Financial Times

Central Bank says pyramid scheme declared illegal in Nepal
The Central Bank last week identified Gold Quest as a pyramid scheme, perhaps for the first time, and said it had been banned in Nepal. "Gold Quest, perhaps the most popular of the pyramid schemes, spread rapidly within Nepal, which resulted in a circular declaring Gold Quest illegal," a Central Bank Sri Lanka statement said.

"Nepal does not have any pyramid schemes in existence at present as domestic schemes that were launched collapsed due to lack of response from the public."

The statement, issued after a regional seminar on combating pyramid schemes, quoted the Sri Lankan delegation at the seminar as saying that a large amount of foreign currency was channeled out of the country due to the operations of a "product-based pyramid scheme or multi level marketing scheme".

Investigations are currently being conducted by the Controller of Exchange under the Exchange Control Act. In addition, the recent amendments to the Banking Act in 2005, has prohibited the operation of pyramid schemes and those who contravene such provisions shall be liable to heavy fines and /or imprisonment.

The law has empowered the Central Bank to conduct investigations into such schemes, the statement said. "Further, a request has also been made to the relevant authorities to explore the possibility of taking action under the provisions of the Consumer Affairs Authority."

The statement said that in the Maldives the authorities noticed that these schemes thrived best amongst young people, due to the rise in Internet usage and unemployment. However, due to the concealed nature of these operations, the Monetary Authority has not been able to play a proactive role in combating the scheme apart from issuing public notices.

The seminar was a follow-up to the SAARCFINANCE meeting held in Washington D.C in October 2004, where members raised concerns on widely spreading pyramid type investment networks in the region and their potential adverse economic, social and political implications.

Resources persons for the seminar in Colombo were Christopher Jarvis and Robert FitzPatrick. Jarvis from the International Monetary Fund is currently serving as the Mission Chief for Maldives. Following his research on pyramid schemes, he has published an IMF Working Paper titled "The Rise and Fall of Pyramid Schemes in Albania."

FitzPatrick founded and serves as president of Pyramid Scheme Alert, the first international association to expose and prevent pyramid scheme frauds. He is also the author of several books and articles including the "False Profits", the first book to critically examine the multi level marketing industry.

Delegates from Central Banks of six SAARCFINANCE member countries, including India, Nepal, Bhutan, Bangladesh, Maldives and Sri Lanka participated in the seminar and shared experiences through presentations of country papers.

Delivering the opening remarks at the inaugural session, Assistant Governor, Dr. A. G. Karunasena highlighted the potential adverse implications of pyramid-type investments as it threatens both economic and price stability and financial system stability, which could pose the risk of destabilising an economy.

He further stated that with the expansion of pyramid schemes, the public might be tempted to borrow from financial institutions to participate in such schemes with the expectation of repaying the loans from their expected returns.

It is a mathematical certainty that the pyramid schemes will collapse leaving a large number of loses and a very few gainers. Combating of pyramid schemes is more challenging as the prevention of new schemes, identification of existing ones and closing down their activities are not easy even though they are possible.

Such combating actions not only require an appropriate legal authority but also need continuous vigilance, a broader public awareness, and strong commitment of the authority as pyramid promoters introduce these schemes with different faces and modalities in order to exploit loopholes in the existing legal system and/or to circumvent the prevailing regulatory system, the Central Bank said.

Citing the Albanian experience, Jarvis in his address stated that unfamiliarity with market institutions and practices, undeveloped and inefficient banking systems and gimmicks to lure investors were the most common reasons why pyramid schemes spread in an economy. Fitzpatrick, calling pyramid schemes a new form of fraud in global market economies, said that these schemes include a concept of an "endless chain" where the trick is on the distributors who are induced to buy products and also keep inducing others into buying products and joining the chain.

He also touched on the continuing trend to legalize these schemes by yielding to pressure and allowing types of schemes, which they had formerly outlawed. In India the multi level marketing schemes were two pronged: Price Chit Scheme and Money Circulation Scheme (Pyramid). However, a legislative action to ban the schemes was taken following an indepth study of the impact of these activities.

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