Bermuda triangle

05 July 2005

By Sarah Modlock

It never ceases to amaze how some people throw their cash away on the most ridiculous things. I don't mean ridiculously lovely things like diamonds and Krug Rose. We're talking ridiculously stupid things like pyramid schemes.

Despite endless publicity and government warnings, the lure of making what appears to be easy money has led thousands of people to give up their savings, often stitching up their friends in the process. Pyramid - or 'gifting' - schemes have duped men, women, old, young, rich and poor alike. For some strange reason these scams seem to surface in summer so don't say I didn't warn you.

How pyramid schemes work

Pyramid schemes are marketed on the premise that they eventually make money for everyone involved. The reality is that a very small number of original 'investors' cash-in at the expense of hundreds of newcomers.

Participants agree to pay a fixed sum of money to one of the members of scheme, but hope to receive even larger payments in return by recruiting others. The person at the top of the pyramid becomes the 'receiver'. He or she finally gets the payback on the cash they put in (typically £24,000 on a contribution of £3,000) when enough new people are recruited. The levels below are full of 'gifters', each hoping to move up a level closer to the top. The pyramid usually collapses when new recruits dry up. When this happens, most of the levels above waiting for their payout get nothing back, including their original contribution.

What victims are unaware of - or choose to ignore - when they hand over their cash is the fact that these pyramids defy the most basic maths. On the basis that, for a typical pyramid, every new recruit must bring eight others and those eight must attract 64 and so on, the 12th layer of recruits would need a total of around 8 billion new joiners - more than the entire population of the planet. Doh.

Women do seem to be particularly attracted to these scams. That could be because many of them have names designed to appeal to them and sound friendly, such as 'Hearts'. News of the scheme - along with whispered tales of 'a friend of a friend who got thousands' - spreads quickly through friends, family and workplaces.

The 'Women Empowering Women' pyramid scheme is a classic example. It was brought to the Isle of Wight in 2001 by a local businesswoman who came across it in the US. The all-female scheme also claimed to provide solidarity, friendship and emotional support. Oh please. The brochure included messages such as: 'Trust the system and remember this feminine process works best through sharing with others, the opportunity we have been given.' The organisers should have been arrested for that sentence alone.

The apparent success of the first scheme spawned others including 'Friends empowering friends' and 'Islanders empowering islanders' which had lower sums of money involved. In Ireland, a scheme called 'The Money Tree' worked in the same way. But several hundred people in the Isle of Wight are thought to have lost thousands of pounds in 2001. In one week alone during that summer, the local NatWest bank in Newport had so many withdrawals of £3,000 that it was concerned it would run out of money. The local Trading Standards Officer had great difficulty explaining to people why the scheme had failed for them - they just could not grasp the maths. Women felt they were letting their friends down if they did not join and at the same time, they felt guilty about recruiting friends into the next layer.

Clamp down

It's not just Brits who are sucked in by pyramid schemes. In 1997 the Albanian government was brought down when pyramid schemes collapsed, in which most of the population had invested their money. This ruined an already poverty-stricken country and sparked riots. Just last month more than 25,000 UK-based victims of a pyramid investment scam were told they could receive compensation after action by US authorities. The US Federal Trade Commission has set m (£11m) aside to compensate victims of Oklahoma-based firm Skybiz which ran an international pyramid scheme based on sales of work-at-home web packs between 1998 and 2001. Check www.skybiz-redress.com for details of the compensation scheme.

In the UK, it has proved tougher to clamp down on what, for many, amounts to daylight robbery. Pyramid schemes have traditionally fallen outside existing law if members sign a statement saying that the money is a gift. Keeping each contribution at or below £3000 avoids tax and because the schemes are marketed through word of mouth, the traditional advertising standards are dodged.

Laws to ban chain gifting schemes are written into the new Gambling Bill. This will make it illegal to organise, encourage others to participate in, or receive benefits from gifting schemes and could lead to a fine up to £5000 or imprisonment for up to 51 weeks. When the Bill becomes law - possibly later this year - the new Gambling Commission will be responsible for investigating schemes and prosecuting those who organise, promote or recruit into them. People merely joining up will not have committed an offence.

If you have concerns about a pyramid scheme the Department of Trade and Industry has further information on its website: www.dti.gov.uk. Alternatively contact your local police, local Trading Standards or the Office of Fair Trading: 0845 7 22 44 99.

Don't get scammed

•  A pyramid scheme may come in a number of guises and the word 'pyramid' may not even be mentioned. They are also known as 'Ponzi schemes', a name which immortalises a highly successful 1920s US pioneer of the technique.

•  Pyramid schemes may be disguised as games, chain letters, buying clubs, motivational companies, mail order operations, or investment organizations.

•  Schemes should not be confused with 'pyramid selling' which involves the sale of a product and regulated by trading laws.

Before you contribute money to anything, consider whether you can afford to lose your cash.

•  Remember there are no guarantees with pyramid schemes. If it sounds too good to be true, it probably is.