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Scams in this category can take a number of
forms, such as phony 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 separate the
unwary from their money by offering the chance
to make large amounts of money quickly.
One thing they 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.
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 other 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 goes 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.)
It is worth checking whether
the operator of a trading scheme is a member
of the Direct Selling Association (DSA). The
DSA is a trade association for the direct selling
sector and promotes high standards and fair
trading through independently administered Codes
of Practice. Website: www.dsa.org.uk
Chain Letters,
Gifting Schemes, Money Clubs and Games etc.
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 enabling
some participants, i.e. those who join early
enough, 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.
Why it 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 however,
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 of would need 4,096 participants then
32,768 participants, then 262,144 participants
and so on. In simple terms each participant
needs another 8 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.
The above example is based
on the so-called Women Empowering Women "gifting"
scheme, which is based on the premise that participants
are making gifts to relatives or friends in
the expectation of themselves receiving gifts
later on. In practice, the scheme operates as
a form of chain letter. The same general principles
and the mathematics apply to all pyramid schemes
or chain letters. A typical chain letter might
introduce itself like this:
Dear………
You have just received information that can
give you financial freedom for the rest of your
life. With NO RISK and JUST A LITTLE EFFORT,
you can make more money in the next few months
than you ever imagined! I should point out that
I will not see a penny of your money, or that
of anyone else who participates in this program.
I have already made over £150,000! I have
retired from the program after sending out over
20,000 letters of invitation to participate
in this phenomenon. Yours faithfully….
Chain 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.
Trading Standards estimate
that thousands of chain letter scams are sent
every day to homes, e-mail addresses or mobile
phones. Some chain letters can persist almost
unchanged for several years. Unfortunately,
it usually proves impossible for Trading Standards
or the police to find the first link in the
chain. One chain letter, sent under the name
of one "David Rhodes", supposedly
resident in Norfolk, has been in circulation
since the 1990's.
Pyramid or chain letter
schemes may 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 and the
co-pilots become captains of their own aircraft.
It's now their turn to make money. But, as with
all pyramid schemes, there must be an infinite
supply of participants, the "paying passengers",
and the airplane must crash, sooner rather than
later.
• 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 and consult the Direct Selling Association
• Don't agree to
anything (or sign anything) at high-pressure
meetings or seminars.
Remember, if no actual
goods or services are involved, 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.'
• 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.
DTI's Consumer and Competition
Policy Directorate have a Fact
Sheet on Trading Schemes and Pyramid Selling
The Department of Culture,
Media and Sport have a Fact
Sheet on chain letters
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