Sucheta Dalal, trustee of Moneylife Foundation, warns investors against companies who use deceptive marketing, play on misplaced beliefs, social and personal needs, to collect huge funds, and then disappear

Moneylife Digital Team

"Any scheme that asks you to introduce two more investors to get extraordinary returns is avoidable," warned Sucheta Dalal, trustee of Moneylife Foundation.

Ms Dalal was speaking at a workshop on "Understanding Pyramid Schemes" today, organised by Moneylife Foundation, a non-profit organisation whose principal objective is financial literacy.

Citing the examples of popular pyramid schemes such as Citi Limouzine, which duped gullible investors on the promise of exceptional returns, Ms Dalal explained how these schemes even target professionals such as lawyers, policemen, doctors, to gain legitimacy. Their modus operandi is simple-target people, pay them returns, then see their friends and relatives start investing.

Citi Limouzine, in fact, managed to dupe around 6,000 policemen, 200 income-tax and 15 Reserve Bank of India officials, as well as about 300 officials from the Mantralaya state headquarters and the defence services.

One other such scheme named Pearls, which is based in Jaipur, claims to be in the business of real estate development and promises 40% returns. It has collected a whopping Rs25,000 crore. The company is hiring top lawyers and trying to turn its fraudulent business into a legitimate one.

Ms Dalal also explained how various schemes like Time Share, Ad Review, JapanLife Mattresses and the recently-closed Nano Excel, managed to dupe investors through dubious businesses.

Pointing to Speak Asia, the ponzi scheme that has been the focus of attention recently with promises of as high as 500% returns, Ms Dalal regretted that the government and the apex bank had not taken strict action so far, despite banks reporting suspicious financial transactions to the finance ministry.

Ms Dalal explained at length the difference between pyramid schemes and multi-level marketing. "MLMs claim to be less dangerous than pyramids," she said. "Still they attract lawsuits due to high start-up costs, tiered sales and exploitation of personal relationships and cult-like sales technique."

"Pyramids are pure fraud. Their business is unsustainable-they promise payment for goods or services of dubious value. The hallmark of these schemes is the promise of sky-high returns in a short period of time, for doing nothing other than simply handing over your money to them, and getting others to do the same," Ms Dalal said. She also explained the mathematics followed by pyramid schemes.

On the subject of MLMs , Ms Dalal referred to the statement by Robert L FitzPatrick, president of Pyramid Scheme Alert and co-author of the book, False Profits: Seeking Financial and Spiritual Deliverance in Multi-level Marketing and Pyramid Schemes, that "50%-70% of 'distributors' quit in the first year and less than 1% of distributors make money."

"The MLMs economic scorecard is characterised by massive failure rates (over 99.5%) and financial losses for millions of people," Ms Dalal said. She attributed this to deceptive marketing, misplaced beliefs and social and personal needs that are used as promotional tactics by MLMs. Unemployed youth and housewives are the biggest target group of MLM companies, she said.

She pointed out that the Direct Selling Association was lobbying with the US government, saying that they are not pyramids. In India, the Indian Direct Selling Association, which has members such as Amway, Oriflame, Modicare, has tried to create a distinction between pyramids and MLMs, and is also lobbying hard with the government to get them out of the Prize Chits & Money Circulation (Banning) Act.

Ms Dalal spent some time on direct selling companies which have been in existence since a long time. Typically, companies like Amway, Gold Quest, Herbalife use film stars and have political connections, and they tie up with NGOs to gain popularity and legitimacy.

She also dwelt on the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, which curbs such illegal activities. "The problem with this law," she said, "is that police refuse to lodge complaints until there is actual loss of money, which then is too late. And the companies pretend that it is not investment but sale of product/service to escape liability."

Several countries, including the US, the UK and Singapore, where Speak Asia is registered, have banned pyramid schemes.

Ms Dalal read from the Manipur legislation which said, "MLM schemes destroy the knitted social fabric of our society." Manipur government curbed all such MLM and pyramid scheme.She also explained various Supreme Court judgements relating to ponzi and pyramid schemes.

Concluding her presentation, Ms Dalal warned that, "Extraordinary returns are nothing but a sign of desperation, and hence, one should avoid such schemes."

Moneylife Foundation has demanded a ban on pyramid schemes and that MLM schemes should be brought under the regulation of the RBI or the Securities and Exchange Board of India (SEBI). "RBI would be the best regulator, since money is transferred through banks," Ms Dalal said. The Foundation has also demanded that The Prize Chits and Money Circulation Schemes (Banning) Act, must be administered by SEBI and complaints of new schemes must be lodged with this regulator before losses."

Replying to a participant who said she was convinced as an MLM product buyer and saw no harm in investing, Ms Dalal said, "A lot of people are convinced, but will start to complain only when the company vanishes. Commonly, we trust friends and family, who introduce us to the scheme, and this is what enables MLM companies to grow."

On another question about whether foreign exchange trading was based on MLMs or pyramids, Ms Dalal said, they were neither. "Forex trading is neither a pyramid or an MLM. It is pure speculation and betting on the share market. This is equally dangerous," she said.