The concept and signs of financial pyramids. Criminal liability for pyramid schemes

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The phrase "financial pyramid" has become the epitome of deceit and fraud. However, today this way of building a business continues to be used all over the world. Entrepreneurs come up with new ways, and this phenomenon is not going to disappear. What are the signs of financial pyramids? What is their essence? Let's take a closer look.

Pyramid mechanism

Building a business in the form of a pyramid involves the involvement of ever wider layers of investors who ensure the stability and profitability of the system. The scheme of the financial pyramid is quite simple: new investors ensure the return on investments of previous investors. The higher the level of entry, the greater the likelihood of making a profit. Almost zero chances of getting money from those at the bottom of the pyramid, and, as it is obvious, the majority of them. The one who stands at the top, and possibly near the top, makes the most profit. Pyramid investing is not always a scamscheme, but it is always vulnerable. Even a small failure in the system can lead to its collapse. Most often, a collapse occurs when one or more large savers want to withdraw their investment.

There are several approaches to assessing the nature of pyramidal financial constructions: firstly, such enterprises can have a different organizational and legal form, secondly, they are a growing system of debt obligations - the longer such a firm can hold out, the more it accumulate debts; thirdly, the pyramid can be considered as a type of fraud, although there are some cases when such structures were created with good intentions. But they always act as a means of getting rich quick, so they raise questions from representatives of the law.

Main signs of pyramid schemes

Speaking of the pyramid business, it should be noted that it can be very diverse, and it can be very difficult to immediately recognize a scam. The first most important sign of financial pyramids is the lack of authorized capital. All dividend payments are made by attracting new investors. This type of business is highly risky for all participants, except for the organizers, but it can be very tempting for investors, since the creators of such schemes always guarantee a quick and high income. It is the guarantees that are the leading feature, since there are always risks for legitimate financial schemes, so they do not give guarantees. Usually such organizations do not have any licenses to carry out financial transactions. They offer for sale not the usual financialproducts, but some own inventions: shares, loan agreements. Also, a sign of the pyramidal scheme is a clause in the contract that in the event of the collapse of the company, the investor does not receive anything and has no right to make claims. There are also signs of financial pyramids associated with promotion: they are always very actively, even sometimes aggressively advertised; organizers devote a lot of time and effort to PR campaigns. To hide the absence of real investment or production activity, the organizers use a lot of special vocabulary in their speech, they create the illusion of a carefully thought out and reasonable scheme. In any attempt to delve into the study of the peculiarities of the company's work, statements of trade secrets appear. Investors are organized into a kind of community of like-minded people, the participants of the scheme are motivated to involve new players. For this, they are often offered additional bonuses, most often in the form of an additional stake in the business - in the form of a block of shares, for example.

Varieties of financial pyramids

There are several attempts to classify pyramidal financial constructions. These schemes are constantly being improved and modernized, so it is unlikely that it will be possible to cover all species within the framework of one typology.

According to the way business is organized, one can single out “pure” pyramids that do not conduct any activity at all, except for registration of participants and fundraising, and “camouflaged” under a variety of types of business: funds, clubs, networks. It is also possible to divide such companies intothe stated purpose of raising funds: some offer earnings and involve people with the promised profit, others work under the guise of investment projects, mutual aid clubs. Some disguise themselves as companies that sell some goods or services (more often than others, the Forex market appears in them). There are pyramid schemes mimicking social enterprises or non-profit foundations.

Today you can often find organizations that present themselves as consumer cooperatives or alternative programs to official mortgage and loan companies. Today, almost every day, a new pyramid appears, and the Internet provides enormous opportunities for their reproduction. This allows such schemes to be divided into online and offline designs. It is also possible to divide pyramids according to the intentionality of harming citizens: there are companies that were initially created with fraudulent intentions, and there are large investment projects that were conceived as real businesses, but as a result of mistakes and miscalculations turned into pyramids. Often the latter lead to the emergence of financial "bubbles" - an unreasonably high flow of investment in the project, which can provoke a loss of control and the destruction of the company.

A special category is the official pyramidal systems that are supported by the state, for example, this is how pension funds are arranged in many states. Current pensioners receive benefits from the contributions of future disabled citizens. Despite the fact that the leaders of the countries talk about various investments of fundspension funds, but often there are almost none, as the pension burden in developed countries is getting higher: life expectancy is growing, the number of working-age population is declining, so there is simply nothing for pension funds to invest, and there are significant risks of collapse of these schemes.

Advertising and promotion

Important signs of financial pyramids are a special advertising activity. These firms need very fast growth in deposits so that people don't have time to start demanding dividends, and at the same time, for a large amount of funds to form quickly. These goals are served by massive advertising of financial pyramids, which has its own specifics. Such advertising campaigns appeal to human emotions; they try to lull his rational part and call for action without hesitation. Advertising communications are usually built around a certain person, often stars and authoritative personalities are involved. It is very rare to recognize the real leaders of the pyramid. All messages are built on the endless motivation of the consumer: they tell him how he can get rich quick by doing nothing, and give a vague explanation. The purpose of advertising is to push for immediate, irrational action, and it works like a mechanism that disables critical thinking. By being obtrusive, aggressively demonstrating near-success and simplicity, and talking about how many have already succeeded, and you may not have time, a rush of demand is created.

Big attentionin such organizations, PR campaigns are given: they always have excellent presentations, impressive publications in the media. Communication is often built around a brand persona that is designed to inspire trust.

Global experience

Our pyramid schemes of the 90s were certainly not a new invention. The world economy has previously been shaken by the high-profile collapse of companies and the ruin of citizens. Charles Ponzi is considered the first creator of a financial pyramid in history, today his name has become a household name and is the designation of such schemes. In 1919, he came up with an international coupon exchange scheme that was supposed to bring huge profits. He managed to find several investors to whom Ponzi promised 45% profit in just 3 months. He did not intend to carry out any exchanges of coupons, especially since they could not be exchanged for money, but only for postage stamps. But the scheme worked, investors simply did not bother to delve into the essence of the proposal and began to bring money. Ponzi began paying out the first depositors - and this spurred the hype, the money flowed like a river. The pyramid was brought down by a publication in the newspaper, in which the journalist considered that there should be several times more coupons bought with the money invested than is physically possible. Investors rushed for money, the company stopped its activities. Money was found in Ponzi accounts, which were divided among the victims. They managed to return about 40% of their investment, and this was not the worst case scenario in history.

After that, the world of finance knew many more pyramid schemes. The most famous of them were Lou Perlman's schemes, Stanford International Bank, L&G and Yingkou Donghua Trading companies, W. Feng's ant farms and many others.

One of the largest long-lived pyramids was created in the USA by B. Madoff. His company was considered a successful investment project, very famous people and many large banks of the world brought money here. For 20 years, Madoff managed to balance, paying interest by constantly attracting investments. It all ended unexpectedly, after the sons of the financier spoke about the essence of their father's enterprise. In a private conversation, he told them about the secret of his success, and they reported him to the police. Madoff was under investigation for a long time, and at the age of 71 he was sentenced to imprisonment for a term of 150 years.

Russian history of the pyramids

Mavrodi Sergey Panteleevich became the ancestor of pyramidal constructions in Russia. In tsarist Russia, there were minor financial pyramids in the form of mutual support funds and mythical investment projects, but they did not reach a large scale. In the USSR, there was no possibility of private investment, and therefore such scams were out of the question. Financial pyramids in Russia flourished during the period of perestroika. People were overwhelmed by the thirst for earnings, and the flow of scammers did not fail to take advantage of this.

The most famous and largest pyramid schemes, apart from MMM, are Khoper-Invest, Vlastilina, Chara-Bank, Russian House Selenga Bank, Tibet. Tens of millions of citizens have suffered from their activities. They were seizedtrillions of rubles, which never returned in any volume. The experience of the 90s with high-profile collapses of the pyramids, litigation and the search for culprits around the world for some time reduced the growth of such schemes. But since the 2010s, a new round in the history of the pyramids begins, which flourish thanks to the Internet and the invention of entrepreneurs.

MMM

In 1992 Sergey Panteleevich Mavrodi and his brother and his wife set up companies. MMM, which sold its own shares and tickets, guaranteed income up to 200% per month. The company itself set the price for the shares, they were not allowed into any free circulation. Shareholders did not receive any financial documents confirming the purchase. The shareholder could sell the shares of the company and make a profit. The main essence of financial pyramids is to attract investors, and MMM has successfully used this mechanism. The population at that time was catastrophically financially illiterate and very gullible, and Mavrodi played on this. For two years the company flourished and grew rich, some investors managed to get income and thus contributed to the popularity of the company. MMM was distinguished by a creative approach to advertising: a mini-series about Lenya Golubkov and his family became a real motivational film for ordinary people, and the phrase: “I am not a freeloader, I am a partner” went to the people. In 1994, claims appeared against MMM for non-payment of taxes, but Mavrodi denied these accusations. All this provoked a panic among investors, and a general appeal of shareholders for money begins. In 1997, MMM was declared bankrupt, and the creator of the pyramid was accused offraud. In total, almost 15 million people suffered from the activities of the MMM, but only 10 thousand were officially recognized as victims. The damage is estimated at 3 billion rubles.

New Features

The emergence of the Internet has led to a new round of development of the pyramidal type of business. The reason that pyramid schemes on the Internet have become so popular is the ability for the creators to maintain their anonymity. There are many money transfer tools on the Web that are poorly monitored by regulators. This is what scammers use. The most common type of financial schemes on the Internet is HYIPs. These investment programs with very high risks today offer on the Internet to invest in some profitable programs. But in fact, the profit is obtained by attracting more and more new players. The organizers of pyramids on the Internet assure that there is no risk in their schemes, since the number of potential participants is still very large. But this argument does not work, since any newsbreak can provoke panic and the collapse of the pyramid. Also on the network today you can find traditional models of pyramids, they are called scams (from the word deception). Such an investment pyramid is designed for the gullibility of people who do not check anything and transfer money. There are models that disguise themselves as games that provide for the sale of some attributes of the game. Fraudsters launch new projects on the network every day and almost always go unpunished.

The most famous pyramid schemesonline

The most famous Internet pyramids today are the Seven Wallets games, NewPro and MoneyTrain, the Stock Generation virtual exchange organized by the infamous S. Mavrodi, the Perfect Money and Liberty Reserve payment systems, the WholeWorld investment pyramid and many more.

Network business and pyramid schemes

Frightened townsfolk today do not just want to invest somewhere, so the pyramid schemes began to conspire under the network business, which, although it is also not perceived very positively, there are still a number of people who are ready to invest in it. There are many similarities between pyramids and networks, but there are also differences. To distinguish a fraudulent scheme from a real business, it is worth understanding what is the difference between them. MLM business always sells a real product. It may be of different quality, but still it always finds a buyer. It does not require too much entry fee. They may offer to buy a starter package of products - then its price should be reasonable and usually preferential for beginners. The network company has a real address, shows constituent documents without any problems, usually does not hide its first persons. Income in the MLM business depends on the efforts and activity of the seller in sales, and not just on the number of people involved.

Rules of caution

In order not to get hooked by scammers, you should remember some simple precautions. Don't give in to the promise of a guaranteed income,In today's world of finance, there can be no guarantees. When joining an affiliate program, you need to evaluate the amount of deductions "up". In trading companies, it does not exceed 5%, but if they promise to deduct 10% or more, then this should alert. Wherever you take the money, you need to carefully check the constituent documents, address and contacts of the company. It should be remembered that reviews on the Internet can be moderated and managed by the owners of the pyramid, so you should not blindly trust them.

Responsibility

If a person has a question: how to create a financial pyramid? Then he can be recommended the following: think about the responsibility for his actions, and only after that proceed with the actions.

Financial fraud is being fought with varying degrees of success in all countries of the world. Russia provides for criminal liability for pyramid schemes. Amendments to the legislation have come a long way and only in 2016 they were finally signed by the President of the Russian Federation. The main punishment for the creators of this type of business is fines. When attracting more than 1.5 million rubles, the fine will be 1 million. If the pyramid is larger than 6 million, then the pen alty will be higher - 1.5 million rubles, as well as forced labor and even imprisonment. The difficulty in bringing fraudsters to justice lies in the fact that the law on pyramid schemes names only the following 5 types of pyramid schemes:

1. Those who do not hide their identity (as was the case with MMM).

2. Companies presenting themselves as legitimate alternatives to mortgage and consumer borrowing.

3. Firms that conspire as pawnshops, microfinance and credit organizations.

4. Companies that, under the guise of services for insurance, refinancing, settling debts to various borrowers, require large incoming contributions.

5. Organizations that pretend to be financial market players, in particular participants in the Forex currency market. And this list does not exhaust the whole variety of companies that operate on the principle of pyramids.