In the face of a prolonged economic crisis that has plagued Sri Lanka since last year, a wave of desperation has gripped the nation. High inflation, increased taxation, and the soaring cost of living have left the population searching for ways to supplement their incomes.
This dire situation has provided a fertile breeding ground for pyramid schemes, which thrive on the vulnerability and desperation of the people. Despite warnings from the Central Bank, the influence of these fraudulent schemes appears to be spiralling out of control, ensnaring unsuspecting victims across the country.
The Central Bank of Sri Lanka (CBSL) confirmed that it had received several complaints regarding entities engaged in pyramid schemes and that it had requested legal action to be taken against three such pyramid schemes thus far. Nearly 30 complaints have been received in four months.
An official from the Central Bank told The Sunday Morning that necessary measures were underway with regard to legal action against Fast 3 Cycle International (Pvt) Ltd. (F3C), Sport Chain App and Sports Chain ZS Society Sri Lanka, and OnmaxDT.
The official added that the Central Bank was taking all possible measures to rescue people from pyramid schemes, but did not specify said measures.
When contacted by The Sunday Morning for comment, the Ministry of Finance instructed that the Central Bank be contacted for any inquiries.
Types of pyramid schemes
Pyramid schemes, also known as Ponzi schemes, lure participants with promises of quick and substantial financial gains. They operate under the guise of legitimate businesses, but their real structure is inherently unsustainable.
The fundamental principle behind a pyramid scheme is the recruitment of new members who invest money into the scheme. Existing members receive a portion of these investments as profits, creating a false perception of success and attracting more recruits. The cycle continues until the scheme inevitably collapses, leaving a majority of participants with significant losses.
University of Peradeniya Department of Economics and Statistics Head Prof. Ariyarathna Herath told The Sunday Morning that as the economic crisis continued to grip the nation, desperate individuals seeking to overcome financial hardships had become vulnerable targets for fraudulent schemes disguised as legitimate businesses.
Prof. Herath shed light on the two main types of pyramid schemes prevalent in Sri Lanka. The first type, known as the naked pyramid scheme, revolves around monetary investments, promising daily or dollar-based interest returns.
The second type involves product-based schemes, where companies promote low-quality imported goods and recruit individuals to build a network for selling these products. Both types of schemes are illegal according to the regulations set by the CBSL.
“These schemes are not only common in developing countries, but are also prevalent in developed nations,” emphasised Prof. Herath, referring to descriptions of pyramid schemes as personal and financial tunnels by pyramid alert systems in the US.
Protective measures
Prof. Herath further explained that in pyramid schemes, individuals at the top benefitted while those at the bottom faced significant losses. Only around 20% of participants at the top of the pyramid may gain some benefits, leaving the majority at a disadvantage.
“The person who joined first always tries to share the risk with others, which is why they encourage others to join the programme,” Prof. Herath explained, referring to the nature of pyramid schemes.
He suggested several measures to address this issue and to protect the public.
Firstly, the Government, through the Central Bank and other financial organisations, needs to conduct comprehensive awareness programmes to educate the public about the risks associated with pyramid schemes. Current efforts through traditional media channels such as television and newspapers are insufficient.
Prof. Herath highlighted: “Comprehensive awareness programmes and the establishment of an operation team within the Central Bank should be implemented to control these schemes effectively.”
Additionally, he emphasised the need for a dedicated operation team within the Central Bank to identify and swiftly ban pyramid schemes once they were discovered. He expressed concern that the existing regulatory framework was not effectively controlling such schemes, which had allowed illegal operations such as informal financial systems to persist.
When asked about the Government’s role, Prof. Herath stressed the importance of implementing multiple programmes by combining awareness campaigns with robust rules and regulations. He highlighted the necessity of engaging Government organisations to tackle this issue more proactively and comprehensively.
The proliferation of pyramid schemes in Sri Lanka poses a significant threat to individuals already grappling with economic hardships. Prof. Herath’s insights underscore the urgent need for heightened public awareness, stricter regulations, and active enforcement to curb the spread of these fraudulent schemes and protect the financial wellbeing of the population.
Impacts on society
The consequences of falling victim to pyramid schemes can be devastating for individuals and society as a whole. As the schemes collapse, the majority of participants suffer significant financial losses, plunging them further into economic hardship.
Many victims are left burdened with debts, shattered dreams, and broken trust. The social fabric of communities also suffers, as relationships are strained and individuals become more wary and distrustful.
Recognising the gravity of the situation, the Central Bank has been actively warning the public about the dangers of pyramid schemes. The CBSL has stressed the importance of financial literacy and urged individuals to exercise caution and conduct thorough research before investing their hard-earned money.
However, the issue has proven to be challenging to control as pyramid schemes often operate outside the purview of regulatory authorities.
Combating pyramid schemes
To effectively combat the growing menace of pyramid schemes, a multi-pronged approach is required. The Government must take stringent measures to enforce existing laws and regulations to identify and penalise the individuals involved in fraudulent schemes.
Public awareness campaigns should be intensified, emphasising the red flags and warning signs associated with pyramid schemes. Financial literacy programmes need to be implemented at various levels to equip individuals with the knowledge and skills to make informed financial decisions.
Ultimately, addressing the root causes of the economic crisis is crucial to reduce the vulnerability of the population to pyramid schemes. The Government should focus on implementing comprehensive economic reforms, stimulating job growth, and promoting investment in diverse sectors. By creating a stable and prosperous economic environment, the allure of get-rich-quick schemes can be lessened.