Thirst for profit. How to recognize a pyramid scheme and avoid cheating

The pyramid scheme is steadfastly associated with deception. Such projects are gaining momentum and becoming more diverse than in the 90s. The naivety of people leads to misunderstandings: not everyone can recognize the pyramid in time, and sometimes they confuse it with network marketing.

What is a pyramid scheme?

Investment or financial pyramid is a way to generate income for those who invented it. The essence of the pyramid scheme is to constantly attract money at the expense of new participants. Early investors receive income from the contributions of "fresh" investors. The principle of a pyramid scheme is when the lower ranks "feed" the upper ones.

The scheme is not always disclosed by the organizers, and the sources of income are silent. Instead of them, they call unimportant sources or even fictional ones. The fact of hiding or altering data is considered a fraud.

Mathematicians and economists say that the redistribution of deposits between participants cannot work forever, so this monetary scheme collapses. Members won't be in profit for long. Usually, only the first members get more than they have invested, the last ones get nothing. Repayment of obligations to everyone is impossible.

The history of pyramid schemes

The first financial pyramids date back to the 17th-18th centuries. The economic history of many countries knows a lot of such examples.

In 1717, John Law, a French businessman and a prominent figure in the royal court issued 20,000 shares for 500 livres. He said that the French navy found gold in Mississippi, where the locals would endow all the French with their wealth. Law launched powerful advertising and his status inspired investor confidence.

A few months later, the shares rose to 5,000 livres. But Luo's company could not keep the price artificially for a long time and after six months the bubble burst. This enterprise nearly ruined France: the financial crisis began, goods disappeared from the shelves, and the dissatisfaction of depositors turned into panic.

Around the same time, Robert Harley opened the South Seas Company in England. She promised to give shareholders the exclusive right to trade with the Spanish part of South America. The only asset of the company was the national debt of England.

Important people became investors, even Isaac Newton invested money there. Harley used their names for advertising, attracting new contributors. As a result, the rights were not as complete as they thought to be founded. The organization was declared bankrupt.

The largest financial pyramids

"Portuguese pyramid"

Emigrant Don Branco opened her bank in 1970 and promised depositors a return of 10% on deposits every month. The system worked for 14 years, and Branko received the nickname "People's Banker". When the pyramid collapsed, it became impossible to report on obligations, and the woman was sentenced to 10 years.

"Lou Perlman shares"

The creator of the musical group Backstreet Boys spent some time in prison for financial fraud. In 1981, he organized fictitious companies and listed shares on the stock exchange, publishing fake profit statements.

The scheme lasted 20 years, shares increased in value during this time, but then Lu received 25 years in prison and a millionth fine. Shareholders even after recovering some of the money lost $ 300 million.

"Pyramid of Sayed Shah"

In 2005, Pakistani teacher Syed Shah began to tell neighbours that he had a secret program to make money on stock trading. Shah found 10 depositors, paid them interest and received dozens of more applicants.

For a year and a half, he gathered 300 thousand people, who gave a total of $ 1 billion. At first, they wanted to make Shah the head of the region, but when the pyramid collapsed, he was convicted of fraud.

Types and types of financial pyramids

Multilevel

Each new member pays an entry fee, which is distributed between those who invited him and the member of the higher level. The newcomer invites others and receives their income from them.

The reason for the collapse is the lack of participants. When the number of users stops growing, the last participants suffer heavy losses. Usually, such a pyramid is covered by trade or highly profitable investment.

Single level or Ponzi circuit

The scheme was named after Charles Ponti (Ponzi), an Italian émigré who made the first pyramid scheme in the United States.

New members are not recruited by old ones. The first investors receive income from the organizers' personal money and think that this will always be so. They begin to validate the financial strategy and recommend the investment to their friends.

Signs of a pyramid scheme

1. Payments are not related to the volume of sales

If they say that you will receive, for example, 5% from every shampoo you and your neighbour sell, most likely it is network marketing.

If no one says that the number of shares, vouchers or goods sold will affect payouts, then it looks like a fraudulent scheme where income comes from contributions of new investors.

2. You are promised an easy and unrealistic income

In advertising pyramid schemes, profitability figures are higher than the market average. No risk is mentioned, get rich quick, the specific amount of money that you will receive is called. For example, "Get guaranteed + 100% profitability every week without special knowledge and skills."

This interest payment is not rational. It exceeds the offers of any financial institutions. Russian banks give a deposit rate of 7-8% per year. Also, it is prohibited by law to guarantee profitability in the securities market and an investor must be warned about the risk of losing money.

3. They demand enough money from you, but at the same time, it is impossible to track the movement of funds.

Usually, the entry fee in the pyramids is large but affordable for people. This way you can reach a maximum of investors who will accept the loss of funds in the event of a collapse.

At the same time, money is constantly “travelling”: you are told that the insurance of fund transactions takes place in one country, and the purchase and sale of shares in another.

4. Company executives think only about PR

If during a presentation, on the website or in booklets, they constantly tell how lucky the shareholders are, but at the same time they do not provide accurate information (annual balances, financial statements, a list of assets) that can be checked in independent sources, this is a pyramid.

Such schemes are characterized by aggressive advertising in the media (for example, Robert Harley's "South Seas Company" was supported by the writers Dafoe and Swift for money).

5. In a conversation with the organizers, incomprehensible terms sound.

The organizers of financial pyramids are constantly using "smart words": trading, futures, forex, options. Such vocabulary should scare away, but in practice, it is intriguing and attracts new investors.

6. The organizers remain anonymous, and the company has many secrets.

Also, such companies usually do not have their own fixed assets and other capital assets. You may be told that the secrets of work are not specifically disclosed because this is confidential and strategically important information.

7. Investment mechanisms are not transparent, and the company has no signs of economic activity.

For example, you have been promised high-interest rates when investing in high-yield stock market instruments. You monitor and find out that the company is not on the stock exchange and does not trade.

Responsibility for the pyramid scheme

Pyramids are recognized illegal in many countries, and in the UAE and China, in general, you can get capital punishment for this. Some states did not begin to introduce a separate article into the criminal law, therefore they qualify pyramid schemes as different crimes (for example, illegal business activity).

Comparing pyramids to fraud is not entirely correct

If an entrepreneur makes a mistake when creating a long-term project, the financial pyramid becomes just an unpleasant consequence, which is avoided using additional lending.

But even with deliberate possession of other people's money, it is not always possible to punish the organizers - if it is proved in court that the money went to intermediate payments, and was not completely appropriated. By and large, the only money appropriated by the pyramid organizers is the deposits of the first investors.

But the trick is that the first depositors were not injured, as they received their money back (at the expense of the last and really deceived depositors). Therefore, such crimes are difficult to define as “fraud”.

Can a victim of a financial pyramid receive compensation?

mainly It depends on which pyramid you fall victim to. if any business did fraud for you, quickly contact your government central bank. ask more details. they will help you.