Pyramids

I’m sure I’m not the only one who is constantly surprised by how many people keep falling for pyramid schemes in all their shapes and sizes. I also know that most people who finally escape the clutches of such schemes then spend ages wondering how they could have been so stupid.

Just this month a Ponzi scheme, a distant relative of the pyramid scheme was uncovered in South Africa. Seemingly very similar to the recent Bernard Madoff scandal in the USA, this scheme was allegedly run by a guy called Barry Tannenbaum. According to various sources Tannenbaum would ask for investments from his victims and promised returns of over 200% per year. In fact the returns the investors received came directly from the investments made by later investors. That’s the essence of a Ponzi scheme. You offer fantastic returns to victim A, take his money, keep it, make the same offer to victim B, take her money and give some of it to victim A. Then do the same with victims C, D and E, giving each one some of the money from the people that follow them. Of course you keep a lot of it for yourself. As you can imagine it soon becomes increasingly difficult to find victims as the numbers needed to keep the scam going get bigger and bigger. Sooner or later victim A will come back and demand more returns but there’s no longer enough money to go around. That’s when it all falls apart and you skip the country and begin a new career as a fugitive from justice.

In the Tannenbaum case one poor fool apparently invested R100 million, presumably not his own. The papers estimate the total “investment” might have been as much as R10 billion.

Of course not everyone falls for such massive schemes, the smaller ones are the ones that get you and me, those of us who don’t have R100 million to throw away. We fall for the pyramid schemes, or more likely, their distant cousins, the Multi Level Marketing schemes. These are just as simple as a Ponzi scheme but always operate at a smaller scale. Almost always these involve you being “recruited” into a scheme that offers you some perceived benefit. It might be cheap “lifestyle” products, educational material or weight-loss or health products.

However, what they are really offering you is an “opportunity”. Not an opportunity to buy their products, that’s just a cover story. The real opportunity they are selling you is the chance to make money by recruiting other people below you. The opportunity is to get a bonus based on the sales of the people beneath you. The person who recruits you also recruits others, each one recruits people beneath them and each of those people recruits other and so on. If each recruit in turn recruits several others you get a pyramid-shaped structure. The trouble is that very quickly the number of potential recruits is exhausted. At best the lower portions of the pyramid just end up buying products from the levels above them. Each level above them takes a cut of the money they spend. The vast proportion of the recruits end up losing money.

In evidence in a court case in the UK a couple of years ago when the British authorities tried to put Amway out of business, Amway were forced to admit that almost three quarters of their “distributors” made no money at all from the scheme. Only 37 distributors out of a population of 60 million made as much as the average wage from Amway.

However, and I must be honest, Amway don’t bother me that much, not nearly as much as some of the other MLM schemes. What bothers me is organisations like the ridiculously named Success University. Let’s start with the basics. They are not a University. If I call myself a doctor when I’m not actually a doctor then I’m a criminal. If I call myself a police officer when I’m not really a police officer then I’m a criminal. If I call my company a university when it’s not really a university then what am I?

Success University’s cover story is that it sells motivational and educational material. In fact what it wants is your money and for you to recruit other victims to give them their money as well. Success University is an illegal pyramid scheme. That’s not just my opinion, it’s the opinion of the Bank of Namibia who have declared SU illegal in Namibia. They should be illegal here as well.

Success University is not, unfortunately, alone. This week I was warned about a new pyramid scheme called “Elite Activity Resurrected”. This scam describes itself as “The World's first Interdenominational Belief System on the Internet”. When you dig through the various quotes from the Bible and the endless pseudo-religious waffle you get to the basis of the scam. You “donate” money to someone, recruit others beneath you who donate via you, each level takes a cut, the original founders make a killing and the innocent sheep at the bottom of the pyramid are fleeced.

The best clue I found regarding the true nature of this scam is on their website. They say that of you want to join you “will need to contact the participant who invited you into our belief system to become a participant yourself”. These crooks claim to be in Botswana already.

Consider yourself warned. The people behind pyramid schemes will come up with a variety of stories to persuade you to join their scam. Be constantly sceptical, don’t believe anyone who offer you wealth and happiness until you’ve done your homework. If you need advice you know how to get in touch with us.