They offer you to invest money at incredibly high-interest rates, promise guaranteed income, and ask you to actively involve your friends in the project? Be careful, a successful investment company can be a pyramid scheme. We will tell you how these organizations operate and how to recognize them.
What is a pyramid scheme?
The classic financial pyramid is a fraudulent income-generating scheme. Finances come from the constant attraction of new members. Those contribute money and then attract new people: the pyramid grows. At the same time, the top can really win. And the base of the pyramid receives nothing: they naively donated their money to those who are one notch higher than the pyramid.
This classic scheme was relevant 20 years ago. If someone tells you that in the 90s he won the jackpot of the pyramid, maybe it was, he did not lie, but ripped him off. But this is not a reason to repeat his feat: in our time, such schemes do not work. The rules have changed. Remember: you cannot make money today with financial pyramids.
If you decide to invest your money in a pyramid scheme, hoping to become a partner and get rich at the top, you will get nothing. Just hand over your money to the organizers.
Modern pyramids are a scam. They act fast: aggressive advertising, raising money from those who believe in miracles (or gifts) and that’s it. The organizers are hiding money from the deceived investors to open another investment project in a new location.
Sometimes the organizers of the pyramid do not hide its essence. They explain very convincingly the mechanism of action and demonstrate logical calculations. The arguments are about the following: due to the Internet many channels have appeared to attract new partners, today this business is even more successful than in the 90s, thanks to the virtual space.
Not all scammers honestly call their activities a “financial pyramid.” They are often positioned as an investment company. They come up with flashy and attractive names: IT company, Internet company, innovative project. They offer to buy stocks and bonds, promise to invest in high-yield construction, gold mining, or ultra-efficient production.
The pyramid as a credit institution
Another type of financial fraud is misleading people who are unable to obtain a loan from the bank due to bad credit or are unable to repay it. The pyramid pretends to be a microfinance organization or even a bank, and they can offer the following services:
1. General loans
You will be offered to deposit only 20% of the loan amount, and the rest will supposedly be borne by the company. More precisely, at the expense of new people who want to get such an attractive loan. As a result, of course, none of the contributors will receive anything.
2. Loan refinancing
The principle is the same: one person contributes 30% of the loan amount and the rest is paid by the company, due to the influx of new debtors. Relying on the generosity of the company, the debtors not only do not repay loans to the banks but also lose even more money.
3. Pyramid as something else
Scammers are inventive, they disguise themselves as other forms of organization: asset management companies, consumer cooperatives, well-known companies. Sometimes it is not so easy to understand that it is a real company or a financial bubble. Only 24% of people surveyed were able to calculate a pyramid from investment proposals.
How to recognize a pyramid scheme?
The first thing you should pay attention to is the absence of a license from the Bank of the given country to carry out the declared activity. Even if you were shown an official document, it is better to double-check it. You cannot invest money in a business without a license, you will lose it.
Other indications also show that this is not a real project, but scammers:
- It is suspicious if a company registered yesterday, on the eve of fundraising, has a minimum authorized capital and only one founder.
- The organization is highly publicized and publicly promises unprecedented returns, well above market levels.
- You are told there are no risks. Real investment firms warn investors about investment risks.
- Upfront Contributions: You must deposit a small amount of money, usually cash, to have a chance to invest in the project.
- If a company claims to invest its money in highly profitable companies (oil or gold extraction, construction), request documentary evidence of this activity.
- It is not clear in the contract if the company is liable to you in case something goes wrong.
- You are asked to bring in new clients: This is an argument in favor of the fact that you have an opaque financial scheme in which they want to take advantage of others.
So, making a decision:
Gather as much information about the company as possible, study the documents carefully, take your time, and don’t succumb to provocations if you’re in a rush to sign an agreement and deposit money. Consult with an attorney if necessary. Don’t fall for these types of scams.