Pyramid 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.
In a pyramid scheme, participants are often asked to make two payments:
- a participation payment to join; and
- a recruitment payment, promised when a member recruits others.
These recruitment payments often help define a pyramid scheme – it may be the only or main reason for new members to join. The ‘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 Australian Consumer Law 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.
Criminal and civil penalties apply.