Most New York residents know it is important to protect themselves against white-collar crimes such as identity theft and mortgage fraud. However, fraud relating to securities and commodities is also fairly common, though it may be harder to identify. A pyramid scheme is one type of fraud that has existed for a long time. Understanding the marks of a pyramid scheme may help people avoid losing their money in such a crime.
According to the Federal Bureau of Investigation, pyramid schemes are a type of investment fraud. Usually, long-standing participants receive payment from funds, such as “investment fees,” collected from newer participants. In most pyramid schemes, existing members receive commissions or incentives for recruiting new participants. While participants may sell products, financial success in a pyramid scheme requires recruiting new members. The FBI states that pyramid schemes often operate under the guise of multilevel marketing programs.
The perpetrators of a pyramid scheme may target groups of people with similar lifestyles or religious beliefs. In many cases, perpetrators use common interests or activities to build trusting relationships with their victims. The high level of trust in these relationships may make it difficult for victims to recognize a perpetrator’s plans to defraud them.
The New York State Office of the Attorney General indicates that pyramid schemes are illegal in the state. It also offers several tips to help residents avoid losing money in a pyramid scheme. For example, a legitimate multilevel marketing company sells products or services that are valuable and reliable; recruiting new distributors is a secondary goal. In a pyramid scheme, any product sales simply serve to recruit potential “investors” to participate in the scheme. People may protect themselves from pyramid schemes by researching companies and investment opportunities. If financial success depends on recruiting rather than selling products or if there is a large start-up cost, the company may be a pyramid scheme.