What Pyramid Schemes Are and How to Spot Them

Not all pyramid schemes are created the same. For the sake of not being labelled as a pyramid, they are all formed and promoted trying not to look like one. Why? Because pyramid schemes are strictly illegal in many jurisdictions, and even at those places they are not, they are still considered as illegitimate practices being prosecuted under various indirect laws.

Following this introduction, let’s step back for a moment and see what pyramid schemes are.

According to the World Federation of Direct Selling Associations (WFDSA), “Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later.”

In her speech at a seminar in 1998, Debra A. Valentine, a former General Counsel at the U.S. FTC, says, “They (pyramid schemes) all share one overriding characteristic: They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.”

In an article dated 2014, FTC’s Aditi Jhaveri advocates if “income is based mainly on the number of people one recruits, and the money those new recruits pay to join the company — not on the sales of products to consumers”, this is a sign that the company is operating a pyramid scheme.

As you see, despite all their efforts to disguise themselves and act as if they are legitimate businesses, pyramid schemes do share some common and if one looks carefully, obvious characteristics.

A few of the significant ones, below:

  • The most important, if not the only, source of income for a participant is recruitment of new people.
  • Participants’ earnings are based on application fees, unreasonably high-priced starter kits or initial product purchases that are either compulsory or “highly recommended” when joining the scheme.
  • There are no competitively priced, good quality products that the participant can sell to other individuals. Plus, there is no product return policy in place.
  • Income opportunity is over-exaggerated, efforts are there to convince candidates that everybody will earn huge amounts in a short period of time.
  • The “business” is presented as a “once-in-a-lifetime” opportunity.

Basically, these are the common and hard-to-miss signs a candidate will need to look for. If any of these exist, the only prudent action is not to take the risk of joining that “opportunity”.

The risks involved in joining and promoting a pyramid scheme? Losing of substantial amount of money, time and losing of friends, relatives, coupled with facing legal charges that may very well end up with being imprisoned!

I do not expect either these fraudulent schemes to disappear anytime soon or individuals to cease showing interest in them. Having that said, we should use every opportunity to educate the society, including the regulators.

Link to Article
Author: Hakki Ozmorali
Publication: The World of Direct Selling

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