- Contributing factors include limited financial literacy, absence of capable guardians, social trust, economic vulnerability, among others
This is Part I of a multiple-part series. The second part, will be published in an upcoming issue of The Daily Morning
The convergence of motivated offenders, suitable targets, and the absence of capable guardians can be seen as some of the main contributing factors for the success of pyramid schemes in Sri Lanka.
Along with these, social trust, economic vulnerability, persuasive recruitment tactics, and limited financial literacy also contribute to the success of such schemes, with emotional factors such as shame, the fear of judgment, and isolation further contributing to underreporting and prolonged exposure to risk.
These findings were made in an article on ‘Criminological perspectives on pyramid schemes: Applying the routine activity theory in the Sri Lankan context’ which was authored by N.D.D.N. Weerasinghe (attached to the Sri Jayewardenepura University's Criminology and Criminal Justice Department) and published in the Ninth Volume of the Journal of Economic Criminology, September 2025.
Pyramid schemes represent a particularly insidious form of financial fraud that has grown increasingly problematic in Sri Lanka. Despite being outlawed under Section 83(C) of the Banking Act, No. 30 of 1988, such schemes continue to operate under deceptive guises, often disguised as legitimate multi-level marketing ventures. These operations exploit the hopes and financial vulnerabilities of the public, especially during periods of economic uncertainty. In a pyramid scheme, the majority of the participants, usually those at the bottom of the hierarchy, suffer financial losses, while a small number at the top, profit immensely. This uneven and deceptive structure preys on trust within communities and capitalises on regulatory weaknesses, making pyramid schemes not only financially harmful but also socially disruptive.
In recent years, Sri Lanka has witnessed a resurgence of these fraudulent schemes, particularly following the socio-economic hardships caused by the Covid-19 pandemic and the subsequent economic crisis. On 24 August 2023, the Central Bank of Sri Lanka (CBSL) issued a public red notice banning nine pyramid scheme entities, highlighting the urgency of addressing this growing threat. These schemes often target unemployed youth, low-income earners, and individuals lacking financial literacy, luring them with promises of quick and high returns through recruitment-based structures rather than actual goods or services. Despite increasing awareness and regulatory efforts, these fraudulent schemes continue to attract new participants, causing significant financial losses and social harm.
The routine activity theory analyses how certain crimes take advantage of routine patterns in daily life. It posits that for a crime to occur, three key elements must converge in time and space: a motivated offender, a suitable target, and the absence of capable guardianship or effective controls. Pyramid schemes find fertile ground in specific social settings. Everyday activities and social interactions, weaknesses in regulatory oversight, widespread financial vulnerability, and high levels of social trust collectively create an environment where offenders can exploit victims with relative ease.
In particular, the lack of effective monitoring mechanisms allows perpetrators to operate with minimal risk of detection or sanction, while the economic pressures faced by many individuals increase their susceptibility to promises of quick financial returns. Moreover, cultural and social dynamics, such as trust within communities and social networks, often facilitate recruitment and perpetuate the cycle of victimisation.
Accordingly, pyramid schemes are considered a form of economic crime due to their inherently fraudulent nature and the significant financial harm that they cause. Economic crime is a negative social phenomenon that is constant and very dynamic, and one that skillfully adapts to the socio-economic and political circumstances in the society.
Throughout history, economic crime has changed its outward appearance, but it has always been specific, and thus, the perpetrators of this kind of crime, have been characterised by the perpetrators’ status and power derived from their position of privilege and/or relevant role in socio-economic and political structures. It is the role, status, and power of economic crime perpetrators that make this type of crime 'invisible' in a way, marking it as the crime of the privileged, who cunningly use their position to gain enormous wealth and power.
Financial crimes are becoming increasingly prevalent in Sri Lanka, with a rise in online fraud due to the growing use of online banking and shopping platforms. Perpetrators are using web- or mobile app-based loan schemes and fake cheques to defraud the public. Tax evasion is also a problem:Individuals, finance companies, and casinos are among the most common evaders. While the authorities have arrested several individuals for committing financial fraud, concerns have been raised about the effectiveness and independence of the judicial system, particularly regarding impunity for one of the most significant financial crimes in the country that caused millions in losses to the Treasury.
Fraudulent schemes and financial crimes are enduring issues in Sri Lanka’s economic and social environment. The country, home to an expanding economy and growing financial industry, remains susceptible to different kinds of fraud that prey on regulatory gaps and socio-economic weaknesses. The reported cases of financial fraud displayed a fluctuating trend over the past few years. According to the Criminal Investigation Department (CID), 457 cases were reported in 2023 due to online financial fraud. In addition, more than 2,800 cases were reported in 2023 due to fraud (including offenses about fraud – scams, the criminal breach of trust, cheating or criminal misappropriation, or any combination thereof) to the Financial Intelligence Unit. The legal framework governing fraud in Sri Lanka encompasses a range of statutes. The Penal Code, first enacted in 1883 and subsequently amended, serves as the primary legal tool to prosecute fraud under sections dealing with cheating, misrepresentation, and the criminal breach of trust. Additionally, specific Legislations such as the Financial Transactions Reporting Act, No. 6 of 2006 and the Consumer Affairs Authority Act, No. 9 of 2003 address fraudulent financial practices and consumer protection.
Accordingly, a large number of investigations linked to scams commenced during the pandemic lockdown period that may be a result of the substitute loss of livelihoods during Covid-19 travel restrictions via proceeds generated from fraud-related criminal activities.
The profile of fraudsters in Sri Lanka varies widely, from individual con artists and organised crime groups to white-collar criminals embedded within corporations. Notably, pyramid and Ponzi schemes have been orchestrated by both local operators and foreign-linked entities targeting middle- and lower-income individuals with promises of extraordinary returns.
In the Sri Lankan context, some corporate financial accounting scandals such as the Government bond scam, the Golden-Key fraud, the Sakvithi Housing and Constructions (Private) Limited deposit fraud, etc., were revealed, highlighting the necessity of increased concern on frauds which defrauded thousands of people through a Ponzi scheme disguised as an investment firm, which remains one of the most prominent examples of large-scale financial fraud in Sri Lankan history.
A pyramid scheme
Pyramid schemes are an enduring problem globally, often operating under the guise of legitimate multi-level marketing ventures. A ‘pyramid scheme’ is defined as a scheme under which a person makes a payment to get the right to recruit others into the scheme for which he/she receives an income. The recruits also make payments to get the right to further recruit others and in turn receive an income for such recruitment. Such a scheme is called a pyramid scheme because, over time, a hierarchy of participants resembling a pyramid is formed with the introduction of new and larger levels of participants to the scheme.
The salient feature of a pyramid scheme is that the number of participants expands rapidly in an exponential manner at each stage, as new participants are drawn to the scheme. Accordingly, a pyramid scheme is a type of investment scam characterised by its hierarchical structure, where returns for earlier investors are paid using the capital of newer investors rather than from profit generated by legitimate business activities. In this approach, participants generate income mostly by enlisting new members into the program, rather than through the sale of items or services.
Pyramid schemes proliferate by focusing on the greed, ignorance, and desperation of individuals who are ignorant and financially strained. Consequently, individuals may be misled into thinking that they can attain wealth rapidly with no exertion. Potential participants are approached with communications indicating that they could make substantial sums of money merely by recruiting a limited number of individuals to the scheme.
Promoters occasionally propose to provide financial assistance on behalf of participants until they secure funding. Promoters frequently exploit the names of renowned individuals or organisations to deceive the public into perceiving the scheme as credible. Motivational seminars are conducted by promoters or participants, during which the audience is exposed to vigorous propaganda concerning the benefits that may be obtained from the plan. During these seminars, images of those who have benefited from the program are displayed beside their opulent vehicles and residences to showcase their wealth and entice the avaricious and naive to the initiative.
There are several key features of pyramid schemes:
Hierarchical structure
The structure is arranged in a pyramid formation, with a limited number of individuals at the top recruiting a greater quantity of participants beneath them. Every tier of the pyramid must enlist additional members to maintain the financial returns guaranteed to those above.
Recruitment focus
The primary way of generating revenue is via the recruitment of new participants. The first employee generally remits a fee, which is thereafter allocated to individuals positioned higher in the hierarchy.
Unsustainable model
The concept is fundamentally unsustainable due to its dependence on a perpetual stream of fresh recruits. Ultimately, the pool of prospective recruits contracts, resulting in financial losses for most players.
Deceptive practices
Participants are frequently deceived regarding the possibility of returns, with assurances of substantial gains that are seldom achieved. This deceit is a fundamental element that differentiates pyramid schemes from bona fide company enterprises.
Legal status
Pyramid schemes are prohibited in numerous countries because of their deceptive characteristics and the considerable financial damage that they inflict on participants. Regulatory authorities frequently disseminate warnings and educational resources to assist the public in recognising and evading such scams.
Pyramid schemes are a major concern in economic crime, marked by their fraudulent recruitment methods and unviable company concepts. These schemes guarantee substantial investment returns, predominantly sourced from the ongoing enlistment of new members rather than authentic commercial operations. The fundamental framework of pyramid schemes establishes a hierarchical system wherein a limited fraction of individuals at the top reaps financial rewards, while the overwhelming majority of the participants suffer significant losses.
Pyramid schemes have impacted Sri Lanka, ensnaring individuals from diverse backgrounds, while a minuscule fraction of the population reaps the benefits. The CBSL has identified two categories of schemes: The naked pyramid scheme and the product-based pyramid scheme. The absence of any product offerings characterises the naked pyramid plan. The product-based pyramid scheme typically functions as a multi-level or network marketing scheme, wherein a participant must acquire a product. Consequently, Section 83(C) of the Banking Act has rendered pyramid schemes unlawful in Sri Lanka due to the potential risks that they represent to the economy.
Multi-level marketing and network marketing pyramid schemes refer to a company promoting a pyramid scheme in which a product is sold at a highly inflated price of say Rs. 50,000 and the buyers become eligible to earn commissions by recruiting further customers. These customers will in turn be eligible to earn commissions on recruiting further customers.
Pyramid schemes have historically evolved in diverse ways, responding to cultural and economic situations. Pyramid scams result in extensive financial devastation and social turmoil. Pyramid schemes have been associated with considerable economic disruption, leading to government actions to mitigate their proliferation. The worldwide scope of these schemes, along with technological and social media improvements, has enabled their swift proliferation, presenting a significant challenge for law enforcement and regulatory agencies. Pyramid schemes have proliferated in Sri Lanka, where socio-economic issues including unemployment and income disparity endure. Pyramid schemes function by persuading participants that substantial financial gains can be attained chiefly through the recruitment of additional members, resulting in an untenable financial framework. Individuals are susceptible to these schemes.
Daily routines, social conditions, and guardianship (such as regulatory agencies) influence criminal activity. Social influence, economic desperation, and the temptation of rapid monetary rewards frequently compel individuals to partake in fraudulent operations. Furthermore, the significance of deceit in attracting new investors is undeniable; individuals frequently misrepresent information to friends and relatives, sustaining a cycle of fraud that capitalises on trust and social connections. Psychological and social elements enhance their allure. The relationship between economic psychology and criminal behaviour elucidates why individuals persist in investing in schemes despite clear dangers and probable losses.
Victimisation is viewed through the lens of the convergence of a motivated offender, an attractive target/victim, and the absence of capable guardianship. Behaviours put people at risk for victimisation. Where the lifestyle theory conceives of risk in probabilistic terms (e.g., certain behaviours elevate one’s odds of being victimised), the routine activity theory simply describes the victimisation event itself (e.g., if the three key elements converge, victimisation happens, yet, if one of the elements is missing, victimisation is avoided).
Accordingly, the three main components are identified: a motivated offender, a suitable target, and the absence of capable guardianship. The motivated offender refers to an individual who is willing and able to commit a crime. The motivation can stem from various factors, including financial need, thrill-seeking, or other personal reasons. The strain theory suggests that individuals might turn to crime due to financial pressures or social inequalities. Socio-economic factors drive the motivation of pyramid scheme perpetrators.
The suitable target refers to a person or object that is vulnerable to victimisation. Suitability can depend on various factors, including the target's perceived value, accessibility, and defenselessness. In the context of pyramid schemes, the suitable targets are individuals who are easily persuaded to invest, often due to financial insecurity, the lack of financial literacy, or social pressure. Considering the characteristics of victims and their vulnerabilities, certain online routines (banking, shopping) increase vulnerability to identity theft, a related crime. Similarly, the link between socio-economic factors and victimisation in rural Southeast Asia, suggests that similar factors might influence vulnerability to pyramid schemes in Sri Lanka.
The absence of capable guardianship refers to the lack of effective measures to prevent crime. Guardianship can be formal (e.g., police, security systems) or informal (e.g., neighbours, community watch groups). In the context of pyramid schemes, the absence of capable guardianship might involve weak law enforcement, ineffective regulatory bodies, or a lack of public awareness about the schemes' fraudulent nature. Considering the role of institutions and their effectiveness in preventing crime, the absence of strong regulatory oversight and public education campaigns can create an environment where pyramid schemes can flourish.
Pyramid schemes are a form of investment fraud that relies on recruiting members into a hierarchical structure. These schemes collapse when recruits can no longer sustain the payouts, causing significant financial harm to the last participants. The lure of high returns with minimal effort attracts individuals seeking quick financial relief, a common occurrence in economies with high unemployment rates. In Sri Lanka, such schemes often target low-income individuals and rural communities.
Pyramid schemes create an illusion of profitability by paying returns to earlier participants using the contributions of newer recruits, which makes them unsustainable and deceptive economic practices designed to collapse when recruitment slows down. Pyramid schemes are prohibited by legislation, including the Securities Act and many international financial regulations. Governments and regulatory agencies such as the Federal Trade Commission and the Securities and Exchange Commission have punished pyramid schemes to safeguard consumers and uphold market integrity.
Participant-dominant and organiser-dominant motivations have been identified in relation to joining pyramid schemes. Participants are most motivated to join pyramid schemes by their promise of a distinctive investment opportunity that guarantees significant profits with no work and the provision of flexibility. Moreover, the increasing impact of social media has facilitated the swift proliferation of pyramid schemes. These schemes possess the capacity for exponential growth when substantial cohorts of like-minded persons are motivated to advocate for them to others. Success narratives from individuals who have garnered substantial profits from the program are frequently employed to motivate others to perceive that analogous results are attainable. Organiser-centric motivations for participating in pyramid schemes encompass coercive strategies.
A South African study discovered that over 90% of the participants incur financial losses, illustrating the deceptive nature of these schemes. This economic loss extends beyond individual individuals and can impact entire communities. Moreover, pyramid schemes frequently proliferate via social networks, specifically targeting low-income populations and minorities. The strategies manipulate trust among these communities, intensifying economic disparity and inflicting extensive financial damage. Individuals resort to illicit methods when legitimate opportunities are constrained. The routine activity theory prioritises situational influences above individual motives.