Advertisement, friend's advice, flyer - you are unexpectedly promised a super offer. All you need to do is take part. This is a great opportunity, the door to a life full of wealth, luxury and freedom from worries. But be careful! The dream of big money can blind you. Especially if you are dealing with skilled criminals who want to rob you. For example, with the help of a financial pyramid. Here you will learn how it works and how to recognize such a scam in time. But despite the sophistication of criminals, how to protect your savings
What is a financial pyramid?
A pyramid scheme (Pyramid Scheme) or Ponzi Scheme (PsS) is a scam in which new investors are most often victims, having succumbed to the persuasion of old investors, and losing their money. It always starts with a tempting offer. Promises: invest a certain amount and in a short period of time you will receive a large profit. Sounds tempting. So what is the problem with Ponzi schemes? It is the promise of profits: they are primarily received only by those who launched the pyramid scheme.
By definition, all FPs are based on a very cunning and age-old scheme: participants convince others to invest their savings. Then these people convince even more people to invest, and so on, and so on. A “snowball effect” is created, when the ever-growing number of participants supposedly leads to a constant increase in profits. Therefore, it is possible that you will be recruited not by shady sellers, but by good acquaintances or friends. Not with the intention of defrauding - they themselves will not yet understand what is at stake. They may even think that they are doing you a favor by opening the door to big money.
The amounts involved are not always particularly large. Sometimes a few hundred dollars is enough to fall for a scam. The goal is to attract as many people as possible to participate, like: “You can take a chance, maybe there’s something to it.” In other cases, you are asked to invest a few thousand hryvnias, or to continue pouring in fresh money. But you won’t get a penny back, which makes it even more important to recognize such FPs in time. Therefore, you should consider the scam in more detail.
The snowball principle
This is not a case where everyone always comes out of the FP empty-handed. Some people make big profits. But only a few and only until the system ends. And it happens quickly. The math shows it.
Imagine a pyramid. At its top are the masterminds. They want to sell a particularly clever product, a desirable service, a profitable financial investment (so they say). To do this, they hire sales partners - the second, upper level of the scam. To get started, you need to pay a kind of entry fee. For example, you can purchase a license to resell the product, get coaching to learn how to independently attract additional players. Or you have to buy a certain amount of product X. If you participate, you become part of the next level one step below.
But regardless of whether it is a license, coaching, or a product, the participants of the system only make a profit when they attract new people, who, in turn, invest. Participants at higher levels initially receive a reward for their investments. This payment of money creates the impression of a really high profit for the product. In fact, this does not happen for sales, but only due to the entry fees of the next deceived.
Who gets what, when, and how much is dictated by the system. Sometimes the top executives get everything, sometimes the lower levels get something too. But all systems have one thing in common: before a new member can recoup their contributions, it is necessary to attract countless other members (= contributors). Due to the large number of participants, the system quickly collapses, many people lose their money.
Example: Suppose 1000₴ was transferred and ten new members were recruited. These members form the next lowest level of the pyramid below you. Each of these ten, in turn, attracts 10 new depositors, only then the next level is complete. In our example of the “bullet”, you receive 100 hryvnias for each new level. Then in geometric progression: the levels grow, requiring millions of new “fighters”. But even with such a huge number of newcomers, you still will not get your share.
What types of scams exist?
Not everything works as described in the previous section. There are options built differently, but according to the same principle.
Chain mail
Here you receive a message by mail, email, messenger or other similar means. Content: you have to send money to the sender, and forward the message to your friends. They also have to pay, but only a small part is received - the rest goes to the previous sender. Here you also need to find a lot of friends very quickly to at least return the contributions.
By the way: like chain letters, spam and phishing attacks are also designed to deceive recipients.
Gift circles
Your deposit is a “gift” to the other members of the friendship circle. Then you should receive a (monetary) gift from the members who came after you. Such circles often take on an esoteric appearance. For example, giving gifts serves as a catalyst for the disappearance of inner burdens, providing a particularly intense friendship. That is why they are also known as “heart circles”.
Ponzi scheme
This scam is named after the Italian fraudster Charles Ponzi. It involves you supposedly investing in an investment fund or similar financial product. In reality, your money never “sees” the capital market. Instead, the profits are distributed among other investors.
This fraudulent game can go on for a long time. Mathematically, you could earn ten percent for ten years, simply by returning your money in installments. The fraud becomes obvious when investors want to get the full amount of their investment. Then fresh capital is needed from new investors, because the system is collapsing.
Is it illegal? Yes, it is a criminal offense. Those who create it, actively support it, face years in prison and a fine. Even attempting it is a crime. There is only one option that is considered legal: multi-level marketing (MLM), also known as network marketing. And what is the difference between a pyramid scheme and an MLM? In the latter case, specific products are purchased and sold, similar to dropshipping. You can also hire other sellers to sell these products. Then you get a commission on the sale. As long as the profit of this option comes from the actual sale of products, multi-level marketing is not prohibited.
How to avoid falling into a financial pyramid
Why do scammers always manage to create FPs and find new victims? They manage to hide its signs behind big promises. They show only the expected benefits and profits, suppress critical inquiries and remain vague about the details. As a result, there is a possibility of being drawn into FPs without even suspecting anything. Therefore, do not give in to the initial euphoria, and do not give in to time pressure. How to recognize a FP - carefully check every offer, no matter how attractive it may seem at first glance.
The following tips will help you with this:
- Beware of offers that promise excessively high returns. Any implied returns of 10, 20, 30, or even more percent should alert you. If an opportunity sounds too good to be true, it probably is.
- Watch for discrepancies. For example, ask yourself why such an attractive way to make money isn’t kept secret so that a few people can make even more profit? Why are you being asked to transfer money abroad, even though the company may be located in Ukraine?
- Avoid business models that require convincing a lot of people in your circle to join in. Even if you (still) believe in the business model, think about what the consequences could be for your friends if it goes wrong.
- Carefully study the company's information materials. Everything should be complete and clear:
a) the organization's website must contain a detailed legal notice;
b) the information must be true;
c) it is clear what product is being referred to;
d) how and to whom this product should be sold.
- Search the Internet for information about the experiences of others who have had dealings with the company. For example, the banking supervisory authority, the National Bank, regularly publishes on its website the names of companies that operate using dishonest methods. However, you can find reliable service providers in the National Bank's database.
By the way, although crowdfunding also involves a large number of people investing money in one company, the system behind it is completely different and reliable, albeit risky.
Financial pyramids in Ukraine
Unfortunately, FPs continue to emerge in Ukraine, often in the most unexpected forms. They take on various guises: investment schemes, Internet fraud, cryptocurrency, loyalty schemes. But the essence remains the same - the system is financed by new participants to pay off old ones. Everything is accompanied by brilliant promises of high profits in exchange for minimal costs and efforts.
One of the most famous financial pyramids in Ukraine was "MMM-2011", in which participants were promised huge profits on their investments. The scam worked on the principle of attracting people who invested money in a pooled fund. They were promised huge interest on their invested funds, but in reality the payments were made at the expense of contributions from new participants. After some time, the FP became unmanageable, most people ran out of money. As a result, the organizers of the scam were brought to criminal responsibility, but by that time thousands of people had already suffered as a result of this financial fraud.
Another example is cryptocurrency scams. Recently, especially during the height of the cryptocurrency boom, many fraudulent schemes have appeared in which participants are offered to invest in untested coins - in the "golden future" of the cryptocurrency market. As a rule, these fraudulent schemes promise huge profits in a short period of time, thus minimizing potential risks. However, as soon as the FP reaches its peak, the organizers disappear along with the investors' funds.
Legislative approach
Ukraine has laws to combat pyramid schemes, but they are not always easy to detect. According to the Criminal Code of Ukraine, FPs fall under Article 190, which provides for 3-12 years of imprisonment with confiscation of property. In addition, the Law of Ukraine “On Financial Services and State Regulation of the Financial Services Market” (No. 2664-IV of July 12, 2001) establishes that providing financial services without a license is illegal. Any activity involving the collection of funds from individuals without proper supervision and regulation may qualify as FP.
Important: FIs can disguise themselves as investment funds, mutual funds, and various financial schemes. Sometimes they even create the appearance of legitimate activity by registering companies, opening accounts, and other legal mechanisms. However, the essence of these schemes is the same: attracting funds from newly defrauded people to pay off existing ones.
Conclusions
Pyramid schemes are not only a criminal and legal problem, but also a serious economic threat to citizens. They lure with a quick enrichment, but in reality they exist until the influx of deceived people stops. It is important to heed the warnings, not to be led by dubious promises and always check all investment offers for licensing and legality.
