The participant is always shown to be the gainer at the top of the pyramid when in reality, he or she may be the victim at the bottom.
In a pyramid scheme, no new wealth is created, the only wealth gained by any participant is wealth lost by other participants. Look at the following hypothesis.
Let’s say someone starts a pyramid scheme chain by recruiting just 3 people beneath him. They, in turn, recruit a further 3 each, i.e. 9 in total. The scheme would apparently involve everyone on earth in just 21 levels. In other words, pyramid schemes are not workable in the long run.
In a simple pyramid scheme, we found that 96.3% of the participants would be losers and only 3.7% would make profits
The pyramid schemes create no wealth. All they do is reallocate existing wealth. Every ringgit that one person gains through such a scheme is a ringgit that someone else has lost.
Such a scheme is thus unethical and dishonest, a fraud in fact — which is why it is banned in many countries.
How do you tell if it is a pyramid scheme? Here are some tell-tale signs:
- Promise of sky-high profits for a small amount of effort
- Payment of a membership fee to participate in the scheme
- Products have a high price compared to similar products
- Unrealistic claims about product quality or performance
- Sellers and buyers are expected to recruit new sellers and buyers to keep the scheme growing.
Increasingly, pyramid scheme con-men are using the internet as a means of recruiting members.
If you are approached through the internet & e-mail solicitations to join a get-rich quick scheme with a foreign-sounding name, reject the offer. Chances are, you could be buying into an illegal high-tech pyramid scheme that will only make you get poor quick- with no recourse for a refund.
One such pyramid scheme, which has reportedly trapped some 100,000 Malaysians and conned them into paying at least RM10 mil, is the Italian-based Pentagono scheme. The scheme, which was claimed by its organiser as having” given many people a hope in life”, had actually been condemned by the New Zealand Consumers’ Institute as “nonsense” as far back as November 1996.
In Malaysia, however our local authorities only got wind of it after many people had already been scammed. Run by a company called Future Strategist, the scheme required each participant to send RM100 to the firm for 3 Pentagono certificates plus a Countdown Card, a discount card, which was later found to be worthless, in Malaysia
As an agent, you had to recruit 3 other participants who used the 3 certificates to send RM100 each to take part in the scheme. The theory is that when your name reaches the top of the list, your downline would have recruited 2,187 participant and you get a sum of RM100 from each participant which totals up to a “fortune” of RM218,700.
As also pointed out by the New Zealand Consumers’ Institute, for a pyramid scheme like Pentagono to work, billions and billions of people would have to sign up, which is impossible, “because there simply aren’t enough people in the world to make them work”.
Although pyramid schemes are illegal, in Malaysia, there is no specific law covering them. However, any direct-selling company which operates such a venture can be prosecuted under the Direct Selling Act 1993.
CAP was given a copy of the draft of the anti-pyramid bill and asked to comment on it in July 2001. Unfortunately this bill has yet to be enacted. However the proposed amendments to the Direct Selling Act 1993 is supposed to have a section specifically on pyramid schemes.
We think it is most important that laws on pyramid schemes be introduced as soon as possible to prevent even more Malaysians from losing their money. Meanwhile consumers should:
- avoid any plan that offers commissions for recruiting additional distributors.
- beware of plans that ask new distributors to spend money on high-price inventory.
- be cautious of plans that claim you’ll make money through continued growth of your “downline” recruits, instead of sales.
- beware of plans that promise enormous earnings or claim to sell “miracle” products.
- avoid companies that offer a product or service which is a secondary, or insignificant, feature in the scheme.
- be wary of companies that make exaggerated potential earnings claims without disclosing the average earning of a typical participant.
- beware of any plan that claims to have a secret plan, overseas connection or special relationship that is difficult to verify.
- avoid programmes that require substantial initial cash investments. In many states in the US, a required up-front investment of US$500 (about RM1,900) or more is considered “substantial” and thus likely to attract the attention of law enforcement.
- stay away from companies that don’t “buy back”. Any plan that does not agree in writing to repurchase a reasonable percentage of unsold inventory or unused sales materials for a stated time after purchase should be avoided.
- do not be carried away by wonderful stories from people who have “made it”. These “winners” are the few who joined at the top of the pyramid at the early stage. Sad tales from the majority who lose in the scheme will not be heard because losers will skulk away and quietly try to recover without any fanfare.
In the past, many unsuspecting Malaysians have been trapped in get-rich-quick schemes.
One popular scheme was the Pak Man Telo scheme, which promised depositors a 10-12% dividend every month to be collected on a particular date.
Its sole proprietor was later fined for illegally collecting deposits from the public without a valid licence from the Finance Minister as required by the Banking and Financial Institution Act.
During the hearing, the court was told that the proprietor had credited no less than RM20 million into his personal bank account.
It was reported that when Bank Negara raided the operator’s premises, they found RM1.74 million there.
Other get-rich-quick schemes popular in the late 80s to the early 90s, which have now all folded up, were: Magnacasa, Century Diamond, Inflation Resource, Jaya Enterprise and Wangsa Enterprise.
In the Magnacasa scheme, RM2,000 was collected from each member for a holiday package.
Century Diamond (which was raided by the authorities in 1988) dealt in diamond rings and precious stones. The scheme promised commissions of 10-45% to members. In 1990, the company launched a new product, a face cream. It was believed to have 3,000 members.
Thousands of consumers mortgaged everything, from their vehicle registration cards to their only plot of land to raise money to invest in the schemes then.
More recently we have the Red Café scams where those who put up thousands to invest in the restaurants were allowed to eat for free at the restaurants. Then there was Lecruz casino scam whereby consumers were promised returns of 200-500% on their investments. They were also whisked away for holidays in Macau and given Rolex watches
Through the years Malaysians must have lost billions through scams which prey on consumers vulnerabilites.
Who to complain to?
Kementerian Perdagangan Dalam Negeri, Koperasi dan Kepenggunaan,