Pyramid and Ponzi schemes
Also known as: Ponzi scheme · Pyramid scheme · Investment fraud · MLM pyramid scheme
Frauds that pay earlier participants with money from new ones — a Ponzi scheme disguised as an investment, a pyramid scheme disguised as a business opportunity paying for recruitment.
Legal basis
SEC Investor.gov, Ponzi Scheme
The SEC describes a Ponzi scheme as an investment fraud that pays existing investors with funds collected from new investors, usually behind a promise of high returns with little or no risk; often the money is never invested at all. A pyramid scheme, as the FTC explains, looks like a multi-level marketing opportunity but pays participants mainly for recruiting others rather than for sales to real customers.
Both collapse for the same reason: they need an ever-growing flow of new money. When recruitment slows, payouts stop and the latest entrants lose everything.
For banks and payment platforms, these schemes show up as structure before they show up as losses: many small inflows converging on a few accounts, recruits linked to recruiters, accounts opened to move money on someone else's behalf. Graph analysis of who pays whom surfaces the pyramid while there is still money in it.
Frequently asked questions
What is the difference between a Ponzi scheme and a pyramid scheme?
In a Ponzi scheme, a central operator takes money as an investment and pays returns to earlier investors with later investors' money. In a pyramid scheme, participants are paid mainly for recruiting new participants, who must recruit in turn. Both depend on constant new money and eventually collapse.
Is multi-level marketing a pyramid scheme?
Not necessarily. According to the FTC, a legitimate MLM pays based on sales to retail customers, while a pyramid scheme pays mainly for recruitment. Many MLM participants still make little or no money.