Financial scams part 1: pyramid schemes and network marketing

Few days ago, one of my friend asked my opinion about this "investment" opportunity that was given to him.

The deal is as follow: Invest 5,000 pesos and get 22,500 after 3 weeks.

Waw, that's an investment that give a 450% return. You must be stupid if you don't sign for it.

Even if it looks nice, I started to ask him questions.

Me: How can they promise such a huge return?

Him: they invest it in gold.

Me: How is that possible, gold has been going down since a 2014 and I showed him a graph showing the price of gold is going down.

Him: ...

Then I started searching about the gold company that offers 450% return. Here's what I found:

• It banks/capitalizes/earns on the appreciation value of gold through a "swap program" where the product is bought by means of an "order table" comprised of 15 people spread across 4 LEVELS.
• New members/gold traders enter the order table's lowest level (Level 4) composed of 8 people. 
• Above them are 4 people (who came before them) in Level 3. 
• Above these 4 people are 2 people (who came before the 4) in Level 2.
• On top of the table is that sole person (who came before all of them) in Level 1.
• The person on Level 1 is the "graduating" member/gold trader who will "EXIT" the table or "graduate" (internally called a "pay out") as soon as all (15) boxes/slots are filled.
• This person on Level 1 will receive either a 15 grams 14K gold pendant or its cash equivalent of P25,000 -- whichever he/she prefers.

What surprised me there are those words: LEVELS, GRADUATING MEMBER and EXIT.

This is a pyramid scheme!

What is a pyramid scheme:

This scheme involves a leader that needs to recruit 2 people. These 2 people will need to pay a fee of let's say 5,000 pesos. These 2 people need to recruit 2 people each that will pay the fee too. Those 4 peoples need to recruit 2 more each, etc... 

Please note that no money is created in this scheme. No product is being sold so the only money circulating inside this scheme is people money.

On a 4 level scheme, 15 people are involved. If each one of them brings 5,000 the pyramid has accumulated 75,000 pesos. When the 4th level is complete, the leader (the first one in the scheme) can exit and pockets 22,500. 

For the pyramid to be sustained, they MUST recruit people below in order to fund the exit fund. 

And that's here where lies the scam. If the people below are not able to recruit new people, the pyramid falls down because of a lack of money.

The leader is usually the one making money but the people below might not get their investment back.

A pyramid scheme is therefor a scam and is illegal!

This scam has been around for so long and I'm still surprised on how people can still fall into that. Those people are even highly educated and were not able to see the scam behind the "investment" proposal.

In order to make it legal, some companies started the "network marketing" program. 

In my opinion, it's still a scam but stays in the legal side because a product is being offered (usually soap or some powder meal replacement).

The network marketing scam lies in the fact that the members of the company focus on recruiting new members instead of selling their products. More members they recruit, more money they make from the recruitment and also they get a cut on the lower member sales.

The new members are obliged to buy a minimum amount of products that can cost as much as 20,000 pesos. 

The company focus on recruiting new members because they know that selling those soap or powder meal is very difficult sometimes impossible. The lower members will be stuck with unsold items and their only way to make money is to recruit other members.

In the end, the products are not being sold elsewhere than within the company. The money the company makes are merely from the products being sold to new members because of their initial fee and the fees needed for them to stay within the business.

An other aspect of it is that the market has a limit on how much soap or powder meal it can buy. And still, the company recruits more and more members so they'll have to fight against each other to make more sales. Hence the necessity to recruit more people in order to make money instead of selling it.