CAI

Consumer Awareness Institute

Non-profit Corporation

What are the various types of pyramid schemes – and what harm do they do? 

 INTRODUCTION

     A pyramid scheme is a means of transferring money from duped investors at the bottom of a pyramid to those at the top, who initiate the recruitment of an endless chain or pyramid of participants. Pyramid promoters promise substantial income to those who “work the system,” but it is considered by law enforcement in most jurisdictions in the U.S. to be an unfair and deceptive practice because of the mathematical certainty that approximately 90% or more will always be in a losing position at the bottom – whether it collapses on its own, is shut down by authorities, evolves into another program, or moves on to another area.
     While it is true that in most legitimate businesses, entrepreneurs lose money or eventually quit the business, the odds of failure are not guaranteed. Success is dependent on market forces and skill and the amount of time, money, and effort invested in the enterprise. However, in an illegal pyramid scheme, the more one invests in the enterprise, the more one loses – with the notable exception of those at the top of the pyramid, which are usually the first ones who entered into a given market. Success is dependent on time of entry and/or on willingness to aggressively recruit and deceive a downline of participants into believing the program is a legitimate enterprise.
     Pyramid schemes come in many forms and with many disguises, including:

 1. NAKED, NO-PRODUCT PYRAMID SCHEMES

     Participants buy into the scheme and move up four or five levels towards the top by recruiting others, who must do the same. The top person pockets all the money and then the next ones in line move up. The originator may move on to start another pyramid. Since no products are offered, these are easy to detect and are often shut down rather quickly by authorities. Losses are usually no more than a few hundred or a few thousand dollars and aggregate harm is minimal, so they seldom attract much attention by law enforcement or by the media. Included in this category are pyramid games, such as the “airplane game,” or pyramid parties, such as the “dinner party,” etc.

2. GIFTING OR AFFINITY SCHEMES

     These are essentially no-product pyramid schemes, but they are disguised as gifts given voluntarily in order to enter the pyramid. Promoters claim they are empowering women or churches or some other group of people striving to gain financial advantage. They do not fool most officials in law enforcement, and the media and the public often unite to support law enforcement in shutting them down. They have been successful in some states for brief periods of time, but seldom gain wide support. Aggregate losses to society are minimal.

3. REPORT CHAINS AND OTHER INEXPENSIVE PYRAMID SCHEMES PROMOTED OVER THE INTERNET

     These involve spamming the Internet with offers to participate in an endless chain of useful “reports,” which are usually readily available information that has been photocopied and added to the chain, much like a chain letter. The cost to participate is very small – usually under $20. While they are hard to control in a medium as unregulated as the Internet, actual financial losses are almost trivial. The real harm is their tendency to hog valuable computer space and time. Internet matrices are also pyramid schemes that cause more irritation to serious web surfers than actual financial harm to participants.

 4. PRODUCT-BASED PYRAMID SCHEMES

     These are the pyramid schemes of choice for at least 90% of promoters of schemes designed to enrich a few at the expense of a multitude of downline investors. Recruits are deceived into buying “potions and lotions” with claims of magical properties and powers – and promises of huge income for sharing these dandy items with friends and neighbors. Promoters exploit the dreams and social capital of participants, who almost never file complaints with authorities when they come up empty – which happens to approximately 99.9% of them. Because participants don’t complain (for reasons I will explain another time), law enforcement seldom does anything to contain them. These programs go by such terms as “multi-level marketing” (MLM), “network marketing,” “consumer direct marketing,” etc.
     Product-based pyramid schemes recruit aggressively until de facto saturation makes recruiting difficult in a given market, moving on to other markets or starting new “divisions,” thus maintaining themselves in a continuously revolving door of new recruits, each of whom buys or subscribes to products to get in on this “ground floor opportunity.” In order to succeed, one must first be deceived, then maintain a high level of deception, and finally go about aggressively deceiving others.
     Aggregate losses to society from product-based pyramid schemes total tens of billions of dollars every year and affect millions of victims world-wide. Approximately 99.9% of participants lose money – far higher than for no-product pyramid schemes. Most recruits participate on a modest scale, buying a few products and then quitting. Harm to more serious participants ranges from a few hundred dollars to loss of one’s life savings, career, or worse – breakup of families, even depression and/or suicide. The ones who get hurt the most are individuals who most enthusiastically embrace the promises and deceptions of the promoters and put their savings, credit, and whole heart and soul into this bogus “business opportunity of a lifetime.” If you had read the thousands of letters we have received from victims world-wide, you would not see MLM as a harmless home business – and certainly not a profitable one..

NOTE: Product-based pyramid schemes include Australian 2-up plans.  
     You are  required to forego commissions for the first two people you sell or recruit before you qualify for commissions. They go to your immediate "upline" instead (the person who recruited you if qualified; if  not, the person who recruited that person, etc). All who wish to earn commissions must go through the same procedure, thus perpetuating the chain. You advance by foregoing these two commissions. Your "pay to play" is the requirement to qualify for commissions, and all commissions go to the upline – which with an "Aussie 2-up" scheme is anyone who is qualified for commissions. Whether or not it is labeled MLM, at least 4 of the 5 Red Flags applies. For those seeking an income from such a scheme, the emphasis is clearly on compensation from recruitment.
     All other pyramid schemes past and present pale into insignificance in comparison with the predatory product-based pyramid schemes that have flooded the market in the USA and now are shamelessly plundering vulnerable populations overseas. Out of hundreds which are still operating, I have found only three that I could considerate legitimate - and that is only to the extent that they are not at all like typical MLM’s. To read evaluations of specific programs, go to –  http://www.mlm-thetruth.com/mlm_evaluations.htm
     So (tongue in cheek) – if you want to start a pyramid scheme, make a lot of money and walk away rich while escaping prosecution, this is the way to do it. Read “How to Start a Pyramid Scheme that Is Very Profitable (for the Founders) – and Get Away with It!” Go to -  http://www.mlm-thetruth.com/startpyramid.htm
     For research, consumer guides, evaluation of specific programs, and other information on MLM, go to – www.mlm-thetruth.com

– Jon M. Taylor, Ph.D., President, Consumer Awareness Institute, and Advisor, Pyramid Scheme Alert

E-mail: jonmtaylor@juno.com

Return to E-series index