What Is A Pyramid Scam?

A friend offers you a great moneymaking scheme, but another friend tells you it’s a “pyramid scam,” and this may have you wondering about just what is a pyramid scam. Pyramid scams resemble multilevel marketing schemes, but they have one objective: to separate you from your money. Read on for advice on how to tell the legitimate apart from the larcenous.

The scam. Pyramid scams work on a simple basic premise: Each person who joins pays a fee to the person who recruited them. Then, these new members set about recruiting others, so they can earn similar fees. There is often no product or service involved, although some pyramid scammers may claim that there is. When the supply of potential recruits runs out, the scam collapses, with those at the “top” of the pyramid making most or all of the profit. The newest recruits lose all money invested. Their only recourse is legal action, if the scammers have not already fled the scene.

History. Pyramid scams came to prominence in the ‘60s and ‘70s, at the same time multilevel marketing companies such as Tupperware and Amway were becoming popular. The difference is that these legitimate companies offered actual products and actual advancement in the company for industrious sales staff. Pyramid scams would claim similar setups in an attempt to borrow legitimacy. But their profits came from new recruits, who were convinced to pay sign-up fees or purchase large amounts of product.

Infamous pyramid scams. The “Women Empowering Women” scam targeted British and Irish women in the early 2000s, convincing some it was a kind of lottery. Many women lost money, and in at least one instance, armed robbers targeted a house where pyramid profits were being exchanged. In 2008, pyramid scams were so prevalent in Colombia that they threatened to destabilize that nation’s economy. Albania faced similar problems in the ‘90s.

Warning signs. According to the U.S. Federal Trade Commission, there are several warning signs of a pyramid scam: 1) A substantial upfront investment is required to join, such as a fee, or purchasing large amounts of product. 2) Participants profit from recruiting others, not from sales to the general public. 3) The outfit promises a huge return on initial investments with little effort. 4) The company claims some new or secret method for generating profits that no one has ever explored before. 5) The company promises results within a certain time, then experiences “delays.”

If you suspect your friend’s new moneymaking scheme is really a pyramid scam, check it out thoroughly before investing any of your own money. The FTC and Better Business Bureau can help. A pyramid scam can generate big money-it’s just unlikely that you’ll see a cent of it.