A glimpse into the world of pyramid schemes

Weekender

By MARK HAIHUIE
PEOPLE are always looking for opportunities – a way to make a profit, get ahead, gain something. There’s always this constant need to be in on the next best thing, but the desire for the next best thing does not always lead to the next best thing. In many cases it leads down a road that is hard to come back from. It leaves people vulnerable to the “scheme” of others who are also looking for the next best thing, opportunists also looking to get rich quick.
The keyword is “scheme”.
This word has several meanings but for the interest of this article the two meanings we are looking is found in the Cambridge Advanced Learners’ Dictionary:

  • “A plan in which things are strategically arranged”; or
  • “To make clever secret plans to deceive others”

Basically a pyramid scheme is an unsustainable business model that operates on the unlikely promise of large returns on initial investments.  This is done through a pyramid hierarchy that allows for the “schemers” or those on the top of the business structure to profit through the gullibility of others.
There are two noteworthy pyramid schemes – Deposit Scheme and Multi-Level Marketing.
Pyramid schemes are not new to Papua New Guinea with it being a recurring feature in various forms from the cargo cult days to the present.
The most notable Deposit Scheme was U-Vistract that made the headlines almost two decades ago in 2000. U-Vistract was initiated by a Noel Musingku along with other sister schemes such as Money Rain.
In its prominence, the scheme had almost a 100,000 participants who invested almost a billion kina into it with the hope of big returns.
This Deposit Scheme was outrageous for various reasons that it deserves another article in itself.
The scheme was short-lived after the government made several amendments to the Banking and Financial Institution Act in 2000 that disallowed enterprises to receive deposits from individuals and allowed for harder penalties.
This effort was supported by the proactive role of the Bank of Papua New Guinea against it and the counter coverage provided by The National during that period.
These Deposit Schemes could not rise to a level of prominence again because it was illegal.
However, there has been an increase in the number of pyramid schemes in recent years.
The increase is seen in the second of the two pyramid schemes, the Mutli-Level Marketing (MLM) scheme or strategy.  These shady business models involve various products or services that are being sold to the public.
The members of such schemes are required to bring in new members, and receive commission for each, while also trying to sell products.
The business operations for MLM schemes vary in terms of the products (health products, internet applications, etc) or services being offered but are uniform in that they are pyramid structured and require members to recruit for a certain commission.
This results in the person(s) behind the scheme profiteering solely on the recruitment drive and the membership fees with the whole business model being unsustainable as it is based on a product/service that is not genuine or does not exist in some cases.
There are a large number of individuals being targeted or have already become victims with the increase of such schemes.
The amendment to the Banking and Financial Institution Act (Section 63) in 2000 was done in specific regards to stop individuals or entities from accepting deposits with the promise of repayment with interest.
The fundamentals of the Banking and Financial Institutions Act prevent an entity or individual from receiving deposits from the public, according to Bank of Papua New Guinea governor Loi Bakani.
Bakani said last week that this Act is applicable to all pyramid schemes including Multi-Level Marketing (MLM).
“Pyramid scheme comes in various forms such as Multi-Level Marketing schemes. There is no legislation or law that stops this kind of thing. When you collect money from people and you promise to pay back something, that is a fundamental role of banking and that person or entity has to be authorised,” Bakani said.
“If it’s a company than it has to be registered with IPA (Investment Promotion Authority) and to be able to conduct the business of collecting deposits from people, that authority has to be given by the Bank of Papua New Guinea.”
However, the past amendments do not cover multi-level marketing scheme (strategy) employed by questionable businesses; which is almost similar to schemes that require individuals to deposit money.
At present, ‘deposits’ are cleverly labelled as membership fees or for entrepreneurship startup package, and operate in the same pyramid hierarchy with members receiving commissions from recruitment drives.
These smart schemers want to make people who join feel like entrepreneurs or their own bosses.
When they don’t get the returns they expect, members blame themselves for not being business-minded enough when the real reason is in fact the unsustainable business model.
“Why we (BPNG) come into this area in the role to licence that entity is the protection of the public’s deposit and that is why the law says that if you collect money from the public, the Central Bank has the role to protect the deposits and that where our regulation kicks in is to make sure that the person that is collecting is keeping up to his promise to pay back or to pay interest upon it because the person who collects it is able to make more money from it,” Bakani explained.

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