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Tom Muleya Fraud Insight
In the previous article, we looked at how pyramid/Ponzi Schemes negatively impact on people’s lives and household economies. Some people have been left homeless, some dead, and some battling for life after suffering medical complications as a result of shock due to the sudden loss. For many victims, their lives will never be the same again, as financial recovery is now a nightmare.
It is important to note that pyramid schemes are a non-sustainable business model that involve promising participants’ payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of product or services to the public.
They are also referred to as franchise fraud or chain referral schemes. In these schemes, the originators sometimes called “Pharaohs” and few individuals at the top levels of the pyramid make huge amounts of money. Those at the bottom are at the bitter receiving end as they don’t benefit anything as distributorship of new recruits become impossible. Emphasis on selling franchise rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.
Now let’s look at this example to further explain how a pyramid scheme works; Fraudster X and his cronies create an illegal and fraudulent investment scheme requiring a victim to pay or deposit an administration fee involving a large sum of money in order to qualify and earn the right to recruit others.
The promise is that Y will reap double or more the investment within a short period of time. Victim Y therefore makes only one payment, say US$5 000, hoping to reap US$10 000.
To start earning, Y recruits others like him who will also make a payment each. Y gets paid out of receipts from those new recruits. They then go on to recruit others and as each new recruit makes payment, Y experiences exponential benefits as the business expands. The pyramid operators X realize their profits through administration fees paid in by newly recruited members. So the race for chasing after new members is hot so that Y realizes his/her profit within a short possible time. Unfortunately the scheme gets to a point where it fails to attract new investors. Victim-Z, who is right at the bottom of the pyramid having been recruited through Y’s chain and had sold his house and invested US$30 000 hoping to reap back US$60 000 fails to recruit the required number of new investors so that he gets paid.
Many others in a similar position to Z lose out as the scheme can’t sustain itself and collapses. Those at the base also lose in this way: As the pyramid expands, it attracts the attention of the regulatory authorities, and become subject to investigation. At this instance, the founders run away from the wrath of the law and disappear with investors’ money.
In order to avoid falling victim to pyramid schemes, consider the following;
- Be wary of financial investments that promise huge investment returns within a short period of time and require you to recruit subsequent investors to increase profit and recoup the initial investment.
- Verify the legitimacy of the investment before you put your hard earned cash.
- Be wary of investment schemes that are too good to be true. Never be fascinated by any idea or scheme to get rich quickly or make easy money.
- Avoid enlisting in investment schemes that manifest a potent symbol of the culture of greedy and dishonesty.
- Never put large sums of money in illegal, uncertain, and risky financial investments.
- Avoid investment schemes that do not involve the selling of products, but rather relies on constant inflow of money from additional investors that work that their way to the top of the pyramid.
- Think. One of the best God-given resources available to all mankind is the ability to think. Remember fraudsters take their time to think in order to come up with the best fraudulent schemes that cannot be easily detected. So you need to think too before making an investment or transacting.
- Don’t let anyone rush you. When someone solicits you for an investment and or presses you to enlist, ask for some time to think over and consult your investment professional or other trusted sources. One of the ways fraudsters use to get their victims is by rushing them into making decisions. Walk away if you find yourself in these circumstances.
Get empowered by Fraud Insight and be part of a solution to fraud scams. Watch out for the next issue.
For your feedback, WhatsApp line: 0772 764 043, or e-mail:[email protected]. Tom Muleya is a Detective Assistant Inspector working under the Criminal Investigations Department. Harare
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