Recent media attention regarding investment scams in the US and Canada provides the RCMP with an opportunity to educate the public on signs indicative of illegitimate investments and illegal investment schemes.
While there are several different types of investment schemes, variations of the “Pyramid” and “Ponzi” scheme appear to receive the majority of this attention.
Pyramid schemes get their name from their triangularly-shaped corporate structure and can be promoted under any number of business names. While it is common for a product or service to be represented in the scheme, the sale of this product or service is a secondary factor in the generation of returns. Sometimes, it’s not a factor at all. The returns, if any, are developed primarily from the recruitment and investments of new members and the resulting creation of lower tiers in the pyramid. Pyramid scams are often advertised to potential victims as a business opportunity where all that they have to do is recruit more investors. The more they recruit, the more money they make.
Ponzi schemes are often confused with pyramid schemes. A Ponzi scheme is basically a fake investment opportunity. Investors are lured into the scheme with the promise of a high return on their investment by way of an elaborate investment plan. This type of scheme can be harder to recognize as investors traditionally place a great deal of trust in people who directly manage investment plans. With Ponzi schemes however, the investment plan rarely generates any actual money. Or, if it does, the returns fall far short of what was promised. Nevertheless, the plan will never stand up to the scrutiny of someone looking for specifics as to how the money is actually made. As a result, very soon after a Ponzi scheme begins to operate, money from new investors is used to pay off existing ones because the ‘investment’ itself does not generate anything. This is known as the “robbing from Peter to pay Paul” scenario.
Ponzi and pyramid schemes differ only in their structure as to how the money is moved around. Both rely on the addition of new money to keep operating and the pool of new potential investors is continually shrinking. By their very nature, these organizational structures cannot support themselves for very long and eventually collapse leaving lower-tiered investors without any recourse to recover their money.
As mentioned, “Pyramid” and “Ponzi” schemes can frequently be disguised as legitimate business or investment opportunities. However, due to the ways in which they function, there are common aspects of these schemes that will differentiate them from legitimate plans. Watch out for:
• high-pressure sales tactics
• closed-door (secretive) information sessions and/or promotion meetings.
• emphasis on recruitment rather than the sale of a product or service.
• very high-yield return within a short period of time.
• vague or non-specific explanations as to the core nature of the business and exactly how it makes money.
• word-of-mouth referrals as opposed to public advertising.
With any type of investment, appropriate inquires should be made in order to ensure that the claims made about the investment or business are true and legitimate. Always conduct your own independent research before deciding to proceed. This may include input from a reputable financial advisor, accountant or lawyer.
Remember: “The truth, if it exists, is in the details”
Additional information on these tactics and others can be found on the following websites:
