Helpful tips in detecting pyramid schemes

Have you ever sat around the dinner table with a friend or family member or attended an ‘investment’ conference or seminar and repeatedly heard someone say, “Now, this is not a pyramid scheme” when talking about an investment opportunity followed by the utterance of these phrases, “a one-off participation payment to join” and “an ongoing recruitment payment, when you recruit others to join”? Be careful, as this investment opportunity may have the hallmarks of a pyramid scheme.

Pyramid schemes are illegal schemes* under the Australian Consumer Law. In a nut shell, they rely on the recruitment of new members so that the people at higher levels of the pyramid earn money. In some instances, there are products or services that are sold to make the scheme look legitimate, but these tend to be grossly overpriced compared to equivalents at an ordinary retailer and aren’t necessarily related to the returns that you are being promised – the main source of income is the recruitment of members, rather than the sale of products or services themselves and most pyramid schemes typically suggest you sell to, and recruit, people you know well.

The reality of pyramid schemes is that they tend to be heavily geared towards rewarding the very top of the pyramid at the expense of everyone below – part of the reason for this is that there needs to be an endless supply of members for the scheme to keep operating, which can sometimes be unrealistic the further down the pyramid you go.

In 2015 alone, 259 complaints were lodged with the Australian Competition and Consumer Commission (ACCC) regarding pyramid schemes, with a total of $951,721 reportedly lost. Although a small piece of the ‘scam pie’ according to the ACCC statistics’ ($83,770,733 reportedly lost in 2015 to all scam types including unexpected money, unexpected winnings, fake charities, dating and romance, identity theft, threats and extortion), it still pays to be informed about the dangers of pyramid schemes.

So, what are some warning signs to look out for if you come across an investment opportunity that just looks too good to be true? Here is a list of a few considerations that we have put together to help you assess the legitimacy of an investment opportunity:

  • Watch out for these indicators:
    • You are told about a 'business opportunity' to join in a group where you make money by recruiting new members.
    • The promoter is at pains to tell you, "This is not a pyramid scheme".
    • You are promised instant wealth or a new type of earning that is different to traditional ways of earning money.
    • You have to pay a large up-front fee to join the group.
    • Training costs can disguise income from recruiting. Distributors may be expected to buy costly sales aids or attend expensive training seminars (and documents leave out or gloss over legal issues and wrongly assert that the scheme is legal or has been approved by the authorities). There may be a commission for selling training down the line.
    • There might be some goods or services to make it look legitimate but consider their real value, whether they are being sold at a reasonable price and if they are something that there is actually consumer demand for.
    • You are discouraged from asking questions.
  • Do your homework:
    • If it simply seems too good to be true, it probably is.
    • Search the internet to see if you can find any complaints about the business and consult your state or territory fair trading or consumer affairs agency as they often have a list of businesses that have had a complaint made against them and/or had a court ruling identifying them as pyramid schemes.
    • Ask your friends and family for their opinion (except if they are already involved as they may be already swayed towards the need to recruit new members).
    • Seek independent professional legal and financial advice.

If you think you've been asked to join a pyramid scheme, you should contact Scamwatch at the ACCC or your state or territory fair trading or consumer affairs agency.