News Articles

WHAT IS A PYRAMID SCHEME?

You have probably seen dozens of them, but perhaps did not recognize them as pyramid schemes.  Pyramid Schemes have been around for a long time, and although they can take many different forms, they all are based on the same illegal concept.  They all require you to pay a relatively small amount of money to a few people who have joined ahead of you, with the expectation that later, very large numbers of people will be making similar payments to you. 

Many pyramid schemes are "chain letter" based.  The letter, or email, you receive claims that you can "earn" large sums of money by simply sending a much smaller amount of money to the person named at the top of the list of participants.  You then remove the top name, move each name up one spot, and then you add your own name at the bottom.  Then you send out as many copies of the letter as you can.  As new people join, your name moves up the list until eventually you begin receiving payments from new members. 

Pyramid schemes are constantly changing in order to find new ways to create the illusion of legality.  Some describe the money exchanged as a "gift" or a "loan".  Others attempt to disguise themselves as legitimate multi-level marketing (MLM) schemes, however a legitimate MLM has one important distinction - there is a real product involved.  The product has value on its own, and most of the profit comes from selling the product to people who actually want and use it.  Not just to try to sell it to someone else.  MLM's do encourage participants to recruit others to sell the product, which entitles them to a cut of those sales.  However, it is possible to make a profit just by selling the product, without recruiting a single person.  On the other hand, in a pyramid scheme, the product is usually something worthless, that no one would buy except that it is necessary to be able to join the scheme. 

The Criminal Code makes participation in or operation of a pyramid scheme illegal.  The penalty for involvement in a pyramid scheme is a maximum of two years in jail.  When prosecuting those involved in pyramid schemes, the Crown does not have to prove that the money had actually been paid.  It is an offence merely to be involved in a scheme that allows participants to receive money, merely because they had recruited new participants.  As long as the Crown can establish that this was the basis of the scheme, those involved are guilty of an offence. 

By Gina Toni
April 13, 2005