Warnings About Cyberfraud ~ Multilevel marketing plans and pyramid schemes

Pyramid schemes, sometimes called multilevel marketing plans, are sure ways to lose money. Individuals are often contacted via e-mail messages and encouraged to recruit six friends; those six people recruit six more friends — and so on, in a relentless search for new recruits. New recruits are expected to purchase a minimum amount of the pyramid’s products. If everyone coop erates, then by level 15, the scheme needs 7.6 billion participants — more than the Earth’s population. Profits from these schemes don’t come from selling products or distributor ships but from recruiting new participants. The endless recruiting of more participants eventually leads to an oversupply of sellers. Investors are left with garages full of products and the loss of their investment.

Three elements characterize pyramid schemes:

A reliance on funds from new investors (recruits) to pay returns, com missions, or bonuses to old investors.

The need for an inexhaustible supply of new recruits.

The promise of earning profits without providing goods or services.

A good example of a pyramid scheme is located in the United Kingdom and online. The enterprise is called a “gifting scheme” and was still available online as of February 2005. Unfortunately, because it doesn’t’ appear to breach any current U.K. legislation on pyramid schemes or multilevel marketing and doesn’t involve any trading of products for services, it has wriggled through a legal loophole and (at this time) can’t be shut down by U.K. authorities.

Here’s how the scam specifically works: If eight individuals invest £3,000 and then progress through the levels of the network, they can each expect to receive £24,000 when they reach the top level. However, to reach that top level, 64 people have to each invest £3,000. Each of those 64 investors also expects to collect her £24,000. However, that means that another 512 investors need to participate.

The next level requires 4,096 participants, then 32,768 par ticipants, and then 262,144 participants. To sum it up, each investor needs eight investors in the scheme in order to get her money back and to make a return. In most cases, the supply of poten tial investors dries up, leaving the majority of investors with nothing to show for their investment.