What are pyramid schemes?

About eight years ago the Finnish news were reporting about a company that was accused of having by lying collected money worth of hundreds of thousands of Euros. The company, Wincapita, had promised investors that their money would make a very high profit if they invested it in the company. The company was supposed to get revenue via foreign exchange transaction. Later the police found out that the company never actually did any sort of exchange transaction, hence its operation was criminal.

Wincapita is probably the best known case of “pyramid scheme” in Finland. Pyramid scheme is a situation where scammers get money from investors by creating a hierarchical setup. The hierarchical setup basically works so that all the new investors keep the money flow going, so that the earlier investors receive “revenue” for their investments. In contrast to legal businesses, in pyramid scheme there is no actual product that the company is selling, but instead the money always comes with the new investors. This naturally means that someone is always getting taken advantage of and that the whole thing is based on a fraud.

Pyramid schemes quickly become unsustainable.

http://money.howstuffworks.com/pyramid-scheme1.htm

Pyramid schemes can be disguised in different kinds of forms. Probably the best known forms are multi-level marketing, Ponzi schemes and chain letters. Unlike the multi-level marketing, that is done in an actual company, in a pyramid scheme the marketing is based on the fact that the product that is being marketed, does not have a value as its own. The new investors are told that they have to get more people involved in the company, and the money that the earlier investors get, comes from the new investors, hence the actual product is not being sold. In a Ponzi scheme, the investors might get revenue for their investments, but there is no guarantee on how the money is generated. This means that the money might be taken from new investors or even made by gambling. Lastly, on a chain letter made by a pyramid scheme there is an actual letter or an email where the receiver is asked to donate an amount of money to the people on the list. By donating the money, the receiver gets to delete the first name on the list and add their own name there.

Dollar, Banknote, United States, January 1 Dollar

Perhaps the best known case of pyramid scheme of all has been the case of Herbalife. In 2008 the company faced allegations on being a pyramid scheme. Even though the company hasn’t been legally convicted of fraud, it is still being investigated by several organizations. However, Herbalife isn’t the only company that has been accused of being a pyramid scheme. There are several more and probably will be more to come. So alas, it will probably take a lot of time before we will get rid of the pyramid schemes completely. Before that, the only thing we can do is to keep our eyes open and be aware.

Sources:

http://www.cheatsheet.com/business/5-huge-companies-accused-of-being-pyramid-schemes.html/a=viewall

http://www.investopedia.com/articles/04/042104.asp

http://www.investopedia.com/terms/p/pyramidscheme.asp

https://fi.wikipedia.org/wiki/Wincapita

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2 Responses to What are pyramid schemes?

  1. unem93 says:

    interesting topic (Y) Hannu Kailajärvi is bad ass criminal

  2. osklet says:

    Well written blog and interesting topic. It is scary to think how dangerous pyramid schemes can be.

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