Download Pyramid and Ponzi schemes

Backgrounder
"Pyramid and Ponzi schemes"
There are several different types of investment schemes; variations of the "Pyramid" and
"Ponzi" scheme appear to receive the majority of this attention.
Pyramid schemes get their name from their triangularly-shaped corporate structure and
can be promoted under any number of business names. While it is common for a product
or service to be represented in the scheme, the sale of this product or service is a
secondary factor in the generation of returns. Sometimes, it's not a factor at all. The
returns, if any, are developed primarily from the recruitment and investments of new
members and the resulting creation of lower tiers in the pyramid. Pyramid scams are
often advertised to potential victims as a business opportunity where all that they have to
do is recruit more investors. The more they recruit, the more money they make.
Ponzi schemes are often confused with pyramid schemes. A Ponzi scheme is basically a
fake investment opportunity. Investors are lured into the scheme with the promise of a
high return on their investment by way of an elaborate investment plan. This type of
scheme can be harder to recognize as investors traditionally place a great deal of trust in
people who directly manage investment plans. With Ponzi schemes however, the
investment plan rarely generates any actual money. Or, if it does, the returns fall far
short of what was promised. Nevertheless, the plan will never stand up to the scrutiny of
someone looking for specifics as to how the money is actually made. As a result, very
soon after a Ponzi scheme begins to operate, money from new investors is used to pay off
existing ones because the 'investment' itself does not generate anything. This is known as
the "robbing from Peter to pay Paul" scenario.
Ponzi and pyramid schemes differ only in their structure as to how the money is moved
around. Both rely on the addition of new money to keep operating and the pool of new
potent ial investors is continually shrinking. By their very nature, these organizational
structures cannot support themselves for very long and eventually collapse leaving
lower-tiered investors without any recourse to recover their money.
"Pyramid" and "Ponzi" schemes can frequently be disguised as legitimate business or
investment opportunities. However, due to the ways in which they function, there are
common aspects of these schemes that will differentiate them from legitimate plans.
Watch out for:
• High-pressure sales tactics
• Closed-door (secretive) information sessions and/or promotion meetings.
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Emphasis on recruitment rather than the sale of a product or service.
Very high- yield return within a short period of time.
Vague or non-specific explanations as to the core nature of the business and
exactly how it makes money.
Word-of- mouth referrals as opposed to public advertising.
With any type of investment, appropriate inquires should be made in order to ensure that
the claims made about the investment or business are true and legitimate. Always
conduct your own independent research before deciding to proceed. This may include
input from a reputable financial advisor, accountant or lawyer.
Additional information on these tactics and others can be found on the following
websites:
www.rcmp-grc.gc.ca/scams- fraudes
www.phonebusters.com
www.recol.ca