Illegal Pyramid/Ponzi Schemes Vs The Real Deal – Can YOU Tell The Difference?

by Robin J Emdon

Unless you’ve been hiding under a rock for the last few months you cannot have helped but noticed the plethora of business opportunities and making money investment schemes that are constantly sweeping through the internet. But how can you tell the difference between a legitimate MLM (or Network Marketing) business, and a Ponzi scheme OR an illegal pyramid scam.

First things first. There IS such a thing as a booming, healthy and LEGAL (Multi-Level Marketing) MLM industry.

It’s vast, (estimated to be worth $100 billion per annum)  it’s powerful and it’s highly lucrative for anyone who takes the time and the trouble to learn how to it well.

It is ALSO surprise, surprise, very ethical!

Unfortunately there are some involved in legitimate MLM who get the industry a bad name. I’ve written about them before and I will again, but not in this article.. The BIGGEST problem with the industry is how it gets mis-identified with Ponzi schemes and illegal pyramids (yes they are different things!) and of course, no illegal pyramid or Ponzi scam is going to ADVERTISE that it’s illegal!

They don’t put a big banner across their website telling you they are going to take all your money or that they will eventually be closed down, after the owners have fled the country with great big wedges of your money.

So in this article I am going to outline for you some of the key things you need to know, so you can avoid the pitfalls and get yourself into some solid, ethical and strong business opportunities.

Illegal Pyramid Scheme vs Legal Pyramid Schemes

Basically, an ILLEGAL Pyramid scheme is where you are recruited by somebody on the understanding that you will pay for the right solely to recruit others and receive compensation (money!) for doing so.

This is NOT to be confused with the multitude of LEGAL Pyramids there are out there. Just because a business has a ‘triangular’ or ‘pyramid’ structure, does NOT mean it’s illegal.

MOST MLM companies operate a distributor structure that resembles a pyramid where a TOTALLY LEGAL & LEGITIMATE distributor network sells a range of products and/or services.

This does NOT mean they are in violation of the law. That happens when their PRIMARY focus is PAYMENT for the recruitment of others.

Unfortunately, ILLEGAL pyramid schemes are not likely to advertise the fact that they are illegal! On the contrary, they can be very sophisticated at hiding their true identity behind a smokescreen of legitimate MLM activity.

That makes our job, as innocent business opportunity seekers somewhat complicated and frustrating.

However, a couple of simple rules of thumbs are:

1) If NO discernible product/service is changing hands and there are very few true retail sales to the non distributing public (with the majority of sales only coming from the distributors themselves) – then it could be an illegal pyramid scheme and/or

2) If there IS a discernible retail product/service but it’s price appears HIGHLY inflated against COMPARABLE* products and services then again, it could be illegal.  

(*comparable means just that – don’t compare a high quality MLM company shampoo for example with a cheap supermarket one – your comparison must be fair and realistic)

Ultimately such judgments can of course be very hard for an individual to make. However, if alarm bells start to ring for you based on one or both of the guidelines I’ve outlined, I would advise extreme caution on your part.

And if that’s not enough for you. Consider this, it is illegal to benefit from the proceeds of being a part of an illegal pyramid scheme.

In other words, IF you choose to work with an MLM that turns out much later to be an illegal pyramid, then you could well be liable for the proceeds of your activity with that company and may be forced to repay them!

ILLEGAL Pyramid Schemes don’t usually collapse. Typically they are investigated by the authorities and then shut down through due legal process if they are found to be in breach of the law.  So there’s no time limit on how long it will take for an illegal pyramid scheme to fold, it can be anything from months to years.

Ponzi schemes on the other hand, always collapse eventually…

 

Ponzi Schemes

Charles Ponzi an Italian immigrant in 1920’s America discovered the lucrative nature of ‘robbing Peter to pay Paul’ with an elaborate scheme based on the different values of postage stamps around the world.

For now, all we need to know is that a Ponzi scheme is basically the term given to any money making scam where the proceeds from new investors joining is used by the scammers to pay inflated and unusually high returns to those already who joined and  invested earlier on.

There are countless reasons why they might THINK their returns are so good, maybe like in the case of Bernard Madoff they just think he is a genius investor who beats the stock market odds consistently or they are told that the profits come from some other kind of brilliant investment strategy that the owners have discovered and that the more you invest, the more you get back!

As long as investors receive the promised high returns on their investments (paid unbeknownst to them from the multitude of NEW recruits), then word spreads like wildfire and more and more and more people want to join!

There’s always a ‘story’ and it is always a darn convincing one that gets people investing and once news of high returns spread, then the story becomes less important than the returns!

People aren’t necessarily stupid – Ponzi schemes rely less on stupidity and more on greed! (and yes I know – greed is stupid!)

Eventually, ALL Ponzi scams collapse, leaving hundreds and thousands out of pocket. They’ve even been know to bring down economies!

They collapse because eventually the numbers don’t add up. The numbers of people who’ve been in the longest expecting high returns can no longer be paid out of the investments of new people joining. Once that happens, the game is up and the whole thing comes tumbling down.

What Are the Warning Signals

If you are being pitched to join an MLM – make sure you;

a) know what they are selling 

b) that the price for what they are selling is NOT inflated

c) are there any retail sales taking place to people OUTSIDE of the distributorship network

d) are the distributors being HIGHLY paid for recruitment 

 

And here’s a big one I am seeing more and more, particularly on the internet…

Are potential distributors being DISCOURAGED from asking DUE DILIGENCE questions such as those I’ve outlined above?

Are they being told to stop being a ‘wuss’ or ‘don’t be so negative’ or ‘go away and deal with your own fears’?

Why on earth would ANYONE go into business with anyone else WITHOUT knowing the facts of what they are getting involved with?

Fair enough you can’t know it all from day one… it takes time to learn a new business and I’m all for learning whilst you grow your business – BUT if questioners are discouraged (and I’ve personally seen them mocked and bullied!) – then RUN AWAY – run hard, run far!!!

There are PLENTY of GOOD MLM companies out there – you do NOT need to be involved in the hyped, ask no questions, just join ones!

And if you are being solicited to join a company or an investment scheme that promises high returns that;

a) seem unrealistically high or 

b) too good to be true

They probably ARE too good to be TRUE!

 

Key Takeaway:

The MLM Industry is a GREAT industry and I’m proud to be associated with it!

However, have your wits about you in selecting who you work with and which company you choose to work with.

And BEWARE if you are desperate for money and/or greedy for large returns (I know, no one likes being called ‘greedy’ – but everyone knows what I mean – right!?) – then you are ESPECIALLY vulnerable to illegal pyramid’s and/or ponzi schemes.

Get involved with one of these and a bad or dire situation will sadly, only get MUCH worse!

Do your due diligence before joining any MLM business or investment scheme. The legal ones are well worth your undivided attention and hopefully I’ve given you some pointers on how to spot the illegal ones!

If you’ve found this article useful please feel free to leave your comments below.

 

Remember, if you want change in your life….
The Change Begins With YOU!

Robin J Emdon

 

 

 

 

 

Robin J Emdon
Life Coach & AttractionMarketing Professional
Skype: lifemaestro
Email: [email protected]

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Robin J Emdon

Life Coach, Professional Online Marketer & Coffee Snob
Online Marketer - Entrepreneur - Bad Joke Teller - Life Coach - Interweb Addict - Single Dad - Retired Retail Stores Owner - Honest to a fault - Dream Builder - Straight Talking - Works From Home - Student of Philosophy and Psychology - Passionate About Life - All Round Good Guy & Cappuccino Lover.
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Comments

  • Before you join a company you have always do your researches. You have to know what you are joining and if you can trust the people who invited you.
    Bruno Buergi recently posted…Make Money From Your Own HomeMy Profile

    • Absolutely true Bruno!

      And yet so many people are being encouraged to forget this simple truth at the moment!

      Makes you wonder why – doesn’t it?

      ~Robin~

  • Beth Hewitt

    Hi Robin,

    Great post, it reminds me of a funny video about pyramid schemes and network marketing. We have to do our due diligence and be prepared if things are not what they seem.

    Thanks for sharing,

    Beth
    Beth Hewitt recently posted…The Purpose of Re-purposing YOUR Blog Content!!My Profile

    • Hi Beth,

      Yes absolutely, we mustn’t let common sense desert us!

      It’s getting increasingly hard to even see what something is meant to ‘seem’ to be!

      Thanks for your feedback.

      ~Robin~

  • Andy Piper

    Well laid out Robin. I’ve always stood by the rule of good due diligence. Especially when investing any amount of money – but then time is money too, so it pays to understand !
    Andy Piper recently posted…The Robinson Crusoe EffectMy Profile

    • Hey Andy,

      Yes, time is most definitely money in the business world – something we have to use carefully!

      ~Robin~

  • It is very hard to tell out a Ponzi scheme from a legit service. Your exhaustive article helps a lot in determining whether it is legit.
    Brian Stev recently posted…SRM 2013 Answer Key with SolutionsMy Profile

  • Eryn McCormick

    Robin, this is a great article! It’s so frustrating to have people constantly confusing ponzi and pyramid, but worse yet – when they paint the entire legitimate network marketing industry with the same broad brush! Due diligence should fall on the seeker, but unfortunately many people would rather parrot a myth than take the time to research it themselves…out of their own baseless fear. These days, I reason that if someone is that skeptical, I don’t want to work with them. Network marketing is for fun people!
    Eryn McCormick recently posted…Is Network Marketing a Bunch of B.S.?My Profile

    • Hey Eryn,

      I agree with you (obviously) that we need to do our own due diligence. And I don’t mind the skeptics. Sometimes the skeptical ones become the hardest working team members. For them, the penny might be in the air a lot longer before it drops than for others, but that doesn’t mean we should rule them out. The trick perhaps is to spot the difference between a skeptical person and a negative person. Skepticism is often just born out of ignorance that can with due diligence be enlightened. Whereas negativity hides a plethora of reasons why this person will never be ‘fun’ to work with and that’s certainly to be avoided!

      ~Robin~

  • Neamat Tawadrous

    Hi Robin,

    Great Post explaining the Illegal Pyramid/Ponzi Schemes!

    Thanks Robin you really explained them very well. I knew that there were Pyramid Schemes but I never knew that there are legal and illegal Pyramid Schemes. Thanks for clarifying that.

    I think you are right here, the stigma around the MLM Industry is because of those Pyramid and Ponzi Schemes.

    Thanks Robin for sharing and explaining these different schemes.

    Be Blessed,

    Neamat
    Neamat Tawadrous recently posted…Alpha Leader! How To Possess The Alpha Attitude in MLM?My Profile

    • Hey Neamat,

      Yes absolutely! And it’s so important to KNOW the difference and it’s so unfair that our MLM industry gets tarred and feathered because of the illegal scams.

      ~Robin~

  • HI Robin,
    There is still a lot of misinformation and assumptions about MLM that is why using an attraction marketing system is so great. You can attrack the people looking for what you have to offer and you never have to hear the question, “Is this a Pyramid Scheme” again.
    That being said, your advice for doing your due dilligence is paramount for your success.
    Thanks for explaining why there is confusion on this subject.
    Tonya
    Tonya Stephens recently posted…MLM Prospecting Online | 3 Mistakes You May Not Know You’re Making & How To Avoid ThemMy Profile

    • Hey Tonya 🙂

      Yes, absolutely, attraction marketing does sort the wheat from the chaff. However, there is an increasing popularity for online entrepreneurs to have many lines of income from many different projects and if THEY have inadvertently been ‘taken in’ by a scheme that later turns out to be illegal, the onus is still upon you to do your OWN due diligence and not just blindly follow them into a new venture, just because you know, like and trust them.

      I have often said ‘no’ to my upline when I think something they are venturing into appears ‘dodgy’. It doesn’t mean they are wrong, it just means I am responsible for my own business decisions and my evaluation of the ‘opportunity’ is different to theirs.

      ~Robin~

  • Hi Robin,

    Great explanation! I know that there are legitimate MLM’s out there but I’ve been so conditioned to thinking they’re bad that I haven’t really revisited the topic to really understand how the legitimate ones really work. And your warning signals are very helpful 🙂

    Also I didn’t know that about Ponzi schemes, I mean I didn’t really know that was named after a person. Learn something new every day 🙂

    Great post. Thanks!
    Liz

    • Hi Liz!

      Yes I highly recommend you do! Legitimate MLM’s are in my humble opinion one of, if not THE best business model in the world! It’s such a shame the industry gets ‘tarred and feathered’ with the illegal scams, because once you find a legit MLM you have an incredibly powerful income generating machine, literally at your fingertips!

      The one I’m with has just merged with a much stronger one (more established and greater development of systems) in the travel industry! I’m REALLY excited about that, having been unable to travel for pleasure for a long time, all of a sudden, I’m thinking… where’s my passport! LOL

      Thanks for your comment Liz!

      ~Robin~

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