MLM and Traditional Investing: Beware the Pyramid Scam
Millions of Filipinos still living in their homeland dream of becoming entrepreneurs whose financial futures rest solely in their own business ventures or their ability to invest. Millions more living as expats in other countries share the same dreams. However, without sufficient capital to invest in a traditional start-up, some choose to pursue entrepreneurial dreams through multilevel marketing (MLM) or investment opportunities that may seem too good to be true. In light of that, we want to offer you this warning: beware of the pyramid scam.
Pyramid scams are illegal all over the world for the simple reason that they are not legitimate business opportunities. They exist solely for the purpose of making the small group of people at the top of the pyramid wealthy while leaving those at the bottom in poverty. You could lose absolutely everything you have by getting involved in one of these scams. It happens more frequently than you might realise.
You might be familiar with the name Bernie Madoff. Mr Madoff is probably the most internationally known scam artist in modern history after having stolen some USD $65 billion from investors. Madoff is now serving a prison sentence of 150 years for being found guilty of 11 felonies in the US. His clients included business magnates, athletes, politicians, and Hollywood celebrities. His story is proof that just about anyone can be sucked into an illegal pyramid scam.
How the Scams Work
A pyramid scam, also known as a Ponzi scheme in some circles, is a means of building wealth through recruitment. Using Bernie Madoff as an example, his wealth was built by constantly recruiting new investors willing to put money into his scheme. Every time a new investor showed up, the money he or she put into the scheme went directly to Madoff and his inner circle. They used that money to establish incredibly lavish lifestyles that the rest of us only dream about.
In order to get investors to contribute, Madoff had to promise them a substantial financial return. Let us just assume an arbitrary rate of 15% for the purposes of illustration. A 15% return on traditional investments is almost unheard of. By offering such a high rate to his investors, Madoff was able to encourage many wealthy people to invest a lot of money. If any of his investors decided they wanted out down the road, he would use the money contributed by new investors to pay off those wanting to get out – including the 15% return.
The problem with pyramid schemes is that they are unsustainable. No real investment is taking place, meaning the whole scam is riding on constantly recruiting new investors. At such time as the amount of money being paid out exceeds what is coming in, the entire scheme collapses. This is exactly what happened to Bernie Madoff. Eventually, he did not have enough cash to continue living his lavish lifestyle while also keeping his investors happy.
Traditional Investing Scams
Bernie Madoff is not alone in stealing large amounts of money from investors through traditional investing scams. While he focused on the rich and famous to fund his scheme, there are other scammers targeting average folks like you and me. That does not make their crimes any less severe or suggest the consequences to investors do not have as big an impact. Indeed, the case could be made that pyramid scams aimed at the average person on the street are more destructive in as much as he or she does not have nearly as much money to lose.
A recent example of a traditional investing pyramid scam is that of Seychelles-registered EmGoldex, an alleged online broker of Middle East gold. This company is in trouble in the Philippines, Colombia, and the United States for defrauding customers who thought they were buying tangible gold assets. According to financial fraud specialist Ethan Vanderbilt, the company has since changed its name to Global Intergold to avoid the adverse publicity associated with their old name.
EmGoldex is allegedly doing to its investors the same thing Bernie Madoff did. They recruit participants by promising to sell them tangible gold at a very good price without ever actually delivering the gold to customers. According to Vanderbilt, only a small amount of gold actually changes hands through this company. Yet they continue to recruit new investors willing to put money into this scheme.
We say they are 'allegedly' ripping off investors because nothing has yet been proven in a court of law. Nevertheless, there is enough evidence to strongly suggest wrongdoing. So much so that the Philippines' Securities and Exchange Commission (SEC) is warning investors to NOT purchase gold from EmGoldex or Global Intergold. Their warning includes a statement that says neither company is a registered corporation or partnership within the Philippines.
In Columbia, the government has gone one step further by suspending all EmGoldex operations in that country. In the United States, it is still possible to invest in gold from this company, but US law prevents their gold from being shipped into the country. Investors would essentially be paying for the company's promise that they actually own gold.
In their defence, EmGoldex claims their business is a licenced seller under an Emirates Gold producer named DMCC. Such claims are denied by DMCC. In an official statement they said, “EmGoldex is not a DMCC-licensed company. DMCC has taken steps to prevent further misuse of our name.”
Multilevel Marketing Scams
Traditional investment scams are a problem in the Philippines. Nonetheless, a more serious problem is that of multilevel marketing. A legitimate multilevel marketing enterprise is based on a product or service each participant in the company is encouraged to sell. Legitimate opportunities cover everything from household cleaning products to vitamins to telecom services.
One of the most recognised and profitable MLM companies in the world is Amway. This company was built on selling a range of household products that include dish soap and laundry detergent. Amway has always been a company that has encouraged its members to aggressively sell products to family, friends, and members of the community. Members earn commission on all their sales, as well as the sales of other participants underneath them in the sales chain.
Recruiting is important to legitimate MLM businesses because it results in more members selling a company's products. In a legitimate scheme, you might be among a group of five recruits brought into the company through a mutual friend. Every time you sell products or services, the individual who recruited you earns a commission. If you were to turn around and recruit five others underneath you, you would receive a commission on all of their sales. As you can see, MLM members can earn money in two ways.
The problem with multilevel marketing is that it is just a few steps away from being a pyramid scheme. Experts say it all comes down to what the MLM company is focusing on. If selling products or services is what drives the company's financials, it is probably legitimate. However, if the company makes most of its money by recruiting new members who are forced to pay a membership fee to get started, there is a good chance it is just a well-disguised pyramid scam.
How MLM Scams Work
A pyramid scam set up as a multilevel marketing opportunity works in much the same way as a traditional investing pyramid. The company is originally established with some sort of product or service in mind. The company's original owners and management team will then begin recruiting others who will ostensibly help sell products and services. In order for those new members to be part of the company, they must pay a registration fee, which may include an initial supply of products to be sold. However, new members are encouraged to focus most of their time and energy on recruiting others to join them. Every time a new member is recruited, a portion of their registration fee is paid to the recruiter.
Multilevel marketing gets its name from the fact that the pay structure is built on multiple levels. Each company has its own set up, but most look something like this:
First Tier – First Tier members are those who have been most recently added to the scheme. They are usually grouped together into easily manageable numbers, say five recruits per group as an example. The person responsible for recruiting this group may have four additional groups under him or her.
Second Tier – Second tier members are those who have already actively recruited new members to work under them. They are typically limited to the number of groups they can recruit in order to prevent too much money from being drained at the lower levels of the pyramid.
District Managers – District managers are directly responsible for groups of second and first tier members. These managers may or may not still recruit themselves, but recruiting is not necessary because they are making enough money from those underneath them.
Regional Managers – Regional managers oversee groups of district managers underneath them. Virtually all of their income is earned in sales and registration fees of new recruits.
Executive Management – The top tier in any pyramid scheme is its executive management. They do virtually nothing other than collecting the money as it rolls in and keeping one step ahead of the law. They are the wealthiest individuals who obviously derive the most benefit from the scheme.
A legitimate MLM company is supported financially through the sales of products and services. As was already mentioned, Amway is a good example. Nevertheless, an illegitimate scheme is supported only by the constant recruitment of new members. When the amount of money coming in at the bottom is not enough to satisfy commission payments all the way up the pyramid, the company must close, or it will collapse under its own weight. In either case, first and second tier members usually lose everything.
How to Avoid Being a Victim
Whether you live in the Philippines or abroad, you do not have to be a victim of pyramid scammers. There are many legitimate business and investment opportunities out there that you can use to meet your entrepreneurial goals. Your main priority is to do plenty of research before you invest any money in any opportunity.
In terms of traditional investments such as stocks, precious metals and property, your research begins by contacting the Philippines’ SEC in the Philippines, or the equivalent agency abroad. They will have information on the company you are thinking of investing with. If the information is either unfavourable or non-existent, you can bet the opportunity in question is a scam.
Should contacting the SEC not provide enough information to make a wise decision, you can always research the company in question online. Just type the company name and the opportunity they are offering into your favourite search engine and let the results come up. You will know very quickly whether you are dealing with a scam or a legitimate opportunity.
If you are thinking of MLM investing instead, treat any multilevel marketing opportunity as a business. Research how money is made, how much can be made, and how a company's management structure is set up. Most importantly, find out whether the company’s financial success is driven by the products and services they claim to sell or by constant recruitment of new members. Any MLM company that cannot survive solely on its products or services is probably a pyramid scheme.
Unfortunately, scammers are out there waiting to prey on anyone willing to fall victim. Do not let it happen to you. Be vigilant to protect yourself against any investment or business opportunities offering unrealistic results in exchange for your money. Remember the old adage: if it seems too good to be true, it probably is.
Sources:
- How Stuff Works – http://money.howstuffworks.com/ponzi-scheme5.htm
- Ethan Vanderbilt – http://ethanvanderbuilt.com/2014/10/23/emgoldex-scam-charged-with-fraud/
- MLM News Flash – http://mlmnewsflash.com/blog/mlm-scam/