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Pyramid Schemes and chain letters

pyramid-dogPyramid schemes and chain letters operate by recruiting people to make money rather than by selling a legitimate product or service. The victim makes a cash investment and, once they have recruited a certain number of other investors, they will allegedly receive a substantial sum of cash. Most of the time, you’ll never make money and will lose any money you paid to participate. Sometimes theses schemes masquerade as home-based business opportunities such as envelope stuffing. You send away for the material which ends up being information on how to perpetrate the same scam on others.

Pyramid schemes

What is a pyramid scheme?

Pyramid schemes are illegal and very risky ‘get-rich-quick’ schemes that can cost a lot of people a lot of money.

Promoters at the top of the pyramid make their money by having people join the scheme. Then they pocket the fees and other payments made by those who join under them.

In a typical pyramid scheme, a member pays to join. The only way for the member to ever recover any money is to convince other people to join up and to part with their money as well.

In contrast, people in legitimate multi-level marketing earn money by selling genuine products to consumers, not from the recruiting process. Be aware though, some pyramid scheme promoters disguise their true purpose by introducing products that are overpriced, of poor quality, difficult to sell or of little value. Making money out of recruitment is still their main aim.

People often hear about pyramid schemes from friends, family or neighbours. Normally, pyramid schemes recruit members at seminars, home meetings, over the phone or even by mail. Now email, usually as spam, is increasingly used to recruit members as well.

For the scheme to work so that everyone can make a profit there would have to be an endless supply of new members. In reality, the number of people willing to join the scheme (and therefore, the amount of money coming into the scheme) dries up very quickly. When the pyramid collapses (and they all do) relationships, friendships and even marriages can be destroyed over money lost in the scam.

In Australia, it is against the law not only to promote a pyramid scheme, but even to participate in one.

Pyramid schemes often look like legitimate multi-level marketing schemes. To tell the difference between them, ask yourself these two questions:

  • Are the rewards you have been promised based on product sales (by either yourself or others you introduce to the scheme)?

  • Are the products genuine products of real value, at a reasonable price and the type of thing that consumers will want to buy time and time again?

If you are unsure or answered no to either of these questions, there is a real chance that the scheme is a pyramid scheme.

If you have doubts about a particular marketing scheme, the ACCC, ASIC or Consumer Protection WA may be able to help. As with any other investment decision, you should seek independent advice (for example, from a lawyer or accountant) before you make a decision.

Warning signs

  •  You are offered a chance to join a group, scheme, program or team where you need to recruit new members to make money.

  •  The scheme involves offers of goods or services of little or doubtful value that serve only to promote the scheme (such as information sheets).

  • There is a big up-front cost to pay for large quantities of goods.

  • There are no goods or services being offered for sale by the scheme.

  • The promoter makes claims like ‘this is not a pyramid scheme’ or ‘this is totally legal’.

If you believe that an offer is a pyramid scheme, do not take part—it is very likely that you will lose your money and you could be breaking the law. If the offer was made to you by a friend or family member, you should also warn them that they might be involved in a risky and illegal scam.

If you believe that the offer could be a legitimate multi-level marketing scheme, make sure you get independent advice before signing up or investing any money.

If you think you might be involved in a pyramid scheme, stop participating in the scheme immediately and contact ASIC, the ACCC or Consumer Protection WA. You should also warn other people you think may have been approached about joining the scheme.

Chain letters

What are chain letters?

Chain letters are a type of pyramid scheme that is spread through the post, or sometimes by email. They promise a large financial return for a relatively small cost.

Typically, the letter will ask you to send a small amount of money to everyone listed in the letter. You then put your name on the list and send out copies of the letter to as many people as you can. The letter claims that by doing this, you will receive a large amount of money in a short space of time.

These schemes are illegal and are a type of pyramid scheme. The only people who have any real chance to make money are the people who start the scam. Scammers often send out many thousands of letters to people using mailing lists that they have bought off another company.

In a chain letter scam you lose your money in two ways. First—you send money to the scammers who sent you the letter. Second— you waste a lot of money on postage and photocopying costs.

Warning signs

  • You receive a letter or email promising you money or good luck if you copy it and send it on to a number of other people.

  • The letter or email may suggest that if you don’t forward it on you will have bad luck or lose out on a fantastic opportunity.

  • Often a token amount, say five cents, is included in the letter ‘as a demonstration of good faith’. The letter may also recommend that you do this when you send out your letters.

  • The letter contains claims like ‘this is not a scam’ or ‘this is not a pyramid scheme’.

  • The letter contains testimonials from people who claim to have ‘made a fortune’ by taking part.

Chain letters promise huge returns or tell you that not participating will bring you bad luck. Don’t let these claims blind you to the fact that chain letters are pure scams. Even if you thought you could make money, would you want to do it by scamming other people who would then have your address?

If you have received a chain letter your best response is to throw it out. You will only be wasting your time and money by forwarding it on to other people. If you do forward it on to your friends and relatives, they will probably be angry when they quickly realise it is a scam.

Protect yourself

  • If it looks too good to be true—it probably is.

  • Use your common sense: the offer may be a scam.

  • Do not let anyone pressure you into making decisions about money or investments: always get independent financial advice.

  • You can contact Consumer Protection WA, ASIC or the ACCC for assistance.

  • Beware of products or schemes that claim to guarantee income or winnings.

  • Remember that family members and friends may try to involve you in a scam without realising that it is a scam: you should seek independent advice (from a lawyer or financial adviser)

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