Pyramid and Ponzi schemes are usually disguised as “get rich quick” opportunities. Oftentimes, they exploit vulnerable communities and disproportionately impact low-income households who are just trying to earn a little extra income.
Today’s financial market frequently calls for households to hold multiple jobs, often tempting them to find some sort of side hustle. Pyramid and Ponzi schemes take that aspiration and run with it, preying on those just trying to earn more income for a better life.
Predatory profit practices are becoming more and more prevalent in the digital era with recruiting taking place across many social media platforms.
Understanding the signs and tactics of predatory profiters can be crucial. Threats to one’s identity, net worth and livelihood can be constant. Recognizing the impact of these practices is vital to protecting people while dismantling said predatory systems.
Protecting yourself and your community
Recognizing the red flags of a potential scam is absolutely crucial. I recently received an inquiry in my inbox urging me to join a digital financial start up that made promises that, through research, proved too good to be true. It’s actually what inspired this article.
Trusting my gut, I contacted my friend and former Business Director for The Bark, Drea Rabuse, and asked for her thoughts. Rabuse currently works in advertising and is based in Chicago.
“Anything that seems that easy or seems too good to be true always is,” Rabuse told me. “Anything that needs something from you right away or puts pressure on you to buy in is always a red flag.”
Rebuse also referred me to her husband Thomas Tran. Tran is the Founding President and Chief Executive Officer of Fortuna Wealth Management, a finance planning company that “helps clients spend less time worrying about money and more time on the people and causes that matter most,” according to their website.
Tran received his Masters of Science in Personal Financial Planning from the College for Financial Planning in 2020 and his Bachelor of Business Administration from the University of Minnesota Duluth in 2018.
Tran advised people to trust their gut. He reiterated that if an opportunity seems too good to be true, it probably is.
“Realistically, there’s no free lunch,” Tran said. “Nobody’s just going to go out and about handing out free money for no reason. So, if it sounds a little bit too good to be true, it might be.”
According to government financial experts, if an opportunity possesses an emphasis on recruitment over sales, or If building a downline seems more important than selling products, it’s a red flag.
Another warning could be guaranteed high returns with little effort. Sustainable businesses require hard work and realistic expectations. Unrealistic promises, such as giving a little money to get more back, are signs of deception.
Pressure to invest can also be a fraud indicator. Legitimate businesses don’t pressure you to buy starter kits or invest significant sums before starting. The scheme that slid its way into my inbox promised everything I mentioned, as long as I gave them a valid credit card and my social security number.
Most pyramid and Ponzi schemes possess the aforementioned practices, so let’s dive into those and weaponize our knowledge cannon with even more information.
What exactly is a pyramid scheme?
According to the New York Attorney General, a pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of “investors.” The initial promoters recruit investors, who in turn recruit more investors, and so on.
The scheme is referred to as a pyramid because, at each level, the number of investors increases. The smaller group of initial promoters at the top require a larger base of later investors to support the scheme by providing profits to earlier investors. Pyramid schemes may or may not involve the sale of products or distributorships and involve sales in an attempt to show legitimacy.
Pyramid schemes rarely focus on selling genuine products or services. Instead, they emphasize recruitment, promising high commissions for building downlines. Initial investments, disguised as starter kits or training materials, drain finances. The true profit comes from recruiting others, not from actual sales. This unsustainable model ensures that only those at the top benefit, while the vast majority lose money.
But, are pyramid schemes illegal? Well, yes they are. The US Department of Consumer Protection states that pyramid schemes are illegal under state and federal law. In other words, they’re barred across the United States. If the plan’s way of making money is based not on selling a product or a service, but on recruiting new members into the plan in order to get paid, it is an illegal pyramid.
What’s a Ponzi scheme?
Investor.gov cites a Ponzi scheme as an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
Are Ponzi schemes illegal? According to the Los Angeles based Criminal Defense law firm Stephen G. Rodriguez & Partners and the Department of Justice, Ponzi schemes are illegal in the United States.
The scheme continues to operate smoothly as long as there is a constant flow of new investors. It eventually collapses when there are no investments nor earnings and it becomes difficult to recruit new investors, or when existing investors decide to cash out.
The term Ponzi scheme takes its name from Charles Ponzi, who was convicted for fraudulent schemes he conducted in Boston, Massachusetts in the late 1920s. The most famous Ponzi scheme in the modern world was Bernard “Bernie” Madoff who allegedly swindled investors for $50 billion. Madoff received a sentence of over 150 years in Federal prison for his scam.
What are the consequences of pyramid and Ponzi schemes?
The consequences of pyramid and Ponzi schemes tend to be widespread. Victims are likely to lose money invested in starter kits and unsold products. They also dedicate time and resources to recruitment, neglecting other income-generating activities such as jobs or pursuing a career related to their passion.
According to the Ryan Pacgya Criminal Defense law firm in Minneapolis, Minnesota, if found guilty of operating a Ponzi scheme, a person can face five, 10 or even more years in a federal prison in the state the Daily Planet is based out of. The same can be said about pyramid schemes.
These schemes are not a victimless crime. Taylor & France, a scholarly publication of more than two centuries, said harm caused by said schemes goes beyond the financial loss of victims.
“There is a growing literature on the impact of fraud on victims indicating that just because there is no physical harm, and sometimes no financial loss, it is not a victimless crime,” Taylor & France cites. “Common impacts include psychological impacts such as feelings of shame, embarrassment, and self-blame, medical issues, and disruption through changes in behavior, which are often negative.”
Research specific to Ponzi and pyramid fraud victims suggests serious health impacts, like negative effects on relationships with friends, family, and colleagues and sometimes violent retaliation against middle-ranking participants of schemes.
Strategic targeting
“The reason that there are so many of these schemes is because it works, right,” Tran said. “When there are people that are financially desperate—when you’re stuck between a rock and a hard place—and somebody offers you a potential chance at hope, and it’s as simple as paying somebody $25 to do it, that can be enough to move the needle, or that can be enough to make somebody make a bad financial decision.”
Caleb Wragge, the Youth Engagement Director for St. Andrew Lutheran Church in Eden Prairie where I work, told me that when he and his wife were living in Portland, they were targeted directly and in person by someone hiding under the guise of friendship.
“My wife was just walking down the street when a woman approached her to compliment her outfit,” Wragge said. “Then she invited her to dinner with her [partner] and asked me to come. At the dinner, they tried to convince us to buy ‘tickets’ for some financial recruitment event. I was just shaking my head the entire time. I knew right away what was up.”
This was an example of strategic targeting. Oftentimes a person trying to recruit others to a financial “opportunity” don’t realize that they’re furthering the scheme. Seeing it as legitimate, they continue to follow the instructions of “the deal,” thinking it’s going to provide them and others with financial opportunity.
How to fight financial schemes
According to financial institutions, combatting pyramid schemes requires a multi-pronged approach.
A lot of solutions require systemic change, like strengthening economic opportunities. Providing access to quality education, job training and access to fair-wage employment would empower people to pursue self-sustainable livelihoods, making them less susceptible to predatory “get rich quick” schemes.
Authorities can also enforce regulations. Stricter laws and enforcement mechanisms can deter scheme operators and hold them accountable. In many cases, the FBI, U.S. Securities and Exchange Commission (SEC) and other governmental agencies will also investigate, which can result in several different types of charges that could lead to federal prison.
Community education is also vital to preventing schemes from hurting vulnerable parties. Raising awareness through education equips individuals with the knowledge to identify and avoid pyramid schemes.
If you suspect a pyramid scheme, report it to authorities and educate others in your community. Share resources and awareness campaigns to empower individuals to recognize and avoid these predatory practices. Listed below are some resources for reporting schemes.
Federal Bureau of Investigation (FBI) | Minneapolis Office
1501 Freeway Boulevard | Brooklyn Center, MN 55430
(763) 569-8000 | www.fbi.gov
United States Postal Inspection Service
1745 Stout Street, Suite 900 | Denver, CO 80299-3034
(877) 876-2455 | postalinspectors.uspis.gov
Federal Trade Commission (FTC) | Consumer Response Center
600 Pennsylvania Avenue NW | Washington, DC 20580
(877) 382-4357 | TTY: (866) 653-4261| www.reportfraud.ftc.gov
If you have concerns about a particular offer or believe you are the victim of a scam, authorities want to hear from you. You may call them at (651) 296-3353 (Twin Cities Calling Area) or (800) 657-3787 (Outside the Twin Cities), or submit a Consumer Assistance Request Form.
Discover more from Daily Planet
Subscribe to get the latest posts sent to your email.
