Ponzi scams, pyramid cons and multi level marketing
‘Work from home and make 4,000 a day! No experience necessary!’ ‘Low-risk, high-returns. Guaranteed!’ ‘Make up to 5,000 a day just meeting people!’
Money makes people smile.
Sound familiar? The sudden explosion of Get-Rich-Quick schemes that have spread over the Internet have made it a billion dollar industry. In society’s impatience to get ahead and move up, some have taken the opportunity to exploit the rat-race. Thousands of people have been cheated out of millions of dollars, time and effort; relationships have been severed and friendships broken as a result of the cunning and masterful tactics of marketers and conmen, who prey on the one of the fundamental characteristics of humankind: survival.
But whilst dozens of companies are involved in these schemes illegally, they have also tarnished the reputation of the few legitimate businesses that offer legitimate career opportunities. But who can tell? Quite simply, if it sounds too good to be true, then it probably is.
The Ponzi Scheme – A Lost Investment
The 30% Interest Investment!
How’s this for a quick buck? – I take $1,000 from you, and promise you $1,200 in three months (12 weeks). That’s an unheard-of interest rate of 80% p.a. Interested? Read on.
In one week’s time, I convince your friend to do the same. I now have $2,000. Word gets around about a ridiculously easy way to make money overnight. I collect $20,000 from 20 investors.
When your money is due, I happily give you back $1,200. I keep my promise. You’re pleased. You invest again, also at the agreed quantum of 20% interest in three months’ time. I take $5,000 from you. My bank balance now = $20,000 – $1,200 + $5,000 = $23,800.
But then something goes wrong: unemployment spikes, and my ‘investors’ want their money back. Two have fulfilled the 3-month period. I give all the other 18 investors their deposits back, no interest. Bank balance is now $5,800. I give the last investor his due $1,200, and avoid your calls. Why?
Because my bank balance now stands at only $4,600 – you’ve lost $400… if I’m nice enough to return it all. Otherwise, you’d have been relieved of all $5,000, and I’d be on the next flight to Phuket.
That was a best-case scenario, one in which I was kind enough to give back investors’ deposits, leaving them (for the most part) untouched. Ordinarily, I would have been using my bank balance’s funds to support myself, eating into your deposit. A sudden flood of withdrawals from the scheme would have resulted in losses for everyone. In fact, you’d probably never see me again as I take to the hills.
With the Ponzi scheme — also loosely-termed Deposit-Taking Schemes — money appears to be made because of large funds that will support individual ‘matured’ withdrawals. Early investors are paid with the money of later investors, with interest. But it always runs at a deficit, and should all participants want to get their money back immediately, the scheme crumbles. It lasts as long as people continue to join and there is a constant inflow of money… or as long as the operator sticks around.
Either way, you rarely see your dosh again.
The Pyramid Scheme – Get In On The Ground Floor
Don’t want to work anymore? Become a member of my little company, and if you work hard, you’ll be able to hang your boots up and retire in a year. Sounds too good to be true? I’ll prove it.
I’m recruiting ten ‘members’ as part of my organisation. You each pay me a ‘nominal’ $1,000 joining fee. My bank balance is now $10,000.
In order to benefit from my idea, my ten members (‘downliners’, in marketing-speak) have to each find ten members to join as their downliners. You get $500 for each member signed up as a commission. I get the other $500.
You all succeed, and your bank balances now stand at $5,000 each. You’ve made a cool $4,000; I, on the other hand, have just topped by my bank balance by another 100 x $500 = $50,000. I have now made a profit of $60,000 from my little company. You are happy; I am happy. Now the real fun starts.
Your downliners (the third generation) have to each find ten members each. By some miracle, they all succeed, recruiting 1,000 members collectively, each paying the $1,000 fee. $500 goes to your downliners for their hard work; $250 to you, as their ‘upliners’, and the other $250 to me. My company now has 1,111 people involved. Bank balances now stand at: you (2nd level) = $30,000; your members (3rd level) = $5,000; Me (1st level) = $310,000. You’re positively ecstatic. So are your members. I encourage all of you to tell your friends and family to ‘get in on the ground floor’, because we’re going to keep growing and growing. (Keep in mind that I have done nothing since I recruited you, except maybe play computer games).
You scour the city you live in, approaching everyone you know – friends, family and distant relatives. Many agree, and you ‘refer’ them to your downliners’ downliners (the 4th level in my plan). But there are now 1,000 new members looking for a further 10,000 members.
If the newly-recruited 1000 manage their momentous task, I’d have 11,100 members; then 111,100 members; then 1,111,100. My little company would be bigger than many governments. But that won’t happen.
Instead, my scheme begins to fall apart at the 4th level, and people quit left, right and centre. The market is saturated. But why should I care? My bank balance, after this latest wave, stands at $435,000.
Is it legal? Take the test!
This is a test devised by Jon M. Taylor, PhD of the Consumer Awareness Institute of the US. Before taking part in any scheme which promises unlikely returns, you should ask yourself these questions:
- Deposit – If you’re asked to put anything other than cash down, sound the alarms. This is an almost positive sign of something being amiss.
- Interest – Anyone who claims that they can make your money earn interest at rates much higher (20% and up) than banks (usually between 4 – 8% p.a.) falls under suspicion.
- Opportunity – Were you asked to participate in a scheme because of the great products or because of the ‘opportunity’? Any company or person that puts opportunity before product is suspect.
- Product – If there is product-selling involved, then carefully scrutinise the products and ask yourself if they’re really worth the price-tag. If you think they’re over-priced, start worrying.
- Compensation – Do some calculations, and see if you can make a respectable income by just selling the products alone WITHOUT having to recruit downliners. If it’s paltry, then it’s not genuine.
- Income Disclosure – People will hype the incomes of certain distributors as an incentive for you to join. Make them prove it.
- Credibility – Many people use fantastic testimonials to lure you in. Beware, as many of these testimonials are paid for. Verify them first.
- Support – Are you expected to pay for company training material (audio/video tapes, manuals etc.) or does the company sponsor them. If you have to pay, that’s just another way that they make money.
- Gut – The best test is to ask yourself if you feel pushed or pressured. Offended? A good opportunity will not disappear. Don’t fall for the ‘get in on the ground floor’ trick.
