Illegal Pyramid Schemes
There must be
differentiated between an illegal pyramid scheme and a form of marketing, which has a pyramid like
An Illegal Pyramid scheme is a system where
people buy into a system whereby they will be paid out upon the introduction of new members into the scheme.
Typically pyramid schemes receives money in the form of an admin or joining fee from a recruit and pays
money out to the person who recruited the newly enlisted person.
In some instances a pyramid schemes sell
products, however such products are not of great value as the incentive of the scheme is the introduction of new
members and it is out of their funds that previous members of the scheme are paid.
This system is very similar to an MLM or
Multi Level Marketing initiative, however the difference is that the compensation for the sale of products to new
members or introducing new people is made from profits generated from the sale of products and not simply from
the funds introduced by the new members.
In the Illegal Pyramid scheme structure no
new money is generated in the form of profit from sales and the existing captital is simply distributed to existing
participants upon the introduction of new members.
A Ponzi Scheme is a type of illegal pyramid
scheme. This is such a plot, because in the Ponzi scheme, investors are paid out of new investor funds and not out
of profits generated. This is in line with any other illegal pyramid scheme, where “Peter pays Paul” i.e.
repayments are paid from new capital and not from profits generated. This is one of the defining characteristics of
any illegal pyramid scheme.
The difference between a Ponzi scheme and a
classical illegal pyramid is that in the former, payments are guaranteed from an initial investment regardless of
any further action taken by the investor. The claim of how the money is generated may or may not be false, but the
promise of the returns on the initial outlay is simply too good to be true.
The illegal pyramid scheme pays out only on
the recruitment of new investors. Both these types are illegal in that in both cases the venture is technically
insolvent from the very start, in that no new wealth is created and repayments are generated solely from the money
generated from the mobilization of new participants into the system.
Types of chain letters and illegal-matrixes
follow the same structure as illustrated above. Money is being introduced on a hierarchical structure, whereby the
up-line is paid on a proportional basis by the money introduced by the down-line. Similarly all payouts are sourced
from new partakers and the money is simply moved between the participants. These schemes fall under the same
category of an illegal pyramid scheme and are equally unlawful.
of illegal Pyramid schemes
- No product or product of little
- Has a hierarchical, pyramid shaped
- The incentive to recruit members is not
the sale of a product of value.
- The main source of income generated is
from the introduction of new members.
Why pyramid schemes never work in the long
There are three
possible outcomes to an ongoing pyramid scheme.
- Once the principal of the scheme has
made enough money to his satisfaction, he disappears with the investor funds and is no longer contactable. This
would amount to theft, amongst other legal charges such as fraud etc.
- The weight of the scheme causes it to
collapse. This would be possibly as a result of the new investor market being saturated and therefore existing
investors can no longer be paid.
- The authorities are called in and they
put a stop to the scheme.
What laws are
The following entities could act as
complainants in a criminal process:
- The Reserve Bank
- The Receiver of
could be laid
- Reckless Trading
- Forgery and Uttering
- Tax Evasion
- Contravention of the Gambling
- Contravention of the Companies
- Contravention of the Banking act
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