Pyramid schemes: If it sounds too good to be true, that's because it is

If you are invited to invest money and can only recoup it by recruiting others to do the same, it's a scam

The Competition and Consumer Protection Commission (CCPC) is warning consumers not to engage with a possible pyramid scheme on social media.

Consumers have contacted the CCPC, saying that they’ve been invited to take part in what they suspect is a pyramid scheme. Social media posts encourage them to make an initial investment of €150 and then to recruit others.

Potential investors are told that once they recruit more people, they will move to the next tier of the model. This continues until the participant reaches the centre, where they supposedly make a return on their investment.

The scheme uses the image of a flower to illustrate how it works, while the posts themselves may refer to flowers or petals. The CCPC also reports that young people, particularly students, are being targeted.

Pyramid schemes offer individuals the opportunity to buy in. When you pay in, your money goes to those above you, and you recoup your money by recruiting others into the scheme. In theory, the further up the pyramid the participant, the more money they get.

As is the case in all pyramid schemes, however, the supply of potential investors runs out and it collapses. Almost everyone loses their money. 

Illegal schemes

This is why pyramid schemes are illegal and those who knowingly participate in them are liable for prosecution.

Under the Consumer Protection Act 2007, it is an offence for anyone to establish, operate, promote, or knowingly participate in such a scheme.

If convicted, you face a fine of up to €150,000 or five years in prison, or both.

Here’s an example the CCPC uses to demonstrate how a pyramid scheme works.

“Darren is recruited into a pyramid scheme by an old school friend, along with nine other people. They each invest €1,000 to join and find out, after they have handed the money over, that the only way to get it back is for each of them to recruit 10 more people. Darren and the other nine new recruits would need to convince no fewer than 100 other people to take part, and these hundred would need to convince 1,000 people, and so on. This very quickly becomes mathematically impossible to achieve and when the pool of potential people runs out, the pyramid collapses and those who have joined most recently lose everything.”

Despite the fact that there are regular public-awareness campaigns warning against them, pyramid schemes have proved remarkably resilient and keep cropping up every couple of years.

Pyramid schemes give every appearance of being fail-safe — for the uninitiated, at least — and they’re particularly insidious, because they rely on an existing network of family and friends.

When they fall apart — and they all fall apart — they wreck as many relationships as they do nest-eggs.

Part of the reason our laws are so strict in this area is that we were hit hard by a particularly nasty scheme back in 2006.

The Liberty Chart System and Speedball schemes swept Co Cork, Co Kerry, and Co Clare in the early part of that year, as ‘investors’ were persuaded to part with large sums of money in the hope of securing many multiples of their stake.

Gardaí estimated that those at the bottom of the pyramid lost about €20m in total. Individual investors handed up to €10,000 each to organisers, with the promise they would receive €80,000 in profits.

Four years ago, six women in England and Wales were convicted of running a pyramid scheme, called ‘Give and Take’.

Just as in Munster some years earlier, thousands of ordinary people lost millions. The group encouraged people to ‘beg, borrow, or steal’ £3,000 to put into the scheme between May 2008 and April 2009.

Probably the worst pyramid-scheme collapse in recent memory was the one that devastated Albania in 1997. There was widespread unrest when a series of interlinked schemes saw thousands of citizens lose an estimated $1.2bn. That worked out as an average of $400 per head of population. The unrest degenerated into civil war, the government fell, and more than 2,000 people died.

Pyramid schemes are a first cousin to multi-level marketing (MLM) schemes, which you also need to beware of. These are also known as network or matrix marketing schemes.

They work by selling products or services through a network of distributors. Critically, however, you get incentives for recruiting other people into the scheme. As the CCPC explains, in multi-level or network marketing, individuals sell products to the public, often by word of mouth and direct sales.

So, once again, you’re talking about tapping into your network of family and friends. Typically, individuals earn commissions, not only for their own sales, but also on sales made by the people they recruit to the scheme.

Some MLM schemes are legitimate, it’s true. But many are not. If the money you make is based on your sales to your customers, it may be legitimate.

If the money you make is based on the number of people you recruit and what you sell to them, it’s probably not.

Remain vigilant

Be sceptical if you hear about the scheme through word of mouth or personal invitation, rather than through open advertisement.

If the scheme is not legitimate, its organisers will try and keep it out of mainstream media in order not to garner attention from those who could readily debunk it. And that’s why you’re far more likely to hear about an MLM scheme, or any pyramid scheme, through people that you know, and, increasingly, through social media.

If promoters give you the hard sell — waxing lyrical about the vast sums you’ll make — listen to those alarm bells. Take the time to do some research on the company or scheme.

Be wary, too, if information is provided at a meeting, but if there is little, if any, material you can take home and study. Never give in to a slick presentation and never decide to invest there and then.

And the standard advice always, always applies: If it sounds too good to be true, it is too good to be true.

The CCPC says that if you are approached to join any kind of pyramid promotional scheme, contact them immediately through the helpline, on 01 402 5555, or go to CCPC.