The curse at the base of the pyramid
- Raising awareness about the pitfalls of today’s get-rich scams
BY Sumudu Chamara
Owing to the Covid-19 pandemic, people have embraced the internet, and have got used to doing a lot of things they did offline, online. While the pandemic merely expedited the slow shifting to online environments which was taking place even before the pandemic, this sudden change has disadvantages which are being exploited by scammers to target clueless individuals.
In a context where people’s online presence has drastically increased due to travel restrictions, it was reported that the Central Bank of Sri Lanka (CBSL) is planning to look into illegal financial schemes, commonly known as pyramid schemes, which are increasingly operating in the cyberspace, while also raising awareness among the public about the risks associated with being part of these schemes.
Combatting pyramid schemes
CBSL Governor Ajith Nivard Cabraal told The Morning on 29 September that since the CBSL has observed a growing tendency of such schemes being promoted through the internet and social media platforms, the CBSL will take certain measures to prevent the public from being induced into getting involved with such schemes.
One of the measures the CBSL is planning to implement to achieve it, according to Cabraal, is campaigns on mainstream and social media, in a bid to inform the public of prohibited financial schemes while cautioning them to avoid such schemes. This would be done through internet-based awareness programmes such as webinars and social media-based awareness programmes; electronic media-based programmes such as radio and television-based discussions, notices, and scroller ads; YouTube-based programmes; electronic mail and WhatsApp groups-based publicity; and continuously responding to telephone, email, and Facebook inquiries and posts.
In addition, the CBSL will carry out an extensive, mainstream press media campaign.
With regard to legal action against scammers conducting pyramid schemes, steps will be taken to encourage investigations into such schemes and to refer the findings that suggest pyramid schemes to the Attorney General’s Department for prosecution.
The Banking Act No. 30 of 1988 was amended by incorporating the following provision, according to the CBSL, with the aim of preventing the operation of pyramid schemes. The amendment reads: “No person shall directly or indirectly initiate, offer, promote, advertise, conduct, finance, manage, or direct a scheme where benefits earned by the participants to such a scheme are largely dependent on, namely, the increase in the number of participants and the increase in the contributions made by the participants in the scheme.”
The CBSL, in its publication titled “Dangers posed by pyramid schemes and network marketing programmes” defines a pyramid scheme as a scheme under which a person makes a payment in order to get the right to recruit others into the scheme, for which he receives an income, and it added that the new recruits also make payments to get the right to further recruit others and in turn, receive incomes for such recruitment.
According to the CBSL, pyramid schemes have been described as “personal and financial tsunamis” by the Pyramid Alert organisation of the US, because “the harm spreads rapidly, sweeping across cities and nations, gaining momentum, leaving long-term suffering in its wake and causing social and personal damage in addition to financial destruction. They can trigger further disruption and are little understood, seldom studied, and known by many different names. 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. A large majority of participants at the bottom levels of pyramid schemes inevitably lose the money they pay into the scheme”. The CBSL further stressed that this is why pyramid schemes are considered “calculated consumer frauds”.
Types and evolution of pyramid schemes
According to the CBSL, there are mainly two types of pyramid schemes, namely, the “naked pyramid scheme” and “product-based pyramid scheme”.
“The naked pyramid scheme is one in which no product is offered but participants charge recruits a fee to be allowed to participate in an investment opportunity claiming to return a large income once the recruit finds more new members. The product-based pyramid scheme is operated in most instances as a multi-level or network marketing scheme, in which a participant is required to purchase a product at an inflated price in return for which he receives the right to sell a product and the right to receive a return for recruiting other participants into the programme. The product is, therefore, a false front to hide the true nature of the scheme, and those purchasing the product are not true customers, but are actually sales persons in that they recruit others who also join the schemes to get the right to recruit further participants. The most common pyramid schemes now operating are those that are disguised as multi-level or network marketing schemes.”
According to the CBSL, another type of financial scam which shows similarities to a pyramid scheme is the “Ponzi scheme”, which is named after Charles Ponzi, who ran such a scheme in the 1919-1920 era.
“This type of scheme is run by a central company or an individual who receives funds from clients, falsely claiming that such funds will be invested in very productive ventures and promising very attractive returns. In reality, funds received from later investors are used mainly to pay earlier investors the promised returns, and very little if any is invested. When funds run out as is inevitable, the scheme collapses. Unlike in the case of pyramid schemes, participants in Ponzi schemes will be unaware of the nature of the scheme in which they participate.”
However, over the years, pyramid schemes or similar illegal financial schemes have evolved, in order to continue to scam people without being noticed by the law enforcement authorities.
According to a victim of an employment-based pyramid scheme who spoke with The Morning earlier, newer forms of schemes which are significantly different from traditional pyramid schemes, keep emerging. He added that due to this, there is a massive possibility of even those who have heard of pyramid schemes becoming victims, as they do not see the same structure, payment methods, and warning signs they have heard of before, and that is exactly the intention of the creators of these schemes.
On condition of anonymity, he further said that another reason that makes people susceptible to pyramid schemes is scammers integrating these schemes with jobs, especially internet-based jobs, and portraying commissions or bonuses as the salary or part of the salary. He added that while doing an actual job that pays, people unwillingly become part of these schemes by inviting their friends who are required to pay to get registered and trained to be eligible to be recruited for these jobs.
He opined that due to this evolution, it is difficult to identify these scams as easily as before.
“Some think that they are doing a job and getting paid for the work they do. Therefore, they see introducing new individuals to these schemes as merely helping someone to find a job. Also, according to what I have heard, pyramid schemes nowadays make payments or give gifts continuously for a longer period of time than traditional pyramid schemes did, and it could also be a reason why victims of these schemes take more time to understand that they have become victims,” he explained.
In addition to different, modified versions of traditional pyramid schemes, there is also a rise in exclusively internet-based scams which show similarities to pyramid and Ponzi schemes, according to the foreign media. Moreover, some such schemes have included services in their schemes, in a bid to deceive and attract more participants.
In a context where pyramid schemes or similar schemes keep evolving and have complicated structures in order to avoid detection by law enforcement authorities and mislead new groups, identifying them is not as easy as before, and therefore, experts recommend that people be vigilant about unbelievably profitable opportunities they receive.
The CBSL pointed out several ways to identify pyramid schemes or similar illegal activities.
Among them are, being vigilant of anyone that claims that a person can make huge amounts of money with very little effort; avoiding any sales plan that sells a product at an inflated price (higher than the intrinsic value of the product) and offers commissions for recruiting other purchasers; being cautious of plans that claim that a person will make money at an exponential rate through the continued growth of that person’s “down-line (having more junior employees in an operation)”; avoiding plans where advancement is based on recruitment rather than retailing; staying clear of plans where there is no evidence that a sizeable number of salespersons earn a majority of their income from retailing; avoiding plans which emphasise on the unlimited authorisation of new sales representatives over local retailing opportunities; being vigilant about false references; refraining from making payments or signing contracts to participate in a marketing scheme in any seminar or other high pressure situation; not being part of business opportunities and “get rich quick” schemes offered through the internet or through unsolicited emails; and being wary of schemes that claim to have secret plans, overseas connections, and special relationships.
International sources also highlight several aspects to be vigilant about in order to identify pyramid schemes or similar scams and the companies that carry out such.
Among them are, giving a high income for easy tasks; the lack of information about the risks of such schemes or claiming that joining the scheme has no risks; the lack of information about how exactly the scheme works or makes profits; companies claiming to be newly established arms of well-established companies (even though those big companies have never mentioned or endorsed them); not having worked with any reputed local company; having obtained registration under a category that does not match with its operations; presenting success stories that do not match the nature of the scheme’s operations or income; not having or selling any actual product or service; companies having changed addresses quite frequently or not having a physical office at all; companies having a high labour turnover in a short period of time, despite claims that those joining the schemes are making high profits; having inactive websites or social media accounts; having only mobile numbers; having no officers or co-ordinators in the operating country or geographical area; requiring that several members join at once instead of individuals; paying more to the recruiter or distributor than the actual seller of the products; requiring that full payment be made in advance to join these schemes or having too strict or too relaxed payment methods; and holding online meetings and strictly refusing to hold face-to-face meetings.
When the public go through difficult times as far as their financial situation is concerned, scammers becoming more creative and active is not a new trend. The difference is how they approach potential victims and what they offer to lure them, which seem to be changing compared to traditional scamming methods; in this case, traditional pyramid schemes.
However, the danger has now increased, as scammers are shifting to online platforms as opposed to traditional, more physical methods, which reduces the chances of them getting caught.
People being vigilant about red flags is key to identifying legitimate income opportunities from illegitimate opportunities, and when something sounds too good to be true, they should start questioning.