Pyramid schemes
Pyramid schemes are designed to con unsuspecting members of the public into investing significant amounts of money which can never be recovered.
These scams come in many forms, but the underlying principle is the same. They make money by recruiting people, so for everyone to profit there would have to be an endless supply of newcomers - which there never is.
When these operations collapse, people lose their money. As pyramid schemes rely heavily on people recruiting friends and family, relationships, friendships and marriages could also be destroyed. Sometimes angry investors threaten the people who recruited them.
How the scam works
A pyramid scheme entices people into a complicated but convincingly "foolproof" money-making scheme in which:
- They are lured by the promise of "free" money
- The money flows up the pyramid to people already recruited to the scheme
- When someone new joins, in order to go higher up the pyramid they have to recruit several more members
- The new recruits, in turn, form a new bottom of the pyramid
- In theory, as a person goes further up the pyramid she/he is supposed to get more money (which does not happen)
- In fact people are promised an exceptional return on their “investment"
The problem is that making money from a pyramid scheme is mathematically impossible. It is very difficult for people to understand the basics on how these schemes work and comprehend the trap, which they will inevitably fall into.
Example of a typical scheme
Assume that the pyramid has 10 levels, with each entrant having to recruit 10 more people. You start at the bottom with just nine other new people.
You and your nine fellow beginners would therefore need to recruit 100 people between you. If you get up to level seven, the scheme will need 100 million people. And by level nine it will need 10 billion people – significantly more than the entire population of the planet.
In other words, it's impossible. Then when the pyramid scheme collapses (and it always does), those at the bottom - the last to join - lose everything. The scheme might indeed work for the handful of people at the start of the scheme, but everyone else down the chain is ripped off.
Different types
A pyramid scheme could take the form of a club, or it might be a "chain letter" in which you send money to the person who sent you the letter, then you forward the same letter to 10 other people and so on.
Many of these schemes are also embellished with fake referrals and testimonials.
Pyramid schemes by their nature have to spread, so most scams in Ireland are likely to have started overseas.
New laws
Pyramid Promotional Schemes are banned in Ireland. The Consumer Protection Act 2007 outlaws all types of pyramid schemes including “gifting of money”.
Before the enactment of the Act, “gifting” had been used as a means of evading the law. This entailed making a gift of money or moneys worth for an opportunity to receive compensation primarily from the introduction of others into a pyramid network.
The Act prohibits any person from
- Establishing, operating or promoting a pyramid scheme
- Knowingly participating in such schemes or
- Inducing or attempting to induce another person to participate in such schemes
Consumers should be aware that if they promote or participate in a pyramid scheme they will not alone lose their initial investment, but they also run the risk of being prosecuted and liable to steep fines and possible imprisonment.
Fines and penalties
The Consumer Protection Act 2007 provides for a fine of up to €150,000 or up to five years' imprisonment or both in respect of a person convicted for involvement in a pyramid promotional scheme.
If after being convicted the person continues with the practice, he or she is liable to a fine of up to €10,000 for each day that the contravention continues.
Under the Act, joint responsibility for the enforcement of the ban on pyramid schemes has been given to the Gardaí and the National Consumer Agency.
What to do
The best way to avoid these scams is simply to say "No".
If you think something isn't a pyramid scheme but sounds too good to be true, discuss it with family or friends and possibly seek professional advice before signing anything, or contact our helpline at lo-call 1890 432 432.
Remember: never, make a commitment at high-pressure meetings or seminars - take time to do your homework on the scheme.
So if you are invited to join any kind of pyramid promotional scheme you should tell the Gardaí or contact the NCA.