Illegal Pyramid Schemes

A Pyramid scheme is  a harmful business practice wherein investors are incentivized to recruit new investors in order to be paid directly from the funds introduced by such investments.

The defining characteristic of a classical pyramid scheme is that no new wealth is created and that any repayment of investments is done from introduced Investor funding as opposed to profit.

 As a result of the above such a Pyramid scheme is technically insolvent from its inception and cannot be sustained indefinitely.

A Ponzi scheme is a variation of the above described classical Pyramid Scheme, where investors are deluded into investing into a system promising fixed and guaranteed returns despite any further action taken on their part. These repayments are often described as interest or trading gains, but are in reality repayments made in the same style as a classical Pyramid scheme whereby the funding is derived solely from newly recruited investors.

Multi-Level- Marketing schemes bare significant similarities to a Pyramid schemes with the possible difference that the sale of highly priced products generates a profit that is distributed amongst the selling agent and an up-line of recruiters.

A Classical pyramid scheme often lacks the sale of a product or service of high quality and the incentive of participating in the scheme is the introduction of new recruits in order to benefit from the recruitments made by them.

This model may be similar to that of MLMs, in which case the source of the investor funding and the quality of the product will indicate whether such an enterprise can be classed as an illegal Pyramid scheme.

Many recruitment business systems are “hybrids” of the above described scenarios and are passed off to potential investors as legitimate investment opportunities.

 Characteristics of illegal Pyramid schemes

• No product or product of little value. 
• Has a hierarchical, pyramid shaped structure 
• The incentive to recruit members is not the sale of a product of value. 
• The main source of income generated is from the introduction of new members. 

Why pyramid schemes never work in the long run

There are three possible outcomes to an ongoing pyramid scheme.

1. Once the principal of the scheme has made enough money to his satisfaction, he disappears with the investor funds and is no longer contactable. This would amount to theft, amongst other legal charges such as fraud etc. 
2. The weight of the scheme causes it to collapse. This would be possibly as a result of the new investor market being saturated and therefore existing investors can no longer be paid. 
3. The authorities are called in and they put a stop to the scheme. 

What laws are applicable?

The following entities could act as complainants in a criminal process: 

• Investors 
• The Reserve Bank 
• The Receiver of Revenue 
• Auditors 

Charges that could be laid 

• Theft 
• Fraud 
• Reckless Trading 
• Forgery and Uttering 
• Tax Evasion 
• Contravention of the Gambling act 
• Contravention of the Companies act 
• Contravention of the Banking act