The Would-be Pharaohs of Today
By Methmalie Dissanayake
Consider the following scenario: a man addresses a packed crowd in a large hall, his words charged with the confidence of a motivational speaker, enough to draw his audience almost into a trance, as he relates the hardships he endured since childhood until a simple strategy helped him become the millionaire he is today.
“What I did was to buy X product from Y company and became a lifetime member,” he says. “Then I made a few of my friends join this fortune and my entire life turned upside-down. I’m forever in debt to this company. I would die for it, because a poor man like me was able to come this far only because of this company.”
The echoes of his voice are drowned out by the cheers of the raving crowd, some of whom are inspired to tears by his story.
If this scenario seems new to you, this next situation might seem familiar: Samantha* is approached by one of his close friends after a long time. Over their conversation, his friend casually tells him of a great opportunity to earn money on the side while doing a permanent job.
“You do not have to do much,” his friend says. “This is a Multi-Level Marketing (MLM) company that has expanded into over 100 countries, so there’s no need to worry about doing business with them. Now I earn a few lakhs per month just by staying at home. I will be able to purchase my own BMW in a few months from now. If you’d like to join, I’ll take you to that office; because there are so many details about the business that you will not be able to understand everything If I explain it all now,” the friend said.
In Sri Lanka, and around the world for that matter, becoming a millionaire without much effort is a lucrative dream. The people that face countless difficulties every day just to put food on their tables are naturally drawn to the prospect.
But is it as attractive as it seems, or does a bed of thorns hide beneath the roses?
Easy money ends in tragedy
The similarity between the scenarios above is a person promising his potential business partners that they can join his business and effortlessly earn a huge sum of money within a few weeks. Anyone facing financial difficulties would find the prospect attractive enough to somehow find the money to buy these products – most likely by borrowing money from others at high interest rates.
They dream of sharing the fairytale ending of the motivational speaker’s story, where their burdens vanish upon them becoming rich. Unfortunately, the reality turns out to be far from what they expect – most of them end up ensnared in the grasp of a pyramid scheme.
Under ‘Pyramid Schemes’, which are illegal in Sri Lanka, a person makes a payment to earn the right to recruit others into the scheme, for which they receive an income. The new recruits subsequently make payments to get the right to further recruit others, and in turn receive incomes for such recruitment.
Such a scheme is called a pyramid scheme because over time, a hierarchy of participants resembling a pyramid is formed with the introduction of new and larger levels of participants to the scheme. The salient feature of a pyramid scheme is that the number of participants expands rapidly in an exponential manner at each stage, as new participants are drawn in. As a result, a large majority of participants at the bottom levels of the pyramid scheme inevitably lose the money they put into the scheme.
In Sri Lanka, there are two types of such schemes; namely the Naked Pyramid Scheme and the Product-based Pyramid Scheme. The Naked Pyramid scheme is one in which no product is offered. The Product-based Pyramid Scheme is operated in most instances as a Multi-level or Network Marketing Scheme, in which a participant is required to purchase a product at an inflated price in return for the right to recruit more members into the network.
The product is therefore a false front to hide the true nature of the scheme – those purchasing the product are not customers, but actually salespersons, in that they recruit others who also join the scheme only to get the right to recruit further participants. The most common pyramid schemes now operating are those disguised as Multi-level or Network Marketing Schemes.
Pyramid scams post COVID-19
Following several reports of pyramid scam victims on through social media, this writer was able to join a Zoom conference organised by such a company. Since quarantine laws prohibit mass gatherings, these companies have now turned to using online conference technology to hold meetings. The participants only had the chance to listen to their presentations, while no time was given to ask questions.
There were about 80 attendees in the online meeting, which was co-hosted by five individuals who claimed that they earned several lakhs per month. One of them even claimed that he recently purchased a branded wristwatch worth millions.
All the hosts highlighted to the participants that once upon a time they were very poor and their world turned upside-down when a friend of them introduced them to the MLM company. Basically, the presentations were all about how they became rich by doing nothing other than recruiting a small number of members into the scheme. Furthermore, they claimed that the company is registered under the Company Act of 2007 and therefore not an illegal pyramid scheme as some would allege.
The participants were told to purchase an item such as a water filter, wristwatch or solar panel by logging on to their website and making two more people join the scheme later. All these items were priced above Rs 50,000.
Prior to the curfew imposed following COVID-19, such recruitment was conducted through motivational seminars organised by promoters/participants, where the audience is subject to intense propaganda with regard to gains that could be derived from the scheme at a physical office or a public hall.
Several participants that attended those seminars told this writer that the speakers always assured attendees that they use luxury vehicles and items purchased from the money earned after joining the scheme.
“To our surprise, even though they told us that they use luxury and branded items, they came to address the seminar in old cars and wore worn-out clothing. We saw poor people who had attended the seminar with their whole families,” one participant said.
How do pyramid schemes collapse?
According to the Central Bank of Sri Lanka (CBSL), there are two reasons for the collapse of pyramid schemes.
One is that the number of potential participants is finite and limited in pyramid schemes, which depend on bringing in an exponentially growing number of participants. In other words, if you get one person who gets ‘n’ persons to join, and each of those persons gets ‘n’ more persons to join, and so on, the total number of persons grows by the power of ‘n’ (exponential growth).
Even if ‘n’ is a small number, the total number of persons joining grows very large in a relatively few steps. If we take n to be 10, the level of 10 million is reached within seven steps – and it is no longer possible to continue with such a pyramid in a country like Sri Lanka, given its population size. At this point, the pyramid collapses and a majority of participants – all those on the final step – lose their money.
Also, in pyramid schemes, no new wealth is created. The only wealth gained by any participant is the wealth lost by other participants. It is like participants putting their money into a black box. If the money put up is distributed in a way that some people gain more than they put in, then some people have to inevitably lose what they put in. Therefore, for a few to gain many have to lose.
Meanwhile, this writer spoke to several pyramid scheme victims who all confirmed that they were lured into the scheme by a close friend or a relative. After they purchased a product, they had been given special training towards attracting more people into the scheme. By the time they understood how their so-called friends and relatives had made them join a pyramid scheme, it was too late.
One of the victims said that it took him two years to recover what he had spent. Another had refinanced his motorbike to find the money for his initial investment. Ultimately, not only did he fail to recover his money, but he also lost his motorbike. Some people had pawned their lands and gold jewellery to loan sharks to find the money to buy products offered by the company, as they thought they would be able to release them within a month.
“When they described to me how the scheme operated, it looked so easy. I only had to purchase a product from them, make two people join the scheme, and stay home while doing my other work. I dreamt of earning millions within two or three months, because they showed me I could earn about Rs 2 million within four weeks. When I came to my senses, it was too late. I could not cover the money I spent to buy their initial product even after three years. I’m still paying interest on the money I borrowed,” said one of the victims.
Legal background and why pyramid schemes still exist
Pyramid Schemes have been made illegal in Sri Lanka in view of the potential danger they pose to the economy. The Banking Act No. 30 of 1988 was amended by incorporating the following provision to prevent the operation of Pyramid Schemes: “No person shall directly or indirectly initiate, offer, promote, advertise, conduct, finance, manage or direct a scheme where benefits earned by the participants to such a scheme are largely dependent on (a) an increase in the number of participants; and (b) an increase in the contributions made by the participants in the Scheme.”
Furthermore, any person who contravenes this provision is liable to a fine not exceeding Rs 1,000,000 and/or a term of imprisonment not exceeding three years. If the offence is committed willfully, the offender is liable to rigorous imprisonment for between three to five years and a fine of Rs 2,000,000, or twice the amount received from the scheme’s participants, whichever is higher.
Violation of the above provision of the Banking Act is specified as an “unlawful activity” under the Prevention of Money Laundering Act No. 5 of 2006 and the Financial Transactions Reporting Act No. 6 of 2006.
Unfortunately, even with these Laws, pyramid schemes have been operating freely for decades. These so-called MLM and network marketing companies appear from time to time and lure people into their traps, but no Government has taken action against such companies thus far. This allows such companies to claim that their activities are legal, as they show that they have maintained their operations for decades.
When contacted, a former CBSL official told this writer that existing laws are enough to stop pyramid schemes in Sri Lanka. The CBSL has a separate unit to look into such matters as well. There have even been instances when CBSL officials who tried to take actions against pyramid schemes received death threats from such companies, he noted.
He also said that during seminars organised by these schemes in rural areas, they introduce their agents as CBSL officials to convince participants that their business is legal.
Many victims remain silent due to the shame of knowing that they were deceived. The bottom layers of a pyramid become a ‘revolving-door group’, with the losers leaving and being replaced by new members who do not know that they have been trapped.
Moreover, the companies use Government officials to promote the schemes and ingratiate themselves by making contributions to political parties. These promoters do not divulge the average level of payouts to participants, but focus on earnings of the handful of customers (usually the promoters themselves) who have gained from the pyramid scheme.
The Economic Offences Wing of Cyberabad Police in India in February served notices to several celebrities including Shah Rukh Khan, Boman Irani and Anil Kapur for endorsing an MLM company based in Hong Kong that has allegedly duped lakhs of investors in the country. More than 60 persons associated with the company for trying to dupe people in the city were arrested as well.
It is sad to say that the same company has been operating in Sri Lanka for decades freely. In 2017, the CID and the CBSL commenced a probe into three pyramid schemes including this particular company, but probe’s results remain unknown to this date.
In Sigalovada Sutta, Lord Buddha advised to gather wealth as bees do honey, and heap it up like an anthill, while pointing out the importance of staying away from foes disguised as friends.
While speaking to pyramid scheme victims, what this writer understood was that they were deceived by such false friends and their own greed for easy money. So, if a friend or a relative approaches you with a way to earn millions without effort, you should run fast – or you risk losing not only your money, but everything you’ve achieved over your lifetime.