When a deal is too good, think twice. The thought of earning quick money is usually very appealing to most people, especially during difficult economic times. Needless to say, we are all familiar with fraudulent investment schemes that have unfortunately cost too many people the world over their hard-earned savings.
The concept behind these fraudulent schemes is simple and should be easy to identify but are not because they are presented to potential investors in a disguised and deceitful form.
For this reason, it is important to not only understand how these schemes work, but also to be familiar with the many different forms they take.
How Pyramid Schemes Operate
The schemes operate like a pyramid structure. They start with one person – the initial recruiter – who is at the apex of the pyramid. This person recruits a second person, who is required to invest a certain amount of money, which is then used to pay the initial person his capital.
In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest the minimum amount, and so on.
If the recruit gets ten new people he will have made nine times as much as the initial minimum investment. The new members become the recruiters as well and the news of the “incredible profits” spreads like bush fire. Recruiters get a profit of all of the money received minus the initial paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure, and totally breaks down when there are no new members joining the scheme. Potential members are deceived into believing that by giving money they will make more money. Unfortunately, the reality is that no wealth has been created, no product has been sold, no investment has been made and no service has been provided.
The fraud lies in the fact that it is impossible for the cycle to sustain itself without more money flowing in from new members, so members are doomed to lose their money eventually.
Those who are most vulnerable are those towards the bottom of the pyramid, where it becomes impossible to recruit more new members.
Unfortunately, many victims never recognize the scam in the “pyramid” because people are attracted to the idea of making a quick return, and the end up falling for the deceptive pyramid scheme structure.
Pyramid schemes usually try to pass off as legitimate entities by registering under the Companies Act or Co-operatives Act, but the absence of genuine commercial activity and the deliberate deception by their promoters to defraud unsuspecting members of the public makes them illegal from the word go.
It is therefore very important to recognize the characteristics of these so-called investment schemes.
It is easy to see how a pyramid scheme can work, but participating in it (regardless of the form in which it is presented) involves deception and fraud because not everyone will receive the money that is promised.
In this respect therefore, it is important to ask the right questions before joining or contributing your hard earned money to any investment scheme that you do not understand well or that you have doubts and suspicions about. How and where will this money be invested? What is the rate of return? Who will be investing it? Which government body regulates the scheme?
Talk to professionals and do your research before placing your money in unfamiliar ventures.
Always remember that if a plan promises to get you rich quickly with almost no risk or does not tell you how your money shall be invested, you should exercise caution before getting on board.
Any legitimate investment venture that involves taking contributions from the public must be duly licensed and registered by the respective government authorities that regulate organizations providing various forms of financial services.
These include, commercial banking and microfinance (Central Bank of Kenya); insurance (Insurance Regulatory Authority); investment schemes (Capital Markets Authority); cooperative societies (Ministry Of Cooperatives and Sacco Societies Regulatory Authority); and pensions (Retirement Benefits Authority).
Always remember that if the entity is not duly registered, licensed or legally recognized by these government bodies, then you and your money are safer staying very far away from it.