A pyramid scheme is an investment scheme in which returns for early investors essentially come entirely from deposits from new investors – rather than from profits from a supposed business model, which is usually only suggested. In principle, collected money is only transferred from new investors to existing investors in order to create the illusion of business success.
The system starts with the initiators and then – once it gets rolling – it gets bigger and bigger. Just like a snowball. These key players often promise high returns with low risk and use aggressive marketing strategies to drive the ever-needed influx of new investors. The lifespan of a pyramid scheme depends on the continuous acquisition of new investors. As soon as no new investors are found, the system collapses because no more money can be paid out to the older investors. After all, a sustainable business model does not exist.
Because of the high risk, lack of sustainability and often fraudulent intentions, pyramid schemes are illegal in Germany. Paragraph 16 paragraph 2 of the Law Against Unfair Competition (UWG) states:
“Anyone who undertakes in the course of business to induce consumers to purchase goods, services or rights by promising that they will receive special advantages either from the organizer itself or from a third party if they induce others to conclude similar transactions, which in turn are in accordance with the If the type of advertising is intended to obtain such advantages for the corresponding advertising of other customers, the penalty is a prison sentence of up to two years or a fine.”
Pyramid schemes are also known as pyramid schemes or Ponzi schemes. The latter goes back to one of the most notorious users of this system and one of the biggest financial fraudsters in history: around 1920, the Italian immigrant Charles Ponzi set up a promising system in Boston. He pays handsome returns, wins over investors, and builds an empire worth millions. The only catch: it’s all based on a huge bluff. Note: You can listen to the entire story of this massive fraud here in GEO EPOCHE’s “Crimes of the Past” podcast.
Pyramid systems are basically the illegal variants of network marketing or multi-level marketing business models. These are also structured in such a way that newcomers can get in – sometimes with a basic investment – and both sell products and recruit additional participants. The earnings then arise, for example, from commissions from your own sales as well as participation in sales from hierarchically subordinate participants. In contrast to the pyramid scheme, however, this is based on a real sustainable business model with real products.
Sources: Consumer Protection Center, Hamburg Police
