Watch Out!

Pyramid selling, trading schemes and chain gifting schemes

Scams in this category can take a number of forms, such as phoney trading schemes, chain letters, mailing lists or money making 'clubs'. Sometimes a scheme will have the features of more than one type. But, like other scams, the aim is to separate the unwary from their money by offering the chance to make large amounts of money quickly.

• Losing money
• Trading schemes
• Pyramid and chain gifting schemes
• Chain gifting letters
• Top tips to remember

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Losing money

One thing these scams have in common is that for every participant to receive the money on offer would require an endless supply of new participants. Since this is impossible in practice, these schemes must eventually collapse and result in most participants losing their money.

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Trading schemes

Trading schemes (also described as direct selling schemes, network marketing, multi-level marketing and other names) are a legitimate form of business activity offering individuals the opportunity to earn money by selling the scheme's goods or services from home. In some schemes, participants may earn additional commission by recruiting others to the scheme and from sales by their recruits.

However, trading schemes must comply with the provisions in Part XI of the Fair Trading Act as amended by the Trading Schemes Act 1996 and the Trading Schemes Regulations 1997.

Trading schemes become illegitimate and illegal when, while purporting to trade in goods or services, their real purpose is to generate money by recruiting new participants.

This is often referred to as "pyramid selling" (but not all "pyramid" schemes are "pyramid selling"). Note that recruitment rewards are not in themselves unlawful. But it is unlawful to persuade someone that the main motive for joining a scheme is to profit from recruiting others or to take money from someone on the basis of such a motive.

The Department of Trade and Industry has issued a guidance booklet ''The Trading Scheme Guide'' which outlines the provisions of current legislation. It includes the following important questions for all potential participants to consider:

• Do I understand what is being offered to me?
• Do I know what I will have to pay?
• Do I understand that this is a self-employment opportunity and earnings will depend on the market and my efforts?
• Is there a demand for the products of the scheme and can I honestly recommend them to others?
• While I have a legal right to a contract, do I understand that, if things go wrong, it will be up to me to enforce my rights?
• Am I prepared to take the risk?
• Should I seek independent advice before joining? (Compliance with the legislation does not mean that a scheme is commercially viable. Potential participants should seek independent and professional business and legal advice before signing any contract.)

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Pyramid and chain gifting schemes

Other forms of pyramid scheme do not claim to sell goods and services but they do sell false promises of quick and easy money. They may be advertised through newspapers, the Internet, 'investment' meetings or you might hear about them through a relative or friend.

In a typical pyramid scheme, a potential member is asked to pay to join the scheme. The only way to advance is to recruit others, who also pay to join. If enough new members join, the pyramid will grow, possibly enabling some participants to make money. But, in order for every participant to make money, there would need to be an endless supply of newcomers. In reality, since the number of new participants is finite, each new participant has less chance of recruiting others and a greater chance of losing their money.

Since the Gambling Act 2005, it is an offence for a person to invite someone to join a chain-gift scheme or for them to knowingly participate in the promotion, administration or management of a chain-gift scheme.

Why Chain gifting/Pyramid Schemes cannot work for most participants

If eight people invest £3,000 each in a scheme and then progress through the levels of the pyramid, they will each expect to receive £24,000 when they reach the final top. For each of those eight people to receive that amount, it will be necessary for 64 people to have each invested £3000.

Each of those 64 investors will be expecting to collect their £24,000, but that would mean that 512 people would have to have invested. Subsequent investors would need 4,096 participants, then 32,768 participants, then 262,144 participants and so on. In simple terms, each participant needs another eight investors in the scheme to get their money back and make a return.

The supply of potential investors will dry up, leaving the majority of people in the scheme having paid out a large sum and receiving nothing in return.

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Chain gifting letters

A typical chain letter might introduce itself like this:

Chain gifting letters are usually circulated with names and addresses of "existing participants" attached. Recipients are invited to send a sum of money to at least one of the named persons and then add their name to the list before photocopying it and forwarding it to other people. But presentational details may vary. In the case of the quoted example, recipients who sent money received superficial 'business plans' and so the scheme claimed to be selling a product, although it was bogus.

Thousands of chain letter scams are sent every day to homes, email addresses or mobile phones. Some chain letters can persist almost unchanged for several years. Unfortunately, it usually proves impossible to find the first link in the chain.

Pyramid or chain gifting schemes may also present themselves as games with names like the Concorde or Plane Game. They consist of a pyramid of participants and a 'plane' with pilot, two co-pilots, crew of four and eight passengers. The 'pilot' recruits passengers to participate in the scheme. Each passenger pays a sum of money to 'fly'. The pilot then departs with the contributions from the 'passengers' and the scheme then splits into two as the co-pilots become captains of their own aircraft. Now it is their turn to make money. But, as with all pyramid schemes, there must be an infinite supply of participants, the 'paying passengers', and the plane must crash, sooner rather than later.

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Top tips to remember

• Avoid plans that offer commissions based solely on recruiting new members.
• Be cautious of claims that you'll make money through continued growth or commissions on sales by your recruited distributors, instead of sales you make yourself.
• Look out for decoy references. Some promoters pay people to describe fictional success in earning money through the plan. Ask for solid evidence rather than a glowing testimonial.
• Don’t hand over any money or sign a contract to participate in any multi-level marketing plan until you've investigated it. Take independent professional advice.
• Don’t agree to anything (or sign anything) at high-pressure meetings or seminars.

Remember, don't fall for claims such as:

• "Your recruits do all the work for you, you just sit back and bank the money."
• "All you need for future wealth is your £XX starter kit."
• "Become part of the world's fastest growing industry, 'Network Marketing’."
• "You and your friends can enjoy wealth together."
• "I was unemployed and in debt before I discovered this opportunity."
• "I made £XXXX in XX days. I guarantee you will do the same."

Remember

• If it sounds too good to be true, it probably is.
• All schemes where money changes hands may be subject to the general criminal law on fraud, theft, and deceit. Evidence that a criminal offence may have been committed should be brought to the attention of the police.

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