Illegal Pyramid Schemes

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There must be differentiated between an illegal pyramid scheme and a form of marketing, which has a pyramid like structure.

An Illegal Pyramid scheme is a system where people buy into a system whereby they will be paid out upon the introduction of new members into the scheme. Typically pyramid schemes receives money in the form of an admin or joining fee from a recruit and pays money out to the person who recruited the newly enlisted person.

In some instances a pyramid schemes sell products, however such products are not of great value as the incentive of the scheme is the introduction of new members and it is out of their funds that previous members of the scheme are paid.

This system is very similar to an MLM or Multi Level Marketing initiative, however the difference is that the compensation for the sale of products to new members or introducing new people is made from profits generated from the sale of products and not simply from the funds introduced by the new members.

In the Illegal Pyramid scheme structure no new money is generated in the form of profit from sales and the existing captital is simply distributed to existing participants upon the introduction of new members.

A Ponzi Scheme is a type of illegal pyramid scheme. This is such a plot, because in the Ponzi scheme, investors are paid out of new investor funds and not out of profits generated. This is in line with any other illegal pyramid scheme, where “Peter pays Paul” i.e. repayments are paid from new capital and not from profits generated. This is one of the defining characteristics of any illegal pyramid scheme.

The difference between a Ponzi scheme and a classical illegal pyramid is that in the former, payments are guaranteed from an initial investment regardless of any further action taken by the investor. The claim of how the money is generated may or may not be false, but the promise of the returns on the initial outlay is simply too good to be true.

The illegal pyramid scheme pays out only on the recruitment of new investors. Both these types are illegal in that in both cases the venture is technically insolvent from the very start, in that no new wealth is created and repayments are generated solely from the money generated from the mobilization of new participants into the system.

Types of chain letters and illegal-matrixes follow the same structure as illustrated above. Money is being introduced on a hierarchical structure, whereby the up-line is paid on a proportional basis by the money introduced by the down-line. Similarly all payouts are sourced from new partakers and the money is simply moved between the participants. These schemes fall under the same category of an illegal pyramid scheme and are equally unlawful.

Characteristics of illegal Pyramid schemes

No product or product of little value.
Has a hierarchical, pyramid shaped structure
The incentive to recruit members is not the sale of a product of value.
The main source of income generated is from the introduction of new members.

Why pyramid schemes never work in the long run

There are three possible outcomes to an ongoing pyramid scheme.

Once the principal of the scheme has made enough money to his satisfaction, he disappears with the investor funds and is no longer contactable. This would amount to theft, amongst other legal charges such as fraud etc.
The weight of the scheme causes it to collapse. This would be possibly as a result of the new investor market being saturated and therefore existing investors can no longer be paid.
The authorities are called in and they put a stop to the scheme.

What laws are applicable?

The following entities could act as complainants in a criminal process: