The phrase "financial pyramid" was the embodiment of fraud and fraud. However, today this way of building a business continues to be used throughout the world. Entrepreneurs are coming up with new ways, and this phenomenon is not going to disappear. What are the signs of financial pyramids? What is their essence? Let's consider in more detail.
Pyramid mechanism
Building a business in the form of a pyramid involves the involvement of a wider range of investors, which ensure the stability and profitability of the system. The scheme of the financial pyramid is quite simple: new investors provide the return on investment of previous investors. The higher the entry level, the greater the probability of making a profit. There are almost zero chances to get money from those who are at the base of the pyramid, and, as it is obvious, most of them get the greatest profit from the one who stands at the top, and possibly near the top. Pyramid investing is not always a fraudulent scheme, but it is always vulnerable. Even a small malfunction of the system can lead to its collapse. Most often, a collapse occurs when one or more large investors want to withdraw investment.
There are several approaches to assessing the nature of pyramidal financial constructions: firstly, such enterprises can have various organizational and legal forms, secondly, they are a growing system of debt obligations - the longer such a firm can hold out, the more it will accumulate debts; thirdly, a pyramid can be considered as a form of fraud, although there are some cases where such structures were created with good purposes. But they always act as a means of quick enrichment, and therefore raise questions from representatives of the law.
The main signs of financial pyramids
Speaking about the pyramidal business, it should be noted that it can be very diverse, and it can be very difficult to immediately recognize a scam. The first most important sign of financial pyramids is the lack of share capital. All dividend payments are due to attract new investors. This type of business is highly risky for all participants, except for the organizers, but it can be very tempting for investors, since the creators of such schemes always guarantee a quick and high income. It is guarantees that are the leading sign, since there are always risks for legal financial schemes, therefore, they do not give guarantees. Typically, such organizations do not have any licenses for financial transactions. They offer for sale not the usual financial products, but some own inventions: stocks, loan agreements. Also a sign of the pyramidal scheme is a clause in the agreement that in the event of a company collapse the investor does not receive anything and has no right to make claims. There are also signs of financial pyramids related to promotion: they are always very active, even sometimes aggressively advertised; the organizers spend a lot of time and energy on PR actions. To hide the lack of real investment or production activities, the organizers use a lot of special vocabulary in their speech, they create the illusion of thorough thoughtfulness and validity of the scheme. For any attempts to delve into the study of the features of the company, statements about commercial secrets appear. Investors are organized in a kind of community of like-minded people, participants in the scheme are motivated to attract new players. For this, they are often offered additional bonuses, most often in the form of an additional share in the business - in the form of a share package, for example.
Varieties of financial pyramids
There are several attempts to classify pyramidal financial structures. These schemes are constantly being improved and modernized, so it is unlikely that it will be possible to cover all types within one typology.
By the method of organizing a business, one can distinguish “clean” pyramids that do not conduct any activity at all, except for registering participants and raising funds, and “camouflaged” for a variety of types of business: foundations, clubs, networks. You can also divide these companies according to the stated purpose of raising funds: some offer income and involve people with the promised profit, others work under the guise of investment projects, mutual assistance clubs. Some disguise themselves as companies that sell certain goods or services (more often than others, the Forex market appears in them). There are pyramids that mimic social enterprises or non-profit foundations.
Today it is often possible to meet organizations that present themselves as consumer cooperatives or alternative programs to official mortgage and loan companies. Today almost every day a new pyramid appears, and the Internet provides great opportunities for their reproduction. This allows you to divide such schemes into online and offline designs. It is also possible to divide the pyramids according to the intentions of harming citizens: there are companies that are initially created with fraudulent intentions, and there are large investment projects that were conceived as a real business, but as a result of mistakes and miscalculations turned into pyramids. Often, the latter lead to the appearance of financial "bubbles" - an unreasonably high flow of investment in a project that can provoke a loss of control and the destruction of a company.
A special category is made up of official pyramidal systems that are supported by the state, for example, that is how pension funds are structured in many states. Current retirees receive benefits from contributions from future disabled citizens. Despite the fact that the leadership of the countries talks about various investments of pension funds, but often there are almost none, since the pension burden in developed countries is getting higher: life expectancy is growing, the number of able-bodied people is declining, so there is simply nothing to invest in pension funds, and there are significant risks of collapse of these schemes.
Advertising and promotion
Important signs of financial pyramids - this is a special advertising activity. These companies need a very fast growth of deposits so that people do not have time to start demanding dividends, and at the same time that a large amount of funds is quickly formed. These goals are served by massive advertising of financial pyramids, which has its own specifics. Such advertising campaigns appeal to human emotions; they try to lull its rational part and call to take action without hesitation. Advertising communications are usually built around a person, stars and authoritative personalities are often attracted. It is very rare to know the real leaders of the pyramid. All messages are built on the endless motivation of the consumer: they tell him how he, without doing anything, can quickly get rich, and give an unclear explanation. The purpose of advertising is to push for immediate, irrational action, and it works as a mechanism that disables critical thinking. Due to the obsession, aggressive demonstration of close success and simplicity, and the story that many have already achieved success, but you may not be in time, an excessive demand is created.
A lot of attention in such organizations is paid to PR-campaigns: they always have excellent presentations, impressive publications in the media. Communications are often built around some kind of brand character, which is designed to inspire confidence.
World experience
Our financial pyramids of the 90s, of course, were not a new invention. Prior to this, the world economy was repeatedly shocked by the loud collapse of companies and the ruin of citizens. The first creator of the financial pyramid in history is considered to be Charles Ponzi, today his name has become a household name and is a designation of such schemes. He in 1919, he came up with a scheme for the exchange of international coupon exchange, which was supposed to bring huge profits. He managed to find several investors, whom Ponzi promised 45% profit in just 3 months. He was not going to carry out any coupon exchanges, especially since they could not be exchanged for money, but only for postage stamps. But the scheme worked, investors simply did not bother to delve into the essence of the proposal and began to bring money. Ponzi began to pay the first depositors - and this spurred a stir, money flowed. The publication in the newspaper, in which the journalist decided that the coupons purchased with the invested money, should be several times more than physically possible, hit the pyramid. Investors rushed for money, the company stopped operations. On the accounts of Ponzi, money was found that was divided between the victims. They managed to return about 40% of their investments, and this was not the worst case scenario in history.
After this, the world of finance knew many more pyramidal schemes. The most famous of them were the schemes of Lou Perlman, Stanford International Bank, L&G and Yingkou Donghua Trading, V. Feng's ant farms and many others.
One of the largest long-lived pyramids in the United States created B. Madoff. His company was considered a successful investment project, very famous people and many large banks of the world brought money here. For 20 years, Madoff has been able to balance, giving out interest by constantly attracting investment. It all ended unexpectedly after the sons of the financier spoke about the essence of their father’s enterprise. In a private conversation, he told them about the secret of his success, and they brought him to the police. Madoff was under investigation for a long time, and at the age of 71 he was sentenced to imprisonment for a term of 150 years.
Russian history of the pyramids
The ancestor of the pyramidal structures in Russia was Sergey Panteleevich Mavrodi. In tsarist Russia there were insignificant financial pyramids in the form of mutual support cash desks and mythical investment projects, but they did not reach a large scale. There was no possibility of private investment in the USSR, and therefore there was no question of such scams. The financial pyramids in Russia bloomed during the perestroika period. People were overwhelmed by a thirst for earnings, and the stream of scammers did not fail to take advantage of this.
The most famous and largest pyramids, besides MMM, were the companies Khoper-invest, Vlastilina, Chara-bank, the Russian House of Selenga, Tibet bank. Tens of millions of citizens suffered from their activities. Trillions of rubles were withdrawn from them, which never returned in any amount. The experience of the 90s with loud pyramid collapses, litigation and the search for perpetrators around the world for some time reduced the growth of such schemes. But from the 2010s, a new round in the history of the pyramids begins, which flourish thanks to the Internet and the invention of entrepreneurs.
Mmm
In 1992, Mavrodi Sergey Panteleevich and his brother and his wife create companies. MMM, which sold its own shares and tickets, guaranteed income of up to 200% per month. The company itself set the price of shares, they were not allowed into any free circulation. The shareholders did not receive any financial documents confirming the fact of the purchase. A shareholder could sell the company's shares and make a profit. The main essence of financial pyramids is attracting investors, and MMM has successfully used this mechanism. The population at that time was catastrophically financially illiterate and very trusting, and this was what Mavrodi played. For two years the company flourished and grew rich, some investors managed to earn income and thereby contributed to the popularity of the company. MMM was distinguished by a creative approach to advertising: the mini-series about Lenya Golubkov and his relatives became a real motivating film for ordinary people, and the phrase: “I am not a freeloader, I am a partner” went to the people. In 1994, MMM had claims for tax evasion, but Mavrodi denied the allegations. All this provoked a panic among investors, a landslide appeal of shareholders for money begins. In 1997, MMM was declared bankrupt, and the creator of the pyramid was accused of fraud. In total, almost 15 million people were affected by the activities of MMMs, but only 10 thousand were officially recognized as victims. The damage is estimated at 3 billion rubles.
New opportunities
The advent of the Internet has led to a new round of development of the pyramidal type of business. The reason that financial pyramids on the Internet have become so popular is the ability for creators to maintain their anonymity. There are many tools on the Web for transferring money that are poorly monitored by regulatory authorities. This is what scammers use. The most common variant of financial schemes on the Internet is hype. These investment programs with very high risks today offer on the Internet to invest in certain profitable programs. But in fact, the profit is obtained by attracting more and more new players. The organizers of the pyramids on the Internet assure that there is no risk in their schemes, since the number of potential participants is still very large. But this argument does not work, since any news feed can provoke panic and the collapse of the pyramid. Also on the network today you can find traditional models of pyramids, they are called scams (from the word deception). Such an investment pyramid is designed for the credulity of people who will not check anything and transfer money. There are models that disguise themselves as games that provide for the sale of some attributes of the game. Every day scammers launch all new projects on the network and almost always go unpunished.
The most famous financial pyramids on the Internet
The most famous Internet pyramids today are the Seven Wallets, NewPro and MoneyTrain games, the Stock Generation virtual exchange organized by the infamous S. Mavrodi, Perfect Money and Liberty Reserve payment systems, WholeWorld investment pyramid and many others.
Network business and pyramids
Frightened inhabitants today do not want to just invest somewhere, so the pyramids began to be conspired by the network business, which although it is also not very positively perceived, there are still a number of people who are ready to invest in it. There are many similarities between pyramids and networks, but there are also differences. To distinguish a fraudulent scheme from a real business, you should understand what the difference between them is. MLM business always sells a real product. It may be of different quality, but still he always finds a buyer. It does not require too much entry fee. They may offer to buy a starter pack of products - then its price should be reasonable and usually preferential for beginners. The network company has a real address, shows constituent documents without problems, usually does not hide its first persons. Income in the MLM business depends on the efforts and activity of the seller in sales, and not just on the number of people involved.
Precautionary rules
In order not to get hooked by scammers, it is worth remembering simple precautions. You should not give in to the promises of guaranteed income, in the modern world of finance there can be no guarantees. When joining an affiliate program, you need to assess the size of deductions "up". In trading companies, it does not exceed 5%, but if they promise to deduct 10% or more, this should alert. Wherever you carry the money, you need to carefully check the constituent documents, address and contacts of the company. It should be remembered that reviews on the Internet can be moderated and managed by the owners of the pyramid, so do not blindly trust them.
