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FINANCIAL INTELLIGENCE CENTRE (FIC)

Web address: www.fic.na

PYRAMID SCHEMES

ISSUED: July 2018

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1. Background:

The Financial Intelligence Centre (FIC) has noted with great concern innocent members
of the public increasingly becoming targets of fraudulent investment schemes presented
in the form of “Pyramid” schemes, also known as illegal financial schemes1.

Pyramid schemes are fraudulent businesses where participants are paid to recruit others
to participate. Pyramid schemes are so named because of the hierarchical structure that
is formed by their investors or recruits. These schemes will typically begin with initiators
recruiting a number of investors who are then expected to recruit a number of new
investors and so this chain continues.

Members who join the scheme earlier may benefit from the membership fees that has
been paid by the new members they recruited. As the scheme expands, the originator
and participants at the top of the pyramid generate more revenue. However, when the
schemes get too large and cannot raise enough revenues from new investors to pay
earlier investors or when the pool of recruits is depleted, the scheme eventually collapses.

A successful pyramid scheme combines an illegitimate, but seemingly credible business

Pyramid Schemes are often broken into two categories:

1. Product based Pyramid schemes: Participating persons not only contribute funds
to a person(s) identified at the top of the pyramid but are also encouraged to sell
products associated with the person(s) at the top of the scheme. These product based
pyramid schemes are often disguised as “business opportunities”; and

2. Non-product based Pyramid schemes: Participants contribute funds only to a

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Banking Institutions Amendment Act, 2010 (Act No. 14 of 2010)

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 existing members to keep recruiting new members as that results in more revenue
from various forms (membership fees etc.).

Although pyramid schemes are often confused with Multi-Level Marketing (MLM), they
are not the same. Legitimate MLM involves recruiting persons to sell products or services
that actually have some intrinsic values. Profits made are based on sales of such products
or services and not on the number of people recruited to join. Although members may be
encouraged to recruit others to join as salespeople whose sales add to the recruiting
person’s revenues, such recruited persons may choose to only sell the products directly
to customers without recruiting other investors.

2. How do Pyramid schemes operate?

Pyramid schemes may be difficult to recognize immediately because they come in many
different forms. However, they all share one principal characteristic, namely: They
promise consumers or investors large profits based primarily on introducing new
members into the scheme, not based on profits from any real investment or real sale of
goods to customers.

The perpetrators make use of various advertisement platforms to promote their schemes
such as social media, newspapers, radios, home meetings, seminars and other online
networks promising high returns. To enhance credibility, the schemes usually produce
illicit referrals, testimonials and information to lure their victims. Below are some of the
red flags to look out for:

 Pyramid schemes place more emphasis on recruiting people rather than on selling
their products;

 Pyramid schemes offer money as returns for recruiting other people into the schemes.
This money can come as commission from the sale of a starter kit or as a recruitment
bonus;

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 Pyramid schemes charge significant startup costs for joining and usually non-
refundable membership fees;

 Pyramid schemes promise high returns in a short period of time. The involved operator
of the scheme may use funds from new investors to pay existing or earlier investors.
To new investors in particular, the operator promises high rates of return within a very
short period of time;

 Fraudsters involved in pyramid schemes use ‘hard-sell’ techniques to pressure their

 Pyramid schemes usually involve business/investments that are not registered with
the relevant authorities.

3. How do I protect myself from Pyramid schemes?

 It is crucial to know whom you are dealing with and understand any investment before
making any commitments or payments;

 Whenever you are considering any type of investment, always remember: “if it seems
too good to be true, it most probably is.” Investments yielding higher returns typically
involve high risks. Be highly suspicious of investments with high returns but minimum
risks for losses. Some Pyramid schemes even guarantee investment returns without
opportunities for losses;

 Members of the public are warned to be very cautious of suspicious and unsolicited
telephone calls, emails, social media adverts and other means of communication
offering any form of investment, from a person/institution not well known in the market
for offering investment services;

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 Before committing money, conduct research on the broker, financial advisor,
investment advisor etc. by contacting the Namibia Financial Institutions Supervisory
Authority (NAMFISA) or the Bank of Namibia to verify if the investment company or
associated professional(s) are licensed to operate;

 Try to obtain written copies of all available company information including audited
financial statements. Ask those with the necessary know-how to confirm or verify
legitimacy and reliability of such information, in as far as it can give you assurance on
your potential investment; and

 Beware of any investment scheme that allows five or more levels of distributors to
collect commissions on a single sale.

4. What to do if you become a victim of a Pyramid scheme?

 Report the fraud immediately to the Namibia Financial Institutions Supervisory

 If you think you are actively participating in a pyramid scheme, break off all contact
with the scheme immediately and report same to the authorities cited above. Do not
invest any more funds until you have received guidance from such authorities;

 If you have provided the fraudsters your bank account details, alert your bank
immediately. If any, instruct the bank to stop facilitating any direct
payments/deductions from your account to such schemes;

 Keep any written communications you have received from the pyramid scheme. They
may help law enforcement authorities;

 Be aware that you will likely be a target for other frauds as scammers often share
details about their victims to such other fraudulent schemes. As such, other fraudulent
schemes will reach out to you, using different identities, to enable the commitment of
further frauds against you; and

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 Beware of the fraud recovery fraud. This is when fraudsters contact people who have
already lost money through fraud and claim to be law enforcement officers or lawyers.
They advise the victims that they can help them recover their losses, but they request
a fee.

Pyramid schemes are illegal because there is mathematical certainty that the last people
to enter the scheme will lose the funds they invest. Therefore, minimizing the occurrence
of these schemes reduces the chances of laundering proceeds from such activities in the
financial system. It is against this background that the FIC presents this guidance to
caution and urge members of the public to be mindful and refrain from participating in
these illicit financial activities.

REMEMBER
All legal financial service providers, inclusive of those who can generate returns on
investments are registered and licensed by NAMFISA or the Bank of Namibia. Scammers
generate funds by applying pressure tactics that forces unsuspecting persons into making
hasty decisions influenced by great promises. Therefore, exercise extreme caution and
verify the legality and status of the involved parties before engaging them. Always contact
NAMFISA or the Bank of Namibia if in doubt about the service, legitimacy or
licensing/registration of persons who appear to be offering activities which relates to
pyramid schemes.