Financial pyramids Printable versionLast update: 21.12.2021
A financial pyramid is a fraudulent scheme under which income is generated from attracting money or other property or titles owned by individuals and (or) legal entities without using the funds raised for entrepreneurial activities that ensure the obligations assumed by redistributing these assets and enriching some participants at the expense of contributions from others.
A promise of obtaining money in a quick and easy way is a peculiarity of financial pyramids. Financial pyramids 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.
Life cycle of financial pyramids depends on the extent of an organization and proposed programs: from 3 days to 16 years. For example, a famous investment company Madoff Investment Securities (US) existed for 48 years (1960-2008) being a financial pyramid.
Types of financial pyramids:
- Multilevel pyramids. Main mechanism for establishing and operating the structure involve the following: each new participant makes 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.
- 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: WhatsApp, 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.
- Participation (membership) in an exclusive club. Such clubs offer cruises, vouchers, travels; teach how to establish and promote a business, and also provide training in marketing, investment, copywriting, palmistry, astronomy, on how to improve a mental balance, psychology, numerology, symbols, magic, etc.
A participant needs to attract other participants and (or) make an entrance fee within a certain period, depending on the programs (from 1-3 to 5-10 years).
Financial pyramid features
Below are the features of financial pyramids:
- Active advertising in mass media, online resources, including social media promising high profitability and passive income.
- A company wants to buy movable or immovable property from customers at an above-market price (by installment for the period from three months or at a minimum interest rate), or on the contrary offers customers to buy movable or immovable property at an above-market price (with a mandatory advance payment);
- A mandatory requirement is a purchase of goods/services for a certain amount and involvement of several additional persons (there are no retail sales);
- Lack of license/registration of the ARDFM, including, but not limited to, the implementation of:
- banking operations, including deposit sourcing, issuance of loans, execution of transfers and payments, etc.;
- activities on the securities market;
- activities on the insurance market;
- microcredit activities;
- debt collection activities.
- The money is deposited in cash, or to a card account of an individual, or to an e-wallet through the terminals of payment institutions;
- There is no precise definition for the activities of a company, an individual, or a public project (a statement on a unique activity).
- Availability of preliminary (special) contributions for subsequent participation in the activities of a company or project.
- A public promise of high profitability, which significantly exceed the level of the market indicator.
- Guaranteeing of profitability (prohibited on the financial market, except for bank deposits);
- Use of words and phrases or symbols in a name, symbols, advertisements that make them look like well-known companies, brands.
- The inability of a company, an individual or a public project to confirm its activities (transfers of attracted funds, information about their placement). Usually, "financial pyramids" claim that they conduct their activities in areas that are associated with high profitability: oil production, gold mining, construction, microfinance activities, the Forex market;
There are various types of financial pyramids, but paying attention to the distinctive features, you can minimize the risks of involvement, thereby protecting yourself and your loved ones.
Also, a list of organizations with signs of illegal activity (signs of an unlicensed investment intermediary, signs of financial pyramids) has been published on the ARDFM website. The list contains organizations with the signs of financial pyramids against which citizens filed complaints to ARDFM.
If you are offered to become a member of a financial pyramid scheme, you should immediately contact the law-enforcement agencies at your place of residence, Ministry of Internal Affairs and Financial Monitoring Agency.
You can also contact ARDFM, if you have suspicions of illegal activities in the financial market. You can contact the financial regulator through "Financial pyramids and financial fraud" section in "FingramotaOnline" mobile app or by calling the Call Center: +7 727 237 1000 (working hours: weekdays from 9.00 AM to 05.00 PM).
Also, ARDFM use the following channels of communication with public on the issues of financial literacy improvement:
- official ARRFR website and a specialized educational project (Fingramota.kz), which are a single point of information for the public and mass media;
- "FingramotaOnline" mobile app, which allows the population to receive prompt consultations from the Agency's specialists regarding financial products, their conditions and protection of the rights of consumers of financial services;
- specialized lectures and trainings on financial literacy for target groups of population, which includes students, pensioners, residents of regions, journalists and employees of quasi-state companies;
Liability for establishment of a financial pyramid and distribution of advertisements