Helpful tips in detecting pyramid schemes
Written and accurate as at: Nov 10, 2016 Current Stats & Facts
Have you ever sat around the dinner table with a friend or family member or attended an ‘investment’ conference or seminar and repeatedly heard someone say, “Now, this is not a pyramid scheme” when talking about an investment opportunity followed by the utterance of these phrases, “a one-off participation payment to join” and “an ongoing recruitment payment, when you recruit others to join”? Be careful, as this investment opportunity may have the hallmarks of a pyramid scheme.
Pyramid schemes are illegal schemes* under the Australian Consumer Law.
In a nut shell, a pyramid scheme relies on the recruitment of new members so that individuals at the higher levels of the pyramid earn money. In some instances, there are products or services that are sold to make the scheme look legitimate, but these tend to be grossly overpriced compared to equivalents at an ordinary retailer and aren’t necessarily related to the returns that you are being promised – the main source of income is the recruitment of members, rather than the sale of products or services themselves and most pyramid schemes typically suggest you sell to, and recruit, people you know well.
The reality of pyramid schemes is that they tend to be heavily geared towards rewarding the very top of the pyramid at the expense of everyone below – part of the reason for this is that there needs to be an endless supply of members for the scheme to keep operating, which can sometimes be unrealistic the further down the pyramid you go.
In 2015 alone, 259 complaints were lodged with the Australian Competition and Consumer Commission (ACCC) regarding pyramid schemes, with a total of $951,721 reportedly lost. Although a small piece of the ‘scam pie’ according to the ACCC statistics’ ($83,770,733 reportedly lost in 2015 to all scam types including unexpected money, unexpected winnings, fake charities, dating and romance, identity theft, threats and extortion), it still pays to be informed about the dangers of pyramid schemes.
So, what are some warning signs to look out for if you come across an investment opportunity that just looks too good to be true? Here is a list of a few considerations that we have put together to help you assess the legitimacy of an investment opportunity:
- Watch out for these indicators:
- The promoter explains that the investment is a 'business opportunity' whereby you make money through the recruitment of new members.
- You hear the words, "This is not a pyramid scheme".
- The investment promises a new type of earning.
- There is a large up-front fee involved in joining the investment.
- The asking of questions is discouraged by the promoter and group.
- The training costs (if applicable) may disguise income from recruiting. Furthermore, distributors may be required to purchase expensive sales aids and/or attend training seminars/conventions.
- Any documents distributed by the promoter/group may misrepresent that the scheme is legal and has been approved by the relevant authorities.
- There might be some goods and/or services to make it look legitimate but consider their real value. For example, are they being sold at a reasonable price and whether they are something that there is consumer demand for.
- Do your homework:
- Rule of thumb - if it simply seems too good to be true, it probably is.
- Do some research on the internet to see if there have been any complaints about the business.
- Consult Scamwatch (ACCC) or your relevant state or territory fair trading or consumer affairs agency as they often have a list of businesses that have had a complaint made against them and/or had a court ruling identifying them as pyramid schemes.
- Ask friends and family for their opinion (however, if they are already involved, be careful as they could be swayed towards the need to recruit new members).
- Consider seeking professional legal and financial advice.
Importantly, if you believe that you've been asked to join a 'business opportunity' that looks like a pyramid scheme, make contact with Scamwatch (ACCC) or your relevant state or territory fair trading or consumer affairs agency.
*Participating in or promoting a pyramid scheme is illegal. Individuals face fines of up to $220,000 and corporations face fines of up to $1.1 million.
