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Pyramid schemes

people pyramidPyramid schemes make money by recruiting businesses or people rather than by selling real and legitimate products or services – even if a product or service is involved.

These schemes inevitably collapse and new members can lose a lot of money. It is illegal for any business or person to participate in, or persuade others to participate in a pyramid scheme.   

The two payments often associated with a pyramid scheme are:

  • a participation payment to join; and
  • a recruitment payment, promised when a member recruits others investors or participants.

These recruitment payments often help define a pyramid scheme – it may be the only or main reason for new member to join. The recruitment ‘payment’ involved could be a financial or a nonfinancial benefit, given either to the new participant or to someone else.

A court can consider several factors when identifying a pyramid scheme. The ACL does not limit the matters a court can consider however the following characteristics can be used to help identify a pyramid scheme:

  • unrealistic claims in regard to future profits;
  • the sales and/or promotional material push recruitment very hard; and
  • recruitment payments are a substantial reason to join.

For more information on Pyramid schemes see WA Scamnet