Pyramid Schemes are Fraud

August 20, 2021

The following is special feature from the Consumer Council of Fiji in a bid to educate and create awareness on pyramid schemes. Many Fijian consumers may be unfamiliar with what pyramid schemes are, how they work, how to recognise them and why people/you should be extremely wary of being recruited to join one. While these schemes may be relatively new to Fiji, they are already a popular means used internationally to fleece/swindle money from unsuspecting consumers.

Investment scams have been on the rise in the last few months. You, or someone you know, may have seen or received an email, a phone call, a message on social media or recommended by a family or friend to invest in a product or property and to send or gift money in order to get sky high returns. The worldwide use of the internet and people’s desperate need to get rich quickly has made it easier and faster for fraudsters to target a wider range of people. The term fraud refers to an intentional deception by a person, referred to as a fraudster, for his/her own personal gain. The deception arises because the fraudster sells you a product or an idea that is not accurate and, in most cases, totally different from what you think you are getting. Fraud is a crime in Fiji and defrauding people for money or valuables is a common purpose of fraud. Many in Fiji would have already been approached or are considering a business opportunity that involves investing money and actively encouraging family and friends to recruit other people to do the same. This type of fraud is known as pyramid schemes.

Case Study

This week, the Consumer Council of Fiji was approached by an individual residing in West. She revealed to the Council that she was lured by an unknown person to participate in a community gifting circle. Unaware that it was a pyramid scheme, she complied in hopes of getting high returns in a short period of time. In just a few weeks, she was made an Admin of the gifting circle. As per her training by the anonymous individual, she started recruiting people in order to keep the pyramid afloat however, over the past few days her new recruits failed to recruit new people, as a result, the pyramid started collapsing. Seeing this, people started to pull out of this scheme and demanded a refund – which is now impossible due to; (1) its illegal nature; (2) it is impossible to track the trail of cash flow.

Pyramid schemes are difficult to recognise at first because of their complexity, they often masquerade as legitimate businesses however, the general structure and manner in which they operate and allegedly share profits are a clear indication of their true nature.

As more and more consumers look to invest their money in profitable businesses, it is important that they are fully aware of unscrupulous business practices and recognise the signs of dishonest business practices.

What is a pyramid scheme?

A pyramid scheme is a business model that makes money by recruiting new members to join the scheme. These new members are required to pay a fee as low as $20 to as high as hundreds of dollars to join the scheme and in return they are promised sky high returns.

In the pyramid scheme, a few top-level members recruit newer members, who pay upfront costs to those who enrolled them. This is the major revenue earner. As newer members in turn recruit underlings of their own, a portion of the subsequent fees they receive is also kicked up the chain

Why is it called a pyramid scheme?

According to the New York States Office of the Attorney General, the scheme is called a “pyramid” because at each level, the number of investors increases. The small group of initial promotors at the top require a large base of later investors to support the scheme by providing profits to the earlier investors.

Example of pyramid schemes

The following is an example of how the scheme works.

Donald sits at the top of the scheme. He recruits 10 members and these members must pay him membership fees. These ten members then recruit 10 more people each – gaining a further 100 people. These 100 new members must also pay membership fees. A portion of these membership fees is paid as commission to the 10 recruiters and then kicked further up the pyramid. These 100 new members are then tasked with recruiting a further 10 members each, making a commission from each new member recruited. This is then repeated at all levels of recruitment where a percentage of membership fees is shared through the pyramid. 

Why are pyramid schemes bad?

The reason that pyramid schemes are not a wise investment is because the business model is unsustainable. Theoretically, consumers will be able to make more money as they receive cash from the recruits below them. But in practice the prospective member pools tend to dry up over time. By the time a pyramid scheme invariably shuts down, the top-level operatives walk away with loads of cash, while the majority of lower – level members leave empty – handed. It should be noted that because pyramid schemes heavily rely on fees from new recruits, the vast majority do not involve the sale of actual products or services with any intrinsic value.

Community gifting circles

 Community gifting circles are another disguise which people are using or orchestrate pyramid schemes in Fiji. Gifting circles are pyramid schemes and participating in them is illegal. In many instances, the person asking you to join could be someone you know who is a member of a group that is active on the Internet or in certain circles. Initially, you may not be told that you will have to recruit more members to make a lot of money. The person will begin by drawing you in with a project you might find interesting and then tempt you with the possibility of making a quick profit.

Gifting circles can take any number of forms devised by ill-intentioned promoters. For example, a circle could appear to be an investment or a community project, or offer you the chance to be your own boss. These circles go by many names, such as gift circle or women’s financial circle to name a few.

Despite promoters’ claims, and even if a group has a catchy name that provides a great cover, gifting circles are still pyramid schemes.

Be cautious of the following scenarios:

• Ask where the amounts you could receive will come from. If revenues are based only on member recruitment, that is illegal. It is really a pyramid scheme. Not only is it against the law to set up this kind of scheme, it is also against the law to participate in it!

• You have been promised a big profit for little or no effort. It is too good to be true.

• You may be encouraged to use a fake name to participate. However, using your real name does not mean that it is not a pyramid scheme.

• You are asked to pay in cash or direct transfer via online modes.

• You are strongly advised not to miss out on this opportunity. Your emotions are being manipulated.

Council tips

• To reduce your chances of falling for this type of fraud, do not be taken in by fancy words or by web testimonials or offers that seem just too good to be true. If you have any doubts, contact the Council or regulatory authorities.

• Be careful if someone promises you money to recruit new people, whether the fraudsters refer to them as investors, partners, associates or by some other term.

• The people who orchestrate pyramid schemes and those who participate in them may be prosecuted.

• Be cautious if you are guaranteed high, risk-free returns.

• Do not be fooled because someone told you that it is legal, that a loophole in the law makes the operation legal, or even that a government official has approved it. All of these statements are false! The only way something can be excluded is if it is gazetted.

• Always check whether the person and firm offering you an investment are authorized to do so. When in doubt, contact the Council on toll free number 155 or email complaints@consumersfiji.org 


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