Business Times

Truth behind Pyramid Schemes

By Lionel Wijesiri

Recently, a fellow entrepreneur brought a business proposal to me, and when I told him that he is about to be caught in a “Ponzi” sting, a type of a pyramid scheme, he was annoyed. He defended the business as being legitimate because he has proof that it works for number of his business friends! The man behind the scheme seemed to have courted a number of business identities with promises of ridiculously large returns. It is said the businessman claimed to be investing the money on highly profitable fisheries ventures and getting exceptional profits, , which legitimate investing sources said was impossible.

I told my friend that it is a matter of time when the so-called investors will hit brick walls when asking for their money to be returned.

Pyramid Schemes come in diverse guises and names. Ponzi and Multi-level Marketing are two of them. Both of them are simple yet very effective pyramid scams. Ponzi operates by using funds from new investors to pay interest to other investors or to the same investor. When the money coming into the scam begins to dry up, the fraud would be revealed. By that time, probably, the businessman is missing.
In Multi-Level Marketing (MML) the members pay a joining fee which is passed on to those above them in the scheme. The members’ purpose is to sell products in return for a commission payment and to recruit new members below them in the scheme in order to qualify for a share of the new member’s commission. MLM was born out of pyramid schemes and as such the structure and the nature is very similar. The concept of the downline that will earn you money works in the same way. You sponsor new members and earn commission from them in a multilevel structure. In all pyramid schemes, unless you are at the top of the pyramid it is likely that you will lose money. Once the scheme has passed its saturation point, no amount of hard work or enthusiasm will make a difference.

Pyramid schemes come in different names: Personal Savings schemes, Investment programmes or Direct Marketing: yet, they offer the same goal of small investments and guarantee bumper returns on investments that no legitimate business or financial institution can ever offer.

A few years back, we experienced in abundance the pyramid schemes in Sri Lanka. With the tightening of the Central Bank regulations, they eventually died down. But, there were some recent news about pyramid schemes raising their heads once again in different formats. That is why we need to be cautious and watchful

Opportunities to make money abound but you will have to be wary of what you’re getting into. Keep away from people and organizations that promise some novel ways of making a fortune without really trying. They will allegedly share some secrets on how to make you instant millionaires. Don’t be taken in. If it does exist others should have known it by then. Be wise and think why should they share the secret and not keep it to themselves and make more money in the process.

As with any other investment plan you consider entering, it is important to ask the right questions. How will this money be invested? What is the rate of return? Who will be investing it? Talk to professionals and do your research before placing your money anywhere. And always remember that if a plan promises you'll get rich quick with no risk, you should raise a red flag and exercise caution before getting on board.

(The writer is a corporate director with 23 years of hands-on experience in General Management and human resources development. Lionel is a prolific writer on a range of issues).

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