions.
[caption id="attachment_139315" align="alignright" width="328"] Roshintha Perera[/caption]
If it’s too good to be true it’s probably not: Roshintha Perera
Executive digital marketer and entrepreneur Roshintha Perera shared her thoughts on pyramid schemes and how to identify them, saying: “Typically the founder of a company finds an initial group of people to buy whatever they’re selling to start the scheme. This first group of people is then asked to recruit more members in order to earn a portion of what new members invest.
“This then repeats when new members recruited are asked to recruit more members, in order to earn a portion of those new members’ investments. This continues with new members bringing in more and more people, so that part of all the new investments always funnels its way to the top. When the pyramid scheme grows, it becomes harder for new recruits to earn profits when recruiting new people (market saturation).”
Perera elaborated more on how pyramid schemes work: “They try their hardest to look like a genuine company just trying to sell their products to the customers. However, the truth behind most of the ‘Get rich fast’ companies involve making money in a typical pyramid fashion. By recruiting other people to ‘market your products’. Pyramid schemes usually disguise their entry fees as registration fees to enter the business, or as training fees.”
“Pyramid promoters would usually ask you to join a meeting that ‘not a lot of people get the opportunity to be in’. They hype up recruitment meetings by creating a fake atmosphere where they make promises of large sums of money and play with people’s greed and fear of missing out on a good deal. And they rarely ask you questions.
At these meetings, you’ll probably hear things like “This is an opportunity which will change your life”, “You need to think outside the box”, “You can earn x amount of money every month just by sitting at home doing absolutely nothing”, or “You can do this online without doing a 9-5 job”, she explained.
Perera further explained how you can prevent getting involved in a pyramid scheme, urging people to “be skeptical of plans that claim you will make money through continued growth of ‘multi-level marketing’ such as the commissions on sales made by new distributors you recruit, rather than through your own sales of products”.
She added: “Be careful regarding income or earnings claims. Many recruiters boast about the incredibly high earnings of a few top performers. Beware when presented with ‘testimonies’ from other distributors. These ‘success’ stories rarely reflect reality. Illegal pyramid schemes often sell products at prices well above retail or sell products that are difficult to value.
“Never sign a contract or pay any money to participate in a multi-level marketing programme, or any business opportunity, without taking your time and reading all of the paperwork. Talk the opportunity over with a spouse, knowledgeable friend, accountant, or lawyer.”
She further added: “Recent incidents involving a popular store selling phones at prices way below the market price showed us how illegal pyramid and Ponzi schemes can come crashing down at any time, and that many people can lose a lot of their hard-earned money if they invest in such suspicious businesses.
“If you decide to become a part of a pyramid scheme, remember that you are legally responsible for the claims you make about the company, its product, and the business opportunities it offers. Be sure to represent the opportunity honestly and avoid making unrealistic promises. If those promises fall through, remember you could be held liable,” opined Perera.
Always remember, “if it’s too good to be true, it’s probably not”, Perera concluded.
Perera and Patabendige both agreed that as pyramid schemes are growing in Sri Lanka, it is important for all of us, as citizens, to take a moment to educate ourselves.
Confusion over the definitions of pyramid schemes and their measurable harm has clouded efforts to control them. People who are involved in such schemes are duping both citizens and officials who are unprepared, and one pyramid scheme can always be replaced by another.
Therefore, in addition to the common person educating themselves, it’s also vital that businessmen and officials in the financial or banking sector join hands and assist law enforcement to protect consumers. We should be more vigilant and not fall for these traps.