Pyramid Scheme, Ponzi-Fraud & MLM [Explanation & Features]

What is a pyramid scheme? Also the term Ponzi fraud has to do greatly with this. Maybe you want to know more about it or maybe you yourself have been conned by a pyramid scheme. Read on for an explanation and characteristics of such a scheme.

Ponzi Fraud Definition

Ponzi Fraud is named after Charles Ponzi, an American of Italian descent. He organized an “investment plan” in the early 20th century, defrauding his participants because participants’ money did not actually go to productive investments .

Its participants had to make an investment in ‘productive investments’, with the prospect of a high return that was promised. However, benefits are paid with contributions from newcomers. After six months, Charles Ponzi was arrested.

Film adaptations and media coverage of well-known Ponzi schemes

Cases of Ponzi fraud continue to emerge in the 21st century. Entertainer “Polka King” was sentenced to 5 years in prison in 2004 for defrauding more than 400 investors. Several documentaries and even a Netflix film (2018) have been made about him.

The Netherlands is also occasionally graced by Ponzi fraud. Consider, for example, news reports from recent years about PlanB4You BV and René van der Berg , where thousands of investors were swindled for millions of euros.

Difference between Ponzi Fraud and Pyramid Schemes

There are slight differences between pyramid schemes and Ponzi fraud. The main difference is: In Ponzi fraud, the organizers bring in new participants. In pyramid schemes, the participants provide new participants.

With Ponzi fraud, the scam is therefore more difficult to identify, because the participants are not aware of the fact that the returns are derived from new participants, and from the promised investment method. In pyramid schemes, the participants have some awareness of the fact that new participants make money.

Recognizing masked pyramid schemes in the 21st century

Because pyramid schemes are explicitly illegal and clearly malicious, it is often masked that it is a pyramid scheme by organizing the pyramid scheme around another activity. For example, it is masked as a distributor of everyday products , such as care products or telephone subscriptions.

There is no clear-cut definition of pyramid schemes nowadays, as many pyramid schemes are embellished with distractions to make it no longer seem like a pyramid scheme.

Multi Level Marketing (MLM) – The unofficial pyramid schemes

In ‘Multi Level Marketing’ (MLM), which is also sometimes referred to as ‘Network Marketing’ or ‘Direct Marketing’, the sale of everyday products is used to mask the pyramid scheme .

This makes MLM officially a legal marketing method, whereby the products can reach new customers via ‘distributors’ / ‘representatives’ / ‘ambassadors’ / ‘business owners’ / ‘resellers’ / ‘consultants’. Not in a store, but through conversations with friends and family.

However, the sale of those products or services is not the main activity. The main activity consists of recruiting new participants, who have to pay a stake in order to participate.

That investment to participate as a new distributor is also masked because all distributors must also be a consumer / buyer of the products . For example, they must consume a daily energy drink of 5 euros per can because ‘a good ambassador must of course also use the product abundantly.’

The high prices for these everyday products, such as 5 euros for a can of lemonade, 20 euros for a tube of toothpaste or 120 euros for a jar of vitamin pills – which must also be purchased monthly in bulk and consumed by new distributors – contribute to the high traditional deposit to participate in a traditional pyramid scheme.

When a new distributor is not sure whether to participate, the mask is revealed quite quickly to convince him / her to participate. The interested party is told that selling the energy drinks yields far too little, but that the big money is in bringing in new distributors.

Main criterion for recognizing pyramid schemes

However, an important criterion for recognizing a pyramid scheme remains: when the activity to bring in new members is greater than the communicated or implied ‘main activities’.

So what is an example of something that is not a pyramid scheme ? The Pepperminds company. This is a company where sellers on the street sell all kinds of subscriptions and products. For example newspaper subscriptions.

Sometimes Pepperminds needs new salespeople. However, looking for new sellers remains a side activity. Less than 20% of Pepperminds’ business is recruiting new salespeople. Those who bring in new salespeople do indeed receive a monetary reward, but actually carrying out the main activity – selling products – still accounts for more than 80% and also yields the most.

Another important criterion: it will cost you more than a small amount to participate

When you register with an organization, it is logical that you pay an amount for the administration costs or for all kinds of other support purposes. However, when you have to spend more than 50 euros without a clear goal, there is a chance of a pyramid scheme.

When a pyramid game is out of financial gain, you can recognize a pyramid game by the fact that you have to make a substantial investment to be allowed to participate. As indicated earlier, this can also be: frequent consumption of the expensive product that serves as a mask.

More criteria: sectarian elements

Also sectarian elements are a reference point for modern unofficial pyramid.

• Mystery and fuzziness  about what the product, your activity or the formula is exactly, until you are actually registered as a participant. You have to come to a meeting to get some information.
• During the meeting, classical elements of persuasion and influence are used , making you enthusiastic to participate based on emotion .
• It uses reverse psychology and intimidation to convince you. “You know, Piet, my mother always said: whoever is lazy and doesn’t want to make any effort, I shouldn’t put any effort into that either. He’ll figure it out. Unsuccessful people should know for themselves.”
• Strong emphasis on recruiting new participants.
• Success stories and accolades from current and new participants. Non-participants are labeled as outsiders and losers.
• No time to think, but have to register immediately.
• A group of friends and ‘love bombing’. The prospect of new, like-minded friends who have a successful mindset . It also responds strongly to the spiritual needs of people to be in a close-knit community.
• Motivational speeches that are not substantively about work and ‘personal development’ as motivation.
• Beautiful promises and presenting a sense of self-esteem, such as making you believe that you have your ‘own company’ with your own ‘website’.

Well-known unofficial and real pyramid schemes

Because a large proportion of the organizations listed below meet the criterion ‘profit from sales of products’, they should not be officially  seen as a pyramid scheme.

• Passing money around in envelopes
• Tupperware (1960s) and Amway (1930s) as the most important and best-known American MLM organizations.
• Pyramid scheme Titan
• Unofficial pyramid scheme Herbalife
• Money flower
• Ponzi fraud with Bitcoin and investments, such as GTI Net and boiler rooms.

AFM Warning list

The Netherlands Authority for the Financial Markets (AFM) is an independent conduct supervisor and is committed to fair and transparent financial markets. View the AFM warning list here.

MLM revenues are low

A survey in Germany in 2012 among the ten largest MLM companies found that the average  monthly  income per seller was between 2 and 168 euros. This was based on total sales and number of salespeople per MLM company, costs and bonuses but excluding social security charges.

One of the larger MLM organizations gives an impression of the income pyramid on its website : 82.7% of the members in the Netherlands had virtually no income from sales in 2013, except for cheaper products for their own use and a small profit from sales. The other members who worked on an active customer base and trained new sales reps received the majority of a bonus of up to 100 euros per month. A few dozen could live on it. Incidentally, operating costs, social security contributions and the like must also be paid from the aforementioned bonuses. Profit from sales in addition to the bonus  amounted to an average of 120 euros in 2012  for all these members together . The profit is therefore much lower for the inactive members, higher for active members.

Quoted from: Wikipedia

If it fails, don’t come cry to me

If you have been involved in a pyramid scheme full-time for two years – in whatever form (yes, even MLM) – and after those two years you have (the prospect of) a good income without having to work 50+ hours a week .. not only did you gain my respect, but then I encourage you to keep going.

If you’ve been playing a pyramid scheme full-time – in any form (yes, even MLM) – for two years, and you’ve barely made any money after those two years, don’t cry to me. Should we really feel sorry for the scammer who got ripped off?

Then it all comes down to what you could have known in advance in your business plan:

• Have I researched the logically expected income? See previous paragraph.
• Is my product easy to sell?
• In what way does the price of the product make for an easy or difficult sale?
• What do I have to perform / sell to earn how much?
• What are my own strengths and weaknesses and does that go along with selling this product?

At MLM, in my opinion, the answers to the above questions are not very promising if you turn it into a business plan. But if you believe in it, feel free to do it. Do you pass? Respect! Are you failing? Then you could have known that your chances weren’t that great.

Elements of a pyramid scheme are also found in cults

Let’s take a look at the situation below:

A cult can communicate that love and service are one of the most important values. That love and service is the mask.

Then a girl can take the broom and clean the streets of her neighborhood and give 100 euros of her savings to the homeless shelter as her act of service. After all, the sect stands for service, doesn’t it?

When her grandfather hears this, he disapproves. She said she would waste her time cleaning the streets and helping the homeless – even if it actually made her of service.

Her grandfather thinks she should actually tell more people about the cult and the value of service . That would make it much more effective.

What is the problem with the above case? If everyone brings in new members so that more people can be of service – but then no one is of service but everyone brings in new members – there is no actual service taking place, but the goal is to make the club as big as possible.

Consumption / Contribution Ratio in a Cult

Another example:

A sect consists of 20 members. There is also a board of 10 members that arranges everything for the sect. The aim of the board is also to bring new members to the cult.

All members of the cult must bring in new members. There are 5 activities aimed at bringing in new members and 1 content activity for actually consuming the cult.

When it also turns out that (almost) nobody shows up in that one substantive activity in which the sect is actually consumed – and all activities are therefore aimed at bringing in new members – it is at most a pyramid scheme.

Also, members of the sect can be prohibited from participating in the content activities – unless they bring guests along.

Well, enough about pyramid schemes and cults. The purpose of this article is to make you think.

On your luck!