Pyramid scheme

A pyramid scheme (commonly known as pyramid scams)

is a business model that recruits members via a promise of
payments or services for enrolling others into the scheme,
rather than supplying investments or sale of products or
services. As recruiting multiplies, recruiting becomes
quickly impossible, and most members are unable to profit;
as such, pyramid schemes are unsustainable and often
illegal.

Pyramid schemes have existed for at least a century in

different guises. Most multi-level marketing plans fall into
a sub-group of pyramid schemes.[1]
The unsustainable exponential progression of a classic
pyramid scheme (here with abranching factor of 6)

Contents
1 Concept and basic models
1.1 The "eight ball" model
1.2 Matrix schemes
2 Relation to Ponzi schemes
3 Connection to multi-level marketing
4 Legality
5 Notable recent cases
6 See also
7 References

Concept and basic models

In a pyramid scheme, an organization compels individuals who wish to join to make a payment. In exchange, the organization
promises its new members a share of the money taken from every additional member that they recruit. The directors of the
organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially
lucrativewhether or not they do any work, the organization's membership has a strong incentive to continue recruiting and
funneling money to the top of the pyramid.

Such organizations seldom involve sales of products or services with value. Without creating any goods or services, the only revenue
streams for the scheme are recruiting more members or soliciting more money from current members. The behavior of pyramid
schemes follows the mathematics concerning exponential growth quite closely. Each level of the pyramid is much larger than the one
before it. For a pyramid scheme to make money for everyone who enrolls in it, it would have to expand indefinitely. This is not
possible because the population of Earth is finite. When the scheme inevitably runs out of new recruits, lacking other sources of
revenue, it collapses. Because in a geometric series, the biggest terms are at the end, most people will be in the lower levels of the
pyramid (and indeed the bottom level is always the biggest single layer).
In a pyramid scheme, people in the upper layers typically profit while people in the lower layers typically lose money. Since at any
given time, most of the members in the scheme are at the bottom, most participants in a pyramid scheme will not make any money. In
particular, when the scheme collapses, most members will be in the bottom layers and thus will not have any opportunity to profit
from the scheme, yet they will have paid to join the scheme. Therefore, a pyramid scheme is characterized by a few people (including
the creators of the scheme) making large amounts of money, while most who join the scheme lose money. For this reason, they are
considered scams.[2]

The "eight ball" model

Many pyramids are more sophisticated than the simple model. These recognize that recruiting a large number of others into a scheme
can be difficult so a seemingly simpler model is used. In this model each person must recruit two others, but the ease of achieving
this is offset because the depth required to recoup any money also increases. The scheme requires a person to recruit two others, who
must each recruit two others, and so on.

Prior instances of this scheme have been called

the "Airplane Game" and the four tiers labelled as
"captain", "co-pilot", "crew", and "passenger" to
denote a person's level. Another instance was
called the "Original Dinner Party" which labeled
the tiers as "dessert", "main course", "side salad",
and "appetizer". A person on the "dessert" course
is the one at the top of the tree. Another variant,
The "eight-ball" model contains a total of fifteen members. Note that
"Treasure Traders", variously used gemology in an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid
terms such as "polishers", "stone cutters", etc. scheme in the picture in contrast is ageometric progression 1 + 2 +
4 + 8 = 15.
Such schemes may try to downplay their pyramid
nature by referring to themselves as "gifting
omen Empowering Women"[3] do exactly this.
circles" with money being "gifted". Popular schemes such as "W

Whichever euphemism is used, there are 15 total people in four tiers (1 + 2 + 4 + 8) in the schemewith the Airplane Game as the
example, the person at the top of this tree is the "captain", the two below are "co-pilots", the four below are "crew", and the bottom
eight joiners are the "passengers".

The eight passengers must each pay (or "gift") a sum (e.g., $5,000) to join the scheme. This sum (e.g., $40,000) goes to the captain,
who leaves, with everyone remaining moving up one tier. There are now two new captains so the group splits in two with each group
requiring eight new passengers. A person who joins the scheme as a passenger will not see a return until they advance through the
crew and co-pilot tiers and exit the scheme as a captain. Therefore, the participants in the bottom three tiers of the pyramid lose their
money if the scheme collapses.

If a person is using this model as a scam, the confidence trickster would take the majority of the money. They would do this by filling
in the first three tiers (with one, two, and four people) with phony names, ensuring they get the first seven payouts, at eight times the
buy-in sum, without paying a single penny themselves. So if the buy-in were $5,000, they would receive $40,000, paid for by the first
eight investors. They would continue to buy in underneath the real investors, and promote and prolong the scheme for as long as
possible to allow them to skim even more from it before it collapses.

Although the "captain" is the person at the top of the tree, having received the payment from the eight paying passengers, once they
leave the scheme they are able to re-enter the pyramid as a "passenger" and hopefully recruit enough to reach captain again, thereby
earning a second payout.

Matrix schemes
Matrix schemes use the same fraudulent non-sustainable system as a pyramid; here, the participants pay to join a waiting list for a
desirable product, which only a fraction of them can ever receive. Since matrix schemes follow the same laws of geometric
progression as pyramids, they are subsequently as doomed to collapse. Such schemes operate as a queue, where the person at head of
the queue receives an item such as a television, games console, digital camcorder, etc. when a certain number of new people join the
end of the queue. For example, ten joiners may be required for the person at the front to receive their item and leave the queue. Each
joiner is required to buy an expensive but potentially worthless item, such as an e-book, for their position in the queue. The scheme
organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. Organizers
can further profit by starting a scheme with a queue with shill names that must be cleared out before genuine people get to the front.
The scheme collapses when no more people are willing to join the queue. Schemes may not reveal, or may attempt to exaggerate, a
prospective joiner's queue position, a condition that essentially means the scheme is a lottery. Some countries have ruled that matrix
schemes are illegal on that basis.

Relation to Ponzi schemes

While often confused for each other, pyramid schemes and Ponzi schemes are different from each other. They are related in the sense
that both pyramid and Ponzi schemes are forms of financial fraud.[4] However, pyramid schemes are based on network marketing,
where each part of the pyramid takes a piece of the pie / benefits, forwarding the money to the top of the pyramid. They fail simply
because there aren't sufficient people. Ponzi schemes, on the other hand, are based on the principle of "Robbing Peter to pay Paul"
early investors are paid their returns through the proceeds of investments by later investors. In other words, one central person (or
entity) in the middle taking money from one person, keeping part of it and giving the rest to others who had invested in the scheme
earlier. Thus, schemes such as the Anubhav teak plantation scheme (teak plantation scam of 1998) in India can be called Ponzi
[5]
schemes. Some Ponzi schemes can depend on multi-level marketing for popularizing them, thus forming a combination of the two.

Connection to multi-level marketing

Some multi-level marketing (MLM) companies operate as pyramid schemes and consumers often confuse legitimate multi-level
marketing with pyramid schemes.[1][6][7][8]

According to the U.S.Federal Trade Commission legitimate MLM, unlike pyramid schemes:

"have a real product to sell."[9] "Not all multilevel marketing plans are legitimate. If the money
you make is based on your sales to the public, it may be a legitimate multilevel marketing
plan. If the money you make is based on the number of people you recruit and your sales to
them, its probably not. It could be a pyramid scheme."[10]

Pyramid schemes however "may purport to sell a product, but they often simply use the product to hide their pyramid structure".[7]
While some people call MLMs in general "pyramid selling",[11][12][13][14] others use the term to denote an illegal pyramid scheme
masquerading as an MLM.[15]

The Federal Trade Commission warns, "Its best not to get involved in plans where the money you make is based primarily on the
number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the
products."[16] It states that research is your best tool and gives eight steps to follow:

1. Findand studythe company's track record.

2. Learn about the product.
3. Ask questions.
4. Understand any restrictions.
5. Talk to other distributors. Beware ofshills.
6. Consider using a friend or adviser as a neutral sounding board, or for a gut check.
7. Take your time.
[16]
8. Think about whether this plan suits your talents and goals.
[17][18][19]
Some commentators contend that MLMs in general are nothing more than legalized pyramid schemes.
Legality
Pyramid schemes are illegal in many countries or regions including Albania, Australia,[20][21] Austria,[22] Belgium,[23] Brazil,
Canada, China,[24] Colombia,[25] Denmark, the Dominican Republic,[26] Estonia,[27] Finland,[28] France, Germany, Hong Kong,[29]
Hungary, Iceland, Iran,[30] the Republic of Ireland,[31] Italy,[32] Japan,[33] Malaysia, Maldives, Mexico, Nepal, the Netherlands,[34]
New Zealand,[35] Norway,[36] Peru, Philippines,[37] Poland, Portugal, Romania,[38] Russian Federation, Serbia,[39] South Africa,[40]
Spain, Sri Lanka,[41] Sweden,[42] Switzerland, Taiwan, Thailand,[43] Turkey,[44] Ukraine,[45] the United Kingdom,[46] and the
United States.[7]

Franchise fraud is defined by the United StatesFederal Bureau of Investigationas a pyramid scheme. The FBI website states:

Pyramid schemesalso referred to as franchise fraud or chain referral schemesare marketing and investment frauds in
which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not
by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product
[47]
eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.

Notable recent cases

The 1997 rebellion in Albania was partially motivated by the collapse of Ponzi schemes; however, they were widely referred to as
pyramid schemes due to their prevalence in Albanian society
.

In 2003, the United StatesFederal Trade Commission (FTC) disclosed what it called an Internet-based "pyramid scam." Its complaint
states that customers would pay a registration fee to join a program that called itself an "internet mall" and purchase a package of
goods and services such as internet mail, and that the company offered "significant commissions" to consumers who purchased and
resold the package. The FTC alleged that the company's program was instead and in reality a pyramid scheme that did not disclose
filiates material that allowed them to scam others.[48]
that most consumers' money would be kept, and that it gave af

WinCapita was a scheme run by Finnish criminals that involved about 100 million. The scheme started in 2005.

In early 2006, Ireland was hit by a wave of schemes with major activity in Cork and Galway. Participants were asked to contribute
20,000 each to a "Liberty" scheme which followed the classic eight-ball model. Payments were made in Munich, Germany to skirt
Irish tax laws concerning gifts. Spin-off schemes called "Speedball" and "People in Profit" prompted a number of violent incidents
and calls were made by politicians to tighten existing legislation.[49] Ireland has launched a website to better educate consumers to
pyramid schemes and other scams.[50]

On 12 November 2008, riots broke out in the municipalities of Pasto, Tumaco, Popayan and Santander de Quilichao, Colombia after
the collapse of several pyramid schemes. Thousands of victims had invested their money in pyramids that promised them
extraordinary interest rates. The lack of regulation laws allowed those pyramids to grow excessively during several years. Finally,
after the riots, the Colombian government was forced to declare the country in a state of economic emergency to seize and stop those
schemes. Several of the pyramid's managers were arrested, and are being prosecuted for the crime of "illegal massive money
reception."[51]

The Kyiv Post reported on 26 November 2008 that American citizen Robert Fletcher (Robert T. Fletcher III; aka "Rob") was arrested
by the SBU (Ukraine State Police) after being accused by Ukrainian investors of running a Ponzi scheme and associated pyramid
scam netting US$20 million. (TheKiev Post also reports that some estimates are as high as US$150 million.)

In the United Kingdom in 2008 and 2009, a 21 million pyramid scheme named 'Give and Take' involved at least 10,000 victims in
the south-west of England and South Wales. Leaders of the scheme were prosecuted and served time in jail before being ordered to
[52]
pay 500,000 in compensation and costs in 2015. The cost of bringing the prosecution was in excess of 1.4 million.
Throughout 2010 and 2011 a number of authorities around the world including the Australian Competition and Consumer
Commission, the Bank of Namibia and the Central Bank of Lesotho have declared TVI Express to be a pyramid scheme. TVI
Express, operated by Tarun Trikha from India has apparently recruited hundreds of thousands of "investors", very few of whom, it is
reported, have recouped any of their investment.[53][54][55][56][57] In 2013, Tarun Trikha was arrested at the IGI Airport in New
Delhi.[58]

BurnLounge, Inc. was a multi-level marketing online music store founded in 2004 and based in New York City. By 2006 the
company reported 30,000 members using the site to sell music through its network. In 2007 the company was sued by the Federal
Trade Commission for being an illegal pyramid scheme. The company lost the suit in 2012, and lost appeal in June 2014. In June
[59]
2015, the FTC began returning $1.9 million to people who had lost money in the scheme.

In August 2015, the FTC filed a lawsuit against Vemma Nutrition Company, an Arizona-based dietary supplement MLM accused of
operating an illegal pyramid scheme. In December 2016, V
emma agreed to a $238 million settlement with the FTC, which banned the
company from "pyramid scheme practices" including recruitment-focused business ventures, deceptive income claims, and
unsubstantiated health claims.[60][61]

See also
Ponzi Scheme
Claims of Social Security in the USA as a pyramid scheme
Aman Futures Group
BurnLounge
The Cobra Group
Holiday Magic
Make Money Fast
Nouveau Riche (college)
Qnet
Success University

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The Fraudsters: How Con Artists Steal Y

our Money, Chapter 9, "Pyramids of Sand" I(SBN 978-1-903582-82-4) by
Eamon Dillon, published September 2008 by Merlin Publishing, Ireland

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