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Financial pyramids Printable version

Last update: 09.06.2020

 A classic financial pyramid is a fraudulent scheme to obtain an income. Frauds offer you to invest money at a very high interest rate, promise a guaranteed income and ask to attract your friends to the project. Be careful as a successful investment campaign might turn out to be a financial pyramid. Peculiarity of financial pyramids involves a promise of obtaining money in a quick and easy way. 
 Financial pyramids are often position themselves as investment companies.  For instance, they offer to acquire shares and bonds and promise to invest into a profitable construction, gold mining or superefficient production. They make up sensational and attractive slogans for their advertising campaigns, for example:  web company, innovation project, cryptocurrencies, housing cooperatives, gold, social media.  Thus, financial pyramids are trying to keep up with the times.  
 Life cycle of today`s pyramids depends on the extent of an organization and programs. Depending on the scope and specific nature, pyramids can exist within the period from 3 days to 16 years.  For example, a famous investment company Madoff Investment Securities (US) had been existed for 48 years (1960-2008 г.) in the form of a pyramid.
 

Major types of financial pyramids:

  • Multilevel pyramids. Main mechanism for establishing and operating the structure involve the following: each new participant make a first contribution which is distributed among members of a pyramid who are on higher levels of hierarchy. In his/her turn, to earn money, a newcomer should invite several people, whose contributions will be distributed in a similar way. This goes on until termination of influx of new members.  
  • Ponzi-based pyramids. Such structures got their name after Charles Ponzi, who was a founder of similar pyramid in the beginning of the 20th century.  Compared to multilevel pyramid, in this case, there is no need for attraction of new members but one need to make an initial contribution and usually for a large sum.    A high income is promised to all the participants within a certain stretch of time.  First customers get a high income out of a founder`s pocket and then a principle of mutual informing triggers and a new contributors appear encouraged by an example. New contributions are paid out to previous contributors. The circulation goes on for a certain period of time until a founder disappears with all the money. 
  • Multilevel marketing-based pyramids. The main mechanism for a scheme implementation is sale of goods/services by a company. In this case, a good is used as a disguise and its price is overestimated. Often, such products are as follows: watches, cosmetics, household chemicals, etc.
  •  Pyramids based on the principle of invitations distribution via messengers.    The scheme is carried out through online groups in messengers: WhatApp, Telegram, etc. Thus, a group is created and you need to pay to be added in it. After you have been added, you need to invite 2-4 people for whom you might receive a prepayment from 200% to 400%. The number of invited participants is unlimited.

Financial pyramid features: 

  1. Necessity to contribute a considerable sum of money.
  2. Promise of high interest rates and quick repayment of contributed sums.
  3. Necessity to attract acquaintances who should contribute money, so that you can get payments.  
  4. A project is positioned as “know-how”.
  5. A company was registered the day before fund raising, it has a minimal    authorized capital and sole founder. You can check a registration on the website of State Revenue Committee under MF of the RK using the service called "Search for taxpayers".  
  6. Active and obtrusive advertising in social media; various presentations; lotteries of various prizes and holiday tours; mass distribution of leaflets; postal and e-mail distributions. The ban for advertising of financial pyramids in mass media is stipulated by the Law of the RK "On Advertising".  
  7. When familiarizing with a contract it becomes clear that nobody will be held responsible in case if something goes wrong.  
  8. A company might call itself a microfinance organization, credit bureau, anti-debt program, center for financial services. Such companies might make the following claims “You got a denial at a bank? We will help!”, “We will refinance your loan! We will help to get rid of debt!”.
  9. A company doesn`t have a license issued by the Agency for Regulation and Development of Financial Market. Pursuant to the Law of the RK “On Mandatory Guaranteeing of Deposits Placed in Second-Tier Banks of RK”,  the banks work with population and guarantee repayment of invested funds.   
  10. Such companies accept cash or use various online transaction and transfer systems without having special settlement account of a company in a bank. 

By familiarizing with the features of fraudulent schemes, you can protect yourself against actions of dishonest “false” entrepreneurs and keep your funds intact.      

What is to be done if you were caught in a financial pyramid net?

  • Make sure once again that a company is a financial pyramid. Use the abovementioned features of financial pyramids as guidance.  
  • If you are sure and want to take your money back, be ready as it won`t be that easy.   
  • If you have documents certifying transfer of money to frauds (contract, bank statement, cash receipt), immediately contact a person via whom you got caught into a pyramid.
  • If a pyramid still operates, draw up a written complaint to the name of a company. Ask to return your money back and inform a company`s founders that you are going to apply to law-enforcement agencies to initiate a criminal action in case if your money won`t be returned.  
  • If a company doesn`t repay your money saying that “money is in the system and cannot be returned”, apply to law-enforcement agencies and tell the frauds about it.   Usually, in this case, chances to return your money back are higher.
  • There are a lot of people, who lost small sums in pyramids. Majority of them are reconciled with the fact. This encourages frauds to keep cheating on people. If you was cheated, don`t stay calm, act. The vital factor in combating frauds is to go public. And also, this will ensure that you won`t implicitly become an accomplice of financial pyramid founders.                               

Liability for establishment of a financial pyramid and distribution of advertisements on its activities    

 

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