Impossible to keep promises utopian deadlines and an idealization that drags more than one victim. The dreaded pyramid fraud is not always easy to identify and is sometimes confused with multilevel marketing .
Why does this happen? Although not all commercial strategies fall into illegality, some do allow themselves to be tempted. At the same time, beneficiaries of the Ponzi scheme sell their devices as marketing to go unnoticed.
Today at we review both concepts and explain the differences for anyone who wants to prosper without incurring fraud.
Although the so-called have always existed, the pyramidal phenomenon was not recognized as such until the appearance on the business scene of Carlo Ponzi .
This Italian “businessman” was the author of one of the most remembered scams in history. A fraud that consisted of paying investors with the money of other investors .
That is, to fulfill what was promised with certain participants at the expense of what others have deposited expecting the same from third parties . And so on.
Ponzi assured his clients that he could pay them 50% profit in just 45 days , or 100% in double the time. Ultimately it was only Carlo himself who was profiting.
All they had to do was buy discontinued postage stamps in other countries to redeem them at their face value in the United States seeking a kind of arbitrage.
Everything was going smoothly, until the system collapsed in 1919. An economist realized that the businessman did not invest a single penny earned in his company , and that the pillars that supported everything were fictitious.
The people involved, scared that they could lose all their savings, rushed to withdraw the money, starting a chain effect . In the end, the last to arrive were unable to repair the damage and were left with nothing.
It was a major social scandal that would be repeated, this time with another protagonist, in the late 1990s. Madoff’s pyramid showed that the system was still vulnerable.
A lowest common denominator also present in Spain
The Ponzi scheme is just one of the many types of existing pyramid scams that have been recorded over the past decades, especially after the advent of the internet.
They are divided between open and closed pyramids , however, they go through the same principle: promise quick profits (more than invested) at the cost of attracting other investors and paying both an entry fee and a monthly payment.
” Their strategy is to create an atmosphere of trust , they convince people to invite their family and friends, ” explains the criminal lawyerAldo Cardenas.
” When the plans do not work and those affected want to find guilty, it is impossible for loved ones to sue each other, so the fight is put aside and simply forgotten .”
In Spain the “flower of abundance” type scheme became especially popular a decade ago ; a fast financing system that feeds on great gifts among participants.
One puts an amount of money, and receives more proportionally from other participants. The unsustainability in geometric terms causes the system to collapse when a part is pushed back.
Multilevel Marketing (MLM)
Some identify the Marketing Multilevel as a simple form of scam pyramid more because of the logic that continues to generate profits.
And it is that, in an MLM strategy it is sought to createpartner networkselling a product and capturing loyalty through future promises .
A customer buys and is given access to a benefits program for attracting new customers. The latter are usually friends, family or close acquaintances.
What do they get in return? Not only what they generate for selling, but also what the rest of the participants invoice , in a percentage that grows according to their position within the hierarchy.
As the network grows, the positioning of the product, its reach and the associated billing improves. All this leads to an increase in the motivation of the sellers, and a continuous feedback is generated .
Why are you confused with the pyramid scam?
Although the objective and background is different, in appearance the multilevel marketing and the pyramid scam are very similar:
Promises of quick profits.
Obsession for recruiting salespeople.
Obscurantism around internal workflow.
Reinforcement of enthusiasm and devotion through sectarian mechanisms.
Now, all this does not equate to both techniques at the legal level. In Spain, the pyramid system is considered fraud .
Multi-level marketing, however, is recognized as a valid business practice according to the Law 7/1996 of January 15, and articles 22 and 23 of Defense of the Consumer and User.
That it is valid does not mean that it is practical to achieve the much desired financial freedom. According to the study Network Marketing Market Report, this type of business has generated 1,500 billion dollars since 2009 .
The benefits, on the other hand, reflect a failure rate of 47% for those who leave the network, and a 27% generalized losses during the first two years of participation .
Some studies put the failure rate for sellers at 99.5%, making MLM a strategy doomed to natural implosion.
Main differences: separate multilevel marketing from fraud:-
It is enough to maintain a cautious attitude to identify the deception when it is taking place. This usually works because pyramid authors exude mistrust or make some kind of mistake.
Of course, the maximum that lights the alert must always be the obsession of capturing over the sale .
At the formal level there are differences between one method and another . The reference to protect yourself can be the material analysis if the case is not entirely clear.
The pyramid tends to trade in illicit, confusing, or dubious products or services . Questions are answered with excuses and delays.
In multilevel marketing, sales also serve as fuel for growth, but there is usually a specific product, with defined characteristics and advantages. In fact, they brag about the quality of what they sell to attract more participants and increase sales .
By operating with fictitious interests, the pyramid business is forced to request very high entry fees for participants. With this money the speculative mechanism is activated .
The MLM strategy tends to impose very attractive entry fees , precisely to attract as many sellers as possible. Here the participants are partners and not just investors.
Being collected by law, multilevel companies must declare what they invoice to the Treasury . In their transactions there must beinvoicessupporting documents for each sale.
In addition, the payment of commissions is regulated by the legal framework of each country in which the sellers operate. What happens in a pyramid?
Neither taxes nor invoices nor any other trace that can serve as support of monitoring for the treasury. Criminals tend to declare profits as donations to avoid paying taxes.
In a pyramid, the benefit to be distributed comes from the amount paid for all the requested entry fees , the oldest being the ones who receive the most. There is thus no relationship between performance and profit.
It does not matter how much you contribute or how much effort you make, because the promise is based on absolute passivity .
In a multilevel company, the commission comes directly from what is sold , plus a bonus offered by the marketing network. The more you sell, the more you get.
Although both systems promise large returns, the difference is in the terms offered to participants .
In the pyramid, investors would have to multiply their money exponentially in a matter of weeks . The multilevel marketing company will never wield such a thing, choosing to promise in the medium and long term .