Pyramid selling

Introduction

Pyramid selling schemes are illegal and very risky get-rich-quick schemes that can cost a lot of people a lot of money.

Usually you pay a fee to become a member.

The only way to recover the money you invested is to convince other people to part with their money as well to join.

It is an offence under Australian Consumer Law to take part in a pyramid selling scheme or induce or attempt to induce others to take part.

You can be fined up to $220,000 for individuals and $1.1 million for corporations.

Find out more on the Australian Consumer Law website.


How pyramid selling works

Pyramid selling schemes are based on recruiting people rather than selling valuable products to customers.

For all members to make a profit there would have to be an endless supply of new members.

In reality, the number of people willing to join the scheme - and the amount of money coming into it - dries up very quickly. 

When the pyramid collapses, and they all do, relationships, friendships and even marriages can be destroyed over money lost in the scam.

Even if the scheme does sell a product, it may still be pyramid selling as the products are usually overpriced, of poor quality, difficult to sell or of little value.

If a pyramid scheme reaches court, the court will look at the value of the product versus the cost to join, as well as payments for recruiting more members.

Recruiting members

Pyramid selling schemes are bad business because the scheme requires you to recruit new participants who will be doing the same thing you are - selling the same product and trying to recruit new members.  

These people are your competitors. No-one in legitimate business wants competitors. 

In real business, you would pay to have exclusive rights to a product or an exclusive territory. 

In pyramid selling, you recruit competitors from the people nearest to you, such as family and friends, who may have normally been your best sales targets.

You’ll face pressure to buy more and recruit more, turning your family and friends into prospects.


Warning signs of a pyramid scheme

You may have been asked to join a pyramid scheme if any of the following applies: 

  • you are approached for a ‘business opportunity' rather than the product
  • you are asked to pay to join
  • you have to pay for expensive sales aids and training seminars
  • you earn commission for selling training later on
  • you have to buy levels of stock that are difficult to sell and you can’t return
  • legal issues are glossed over or left out
  • the products are overpriced
  • there is a high energy presentation that is low on substance - questions may not be encouraged
  • there are claims the business is registered with authorities so it is legitimate - just because a business name is registered doesn’t mean it's legitimate
  • being given the hard sell using words like ‘pre-launch’ and ‘get in on the ground floor’.

If you are involved in an unlawful pyramid selling contract and the business is based overseas, you won’t be able to seek legal action through Australian courts and will have to walk away from your losses.


Chain letters

Chain letters involve sending money or gifts to a person on the top of a list while you add your name to the bottom. These are another form of pyramid selling and are illegal.

Usually a letter or email will ask you to send a small amount of money to everyone listed in the letter. 

You put your name at the bottom of the list and send out copies of the letter to as many people as you can.

The letter claims you will receive a large amount of money in a short space of time.  This rarely happens.

How you lose money

In a chain letter scam you lose your money in two ways:

  • you send money to the scammers who sent you the letter
  • you waste money on postage and photocopying costs.

Warning signs of a chain letter

A letter or email you receive may have these warning signs:

  • promise you money or good luck if you copy it and send it to a number of other people
  • suggest you will have bad luck if you don’t, or lose out on a fantastic opportunity
  • include a token amount as a demonstration of good faith, such as five cents, and recommend you send the same in your letters
  • contain claims it is not a scam or pyramid scheme
  • contain testimonials from people who claim to have made a fortune by taking part.

If you receive a chain letter

If you have received a chain letter your best response is to throw it out. 

You will only be wasting your time and money by forwarding it on to other people.

For more advice contact NT Consumer Affairs.