Pyramid schemes are scams,  unsustainable and often illegal

21Feb 2019
Editor
DAR ES SALAAM
The Guardian
 Pyramid schemes are scams,  unsustainable and often illegal

A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as-

 as such, pyramid schemes are unsustainable and often illegal.

Pyramid schemes have existed for at least a century in different guises. Some multi-level marketing plans have been classified as pyramid schemes.

In a pyramid scheme, an organisation compels individuals who wish to join to make a payment. In exchange, the organisation promises its new members a share of the money taken from every additional member that they recruit. The directors of the organisation (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative—whether or not they do any work, the organisation's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.

Such organisations seldom involve sales of products or services with value. Without creating any goods or services, the only revenue streams for the scheme are recruiting more members or soliciting more money from current members. The behavior of pyramid schemes follows the mathematics concerning exponential growth quite closely. Each level of the pyramid is much larger than the one before it. For a pyramid scheme to make money for everyone who enrolls in it, it would have to expand indefinitely. This is not possible because the population of Earth is finite. When the scheme inevitably runs out of new recruits, lacking other sources of revenue, it collapses. Because in a geometric series, the biggest terms are at the end, most people will be in the lower levels of the pyramid (and indeed the bottom level is always the biggest single layer).

In a pyramid scheme, people in the upper layers typically profit while people in the lower layers typically lose money. Since at any given time, most of the members in the scheme are at the bottom, most participants in a pyramid scheme will not make any money. In particular, when the scheme collapses, most members will be in the bottom layers and thus will not have any opportunity to profit from the scheme, yet they will have paid to join the scheme. Therefore, a pyramid scheme is characterized by a few people (including the creators of the scheme) making large amounts of money, while most who join the scheme lose money. For this reason, they are considered scams.  

Several years ago, the Bank of Tanzania (BoT) and Capital Markets and Securities Authority (CMSA)   issued a formal warning to the general public to stay away from the relatively new network marketing scheme known as D9 Club, saying it operates outside the country’s legal framework.

 

According to a joint statement from the two top financial sector regulatory bodies, getting involved with the D9 Club programme will simply lead to people losing their money.

 

“BoT and CMSA believes that D9 is operating contrary to sections 171A, 171B and 171C of the country’s penal code. It is a criminal offence to run and or persuade people to take part in a pyramid scheme,” the statement said.

 

We should note that illegal pyramid schemes are invented in such a way that the money contributed by the new member is given to another member who joined earlier, and there is no logical explanation on how that money is invested or multiplied.

 

It is a timely warning to members of the public to avoid being tempted in any way to take part in the D9 Club scheme or any other of pyramid nature.

 

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