You can go to jail for that

The emergence of the COVID-19 pandemic has not only resulted in loss of lives, but economic recession. Botswana has not been immune to this scourge as evidenced by amongst others, high unemployment rates; decline in mining and tourism revenues, abrupt decline in equity markets and loss of market value.

The disruptions in both demand and supply as a result of the pandemic, led to technological revolution that fundamentally altered the way we live, work, and relate to one another. More and more people have resorted to the use of technology in their endeavour to seek or provide product/service during restrictions such as “stay-at-home” that were imposed by countries, Botswana included. With the current cost of living in our economy being high, more people find themselves looking for ways to make money, particularly online. However, this has made an opportunity for other people to come up with new ways to swindle others of their hard-earned cash.

Are we implying that pyramid schemes started after the COVID-19 pandemic? Not at all. However, this article attempts to sensitise consumers to always be on the lookout especially that the “new normal” requires most if not all people, to make use of technology.

The first pyramid scheme is credited to Charles Ponzi, who in 1919 is said to have engineered a “top down” scam involving promissory notes payable in 90 days and a promise to repay investors, at 50% interest, who invested in the notes. Then, what really is a pyramid scheme? Debra A. Valentine, Former General Counsel of the Federal Trade Commission, states that pyramid schemes promise consumers or investors large profits based primarily on recruiting others to join their scheme, not based on profits from any real investment or real sale of goods to the public.

Simply put, it is a fraudulent business model in which unsuspecting victims are lured to join the scheme by recruiting others rather than by selling actual products or services. That is, the model works by asking new investors to make an upfront payment so that they can be allowed to join the scheme and money received from the new recruits, is used to pay off the earliest investors. Perpetrators use various methods to advertise their schemes, the most common one being social media, others include newspapers, home meetings and other online platforms.

To attract unsuspecting victims, the perpetrators seldom use their true identity, and often use fabricated testimonials and referrals. They are very skilful and use sales techniques that put emphasis on urgency and make people to make hasty decisions giving them no time to do their own research or background checks.

It is therefore important to note that there is another business method often confused with pyramid scheme called “Multi-level” or “network” marketing.

Multi-level is a form of business that uses independent representatives to sell products or services to the community at large. That is, a representative earns commissions from retail sales he/she makes, and also from retail sales made by other people that he or she recruits. This form of a business model is lawful and legitimate as it uses a network of independent representatives to sell consumer products.

What the law says about pyramid schemes according to the Consumer Protection Act, 2018, pyramid schemes are UNLAWFUL. Section 9. (1) (a) of the Act states that “A person shall not directly or indirectly promote, or knowingly join, enter or participate, or cause any person to promote, join, enter or participate in- a) a pyramid scheme; How do pyramid schemes work?

They may be difficult to identify especially at the beginning because they are often disguised as legitimate network marketing businesses. In a legitimate network marketing business, people are recruited to sell products and services that have a specific value or benefit usually household, personal care and wellness products. Profits made are from the sale of such products rather than on the number of people a person can recruit into the business.

Although members may be encouraged to recruit other people to sell the products, such recruited people have an option to choose to focus on selling directly to their own customers without the need to recruit other “investor”.

Pyramid schemes are diverse, and we see new ones mushrooming on social media, but they all have one typical characteristic: they promise consumers or investors huge returns based primarily on introducing new members into the scheme, as opposed to rather expecting returns to come from real investment or the sale of goods. Can you then be jailed for engaging in such a scheme? Definitely.

Once it has been established that a person has engaged in a pyramid scheme, they are liable for a fine not exceeding P100, 000.00 or to an imprisonment for a term not exceeding five years, or both. Section 9(4) categorically states that “A person who participate in an arrangement, agreement, practice or scheme under subsection (2) commits an offence and shall be liable, upon conviction, to a fine not exceeding P100 000 or to imprisonment for a term not exceeding five years, or both”. How then can you protect yourself when faced with any investment decision on whether to participate in this scheme, it is advisable to consider the following:

Do your own research about the company, its history, management, shareholders etc;

Avoid any programme that focuses more on recruitment of new people rather than the sale of a product or service to an end-user consumer;

Make sure the product or service offered by the company is something you would buy without the income opportunity and the product or service is competitively priced; and

Never sign a contract or pay any money to participate in a multi-level marketing programme, or any business opportunity, without taking your time and reading all of the paperwork.

The first pyramid scheme is credited to Charles Ponzi, who in 1919

is said to have engineered a “top down” scam involving promissory notes payable in 90 days and a promise to repay investors, at 50% interest, who invested

in the notes.