How pyramid schemes scam you out of your money

Pyramid schemes are just another scam to steal your money. Quite a few scammers who used this method to steal money were arrested recently, prompting consumers to ask how to spot one.

According to a consumer alert from the National Consumer Commission (NCC), a pyramid scheme is a deceptive practice where participants earn money primarily by recruiting others into the scheme, rather than through the sale of goods or services.

These schemes often pretend to be legitimate businesses or investment opportunities, targeting individuals seeking financial security and quick wealth. Most of the people targeted recently retired and received substantial amounts of money or have other substantial amounts in their bank accounts.

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What is a pyramid scheme?

According to the Consumer Protection Act an arrangement, agreement, practice or scheme is a pyramid scheme if the participants receive compensation for recruiting other people rather than from the sale of any goods or services and the emphasis is to get more members.

Pyramid schemes, unlike Ponzi schemes, usually offer a victim the opportunity to ‘make’ money by recruiting more people into the scam.

The NCC says marketers or recruiters for pyramid schemes can be anyone, even people you trust or admire. They prey on your financial aspirations and present enticing narratives of success to lure you into their schemes.

The initial promoters recruit members who then recruit more members, with returns for older members funded by contributions from recruits. As the scheme grows, only a few benefit while the majority, especially those who join later, suffer losses. This fraudulent structure is an indication that it is a pyramid scheme.

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How to safeguard yourself from pyramid schemes

You can safeguard yourself from falling victim to a pyramid scheme by taking these precautions:

• Confirm with the Financial Sector Conduct Authority (FSCA) that the company selling the financial product is legitimate and authorised to give financial advice and operate in South Africa.
• Beware of recruitment methods such as seminars, home meetings, phone calls, emails, or social media and always confirm the authenticity of the offering.
• Seek opinions from trusted individuals, such as an independent financial adviser, before committing to any financial opportunity.
• Report any suspected pyramid schemes to the South African Police Services (Saps) immediately.

If you suspect that you have become involved in a pyramid scheme, report the fraud to the police and NCC immediately. Cut off all contact with the fraudsters, cease any further investments and alert your bank if you shared your bank account details.

Remember scammers do not care about you, the NCC warns, they only want your money. “Stay vigilant and protect yourself from falling victim to these illegal schemes.

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Is a Ponzi scheme the same as a pyramid scheme?

According to Investopedia, a Ponzi scheme is investment fraud, where funds from new investors are used to pay existing investors. Ponzi schemes are named after Charles Ponzi who promised investors a 50% return within a few months for what he claimed was an investment in international mail coupons. He used funds from new investors to pay fake returns to earlier investors.

With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

Useful contacts

Financial Sector Conduct Authority: to check if a financial services provider or financial advisor is authorized to sell you financial products and services, call the FSCA Call Centre: 0800 20 3722 or visit the website at www.fsca.co.za.

National Consumer Commission: Report pyramid schemes to the NCC by sending an email to scams@thencc.org.za.