Pyramid schemes make money by recruiting businesses or people rather than by selling real and legitimate products or services – even if a product or service is involved.
In a pyramid scheme, participants are often asked to make a payment, known as a 'participation payment', to join and are promised payments for recruiting other investors or new participants.
The two payments often associated with a pyramid scheme are:
These recruitment payments often help define a pyramid scheme – it may be the only or main reason for new members to join. The 'payment' involved could equally be a financial or a nonfinancial benefit, given either to the new participant or to someone else.
These schemes inevitably collapse and new members can lose a lot of money. It is illegal for any business or person to participate in, or persuade others to participate in a pyramid scheme.
A court can consider several factors when identifying a pyramid scheme. The Australian Consumer Law (ACL) does not limit the matters a court can consider however the following characteristics can be used to help identify a pyramid scheme:
Criminal and civil penalties apply under the ACL reference: sections 44 and 46. Aside from incurring fines, you are likely to lose your money and possibly the friends you recruit into the scheme.
Some examples of pyramid selling schemes are:
This Scheme uses ‘tables’ in a pyramid structure with levels escalating from Diamond Miners to Diamond Cutters to Diamond Polishers and, at the peak of the pyramid, a Diamond Collector. Promoters claim that when a participant reaches the Diamond Collector level they will receive a diamond and a cash payment, which they can use to reinvest into the scheme.
CDT resembles Treasure Traders International, another pyramid scam promoting precious stones such as emeralds, sapphires and rubies which collapsed in 2006 in Canada leaving thousands of people out of pocket and was also found by the High Court in England to be in breach of the United Kingdom’s Fair Trading Act, 1973.
Required participants to photocopy a letter and send it to 200 other people. The letter contained a distribution list of five names and addresses. The participant was required to send $10 to the name appearing on the top of the list, then cross off this name and place their name and address at the bottom of the list before copying it and sending it to 200 people.
Consumers received a welcome kit and 350 points to purchase CDs and CD ROMs (of dubious value). Participants induced two other people to join the scheme with more commission being earned for more referrals.
Other pyramid schemes go by names that you may recognise such as: Joker 88, Golden Phoenix, Cash Daily, David Stein Mailing Scheme, Future-Gen Pty Ltd, Future Strategies, Concorde Game, Edward L Green, They need you!, Global Interactive Investment Club, Mega$net, Power of 8, Pray for World Peace, Self Help Co-operation Programme, Treasury 2000 and many more.
While some of these get-rich-quick schemes use the mail to get their message across, others adopt different tactics, such as recruiting friends and family; placing their offers on electricity poles and relying on casual passers-by to become involved. They desperately need new recruits – otherwise, they will sink without trace.
So, what is your best defence against scams like this? Don’t respond! Don’t act on them! Don’t provide any of your personal or financial details. Even better – don’t open the letter at all.