If you’re surprised that pyramid schemes are still a thing here in SA, especially in this day and age when you can Google the hell out of anything suspicious, then you might be shocked to find out that they are actually thriving.

The National Consumer Commission (NCC) are still kept very busy, although they are now handing many suspected pyramid schemes over to the police’s Specialised Commercial Crimes Unit for further investigation.

One of the more high-profile recent examples is called Kipi, also known as Mydeposit241, which is currently under investigation.

IOL spoke to Wouter Fourie, the 2015 Financial Planner of the Year and chief executive of Ascor Independent Wealth Managers, who outlined just how ludicrous the whole set-up really is:

[He] says a client who approached him for tax advice had “invested” in Kipi and last year invited Fourie to address an investment club of which the client was a member.

“All the members of the club had put money in Kipi and didn’t know how to deal with the income they had received.

“I was shocked! ‘Are you stupid? Where is the income generated from?’ I asked. He didn’t know, so he arranged for me to meet someone from Kipi. When I questioned him about the assets used to generate this huge income, the guy got very aggressive, because the money is derived from other so-called investors,” Fourie says.

“Money is ‘donated’ by you to fund a portion of somebody else’s ‘dream’, with the expectation that others will in turn ‘donate’ money to fund your dream. It’s like taking from Thabo and Tannie Susan to pay Peter. The only way this can work is if you recruit more people to ‘donate’ to keep funding the dreams of the people already in the system. This pyramid will tumble as soon as the new recruits dry up. It might work for a year or even longer, but the longer it goes on, the bigger the impact will be on those who join last. It is a crash waiting to happen.”

Therein lies that catch, the constant need to recruit more members or see the whole scheme tumble to the ground. If that tends to be the main way that new funds are generated then hello, it looks like you’re all wrapped up in a pyramid scheme my friends.

A key feature of a pyramid scheme is its dependence on the recruitment of new members, rather than the sale of a product or service or any investment, to generate money. There may be a product, but it’s usually a by-product and not the main source of income for the scheme.

Pyramid schemes are often disguised as multi-level marketing schemes, selling legitimate products or services, Lyndwill Clark, the head of consumer education at the [Financial Services Board], says.

“However, the promoters of the investment use money collected from new recruits to pay off early investors until eventually the pyramid collapses. At some point, the schemes get too big and the promoter cannot raise enough money from new investors to pay earlier investors and people lose their money,” Clarke says.

Fourie says that once investors receive a benefit, their involvement in the scheme becomes like gambling. “They go back for more, thinking ‘just one more’ … and keep going back for more.”

Those who induce friends and family to join, knowing full well that it’s a pyramid scheme, are putting those people at risk of losing their money, as well as anyone else they, in turn, recruit.

That friend that keeps on telling you he knows about this amazing business opportunity and he wants you to get in on the ground floor? Ask questions, lots of them, and if you catch them out feel free to deliver a snotklap where appropriate.

Friends don’t let other friends invest in a pyramid scheme to make themselves rich, I think I read that on a fortune cookie once.

[source:iol]