Lexi Webster
Pyramid schemes are illegal in Australia, and so is participation in or promotion of such a scheme. These schemes make money by recruiting businesses or people rather than by selling legitimate products or services. They inevitably collapse, and new members can lose a lot of money. If you suspect a business to be a pyramid scheme, you can report it to the Australian Securities and Investments Commission (ASIC).
| Characteristics | Values |
|---|---|
| Legality | Illegal in Australia |
| Nature of the scheme | Based on recruiting people rather than selling valuable products to customers |
| People at the top | Only a small number of people at the top receive any financial benefits |
| Involvement of products or services | Even if a product or service is involved, pyramid schemes make money by recruiting people |
| Collapse | Pyramid schemes inevitably collapse and new members can lose a lot of money |
| Participation | It is illegal for any business or person to participate in, or persuade others to participate in a pyramid scheme |
| Loss | Australians lost more than $7 million in 2022 to pyramid schemes alone |
| Reporting | Businesses suspected to be pyramid schemes can be reported to the Australian Securities and Investments Commission (ASIC) |
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What You'll Learn
How to spot a pyramid scheme
Pyramid schemes are illegal in Australia. Scamwatch, run by the Australian Competition and Consumer Commission (ACCC), reports that Australians lost more than $7 million to pyramid schemes in 2022.
- Emphasis on recruitment: If a program focuses on recruiting others to join for a fee, it is likely a pyramid scheme. Be cautious if you will be compensated more for recruiting others than for product sales.
- No genuine product or service is sold: Even if a scheme offers a product or service, it may still be a pyramid scheme if the products are overpriced, of poor quality, difficult to sell, or of little value.
- No demonstrated revenue from retail sales: Ask to see financial statements audited by a certified public accountant (CPA) to ensure that the company generates revenue from selling products or services outside the program. Legitimate companies derive revenue primarily from selling products, not from recruiting members.
- Complex commission structure: Be cautious if you do not understand how you will be compensated. Commissions should be based on products or services that you or your recruits sell outside the program.
- Requiring an upfront investment or bulk product purchases to join: Be wary of any company urging you to invest or buy inventory before doing thorough research.
- Unrealistic income claims: Be skeptical of outsized income claims and recruitment-focused pitches.
If you suspect a business to be a pyramid scheme, you can report it to the Australian Securities and Investments Commission (ASIC). Provide details of any contact you have received, such as emails, text messages, or screenshots of online interactions.
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How pyramid schemes work
Pyramid schemes are a form of fraud that is illegal in Australia. They are also known as 'get-rich-quick' schemes, and they aim to generate money primarily through the recruitment of people or businesses into the scheme. The promoters of these schemes often promise high returns in a short period, with little effort involved. However, the success of a pyramid scheme depends solely on the ability to recruit more and more investors, and since there is a limited number of people in any given community, all such schemes are doomed to fail.
Pyramid schemes may or may not involve the sale of products or distributorships, with the latter included solely to sidestep regulatory agencies. The selling of a product itself is much less important than the recruitment of new investors. The promoters often target closely-knit groups such as religious or social organizations, sports teams, and college students to increase the pressure to participate. They give attractive names to their schemes, such as "investment clubs" or "gift programs," and assure potential investors that they are legal.
To avoid being defrauded, it is important to gather all information about the company, its officers, products, services, marketing plans, sales literature, and contracts. Be cautious of promoters who fail to explain their plans clearly and in detail. Legitimate businesses have clear, straightforward revenue models, whereas pyramid schemes often have complex multilevel payment structures that are designed to obscure their true nature. Fraudsters often create artificial urgency, claiming limited spots or special "founder" rates to pressure potential victims into acting without conducting due diligence.
Some warning signs of a pyramid scheme include constant delays in withdrawal requests, reduced communication from operators, and frequent changes to terms of service or withdrawal requirements.
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Are Ponzi schemes illegal in Australia?
Ponzi and pyramid schemes are both forms of financial fraud that deceive unsuspecting individuals by offering substantial income or returns on their initial investment. However, they are not identical.
A Ponzi scheme is a type of financial fraud in which the success of the entity is propped up by paying returns to initial investors from the money invested by subsequent investors. Eventually, all Ponzi schemes fall apart when new investor deposits can no longer support dividend payments to existing investors.
A pyramid scheme, also called a chain referral scheme, is a fraudulent business model in which new members are recruited with promises of payment tied to their ability to enrol future members in the scheme. As the membership pool expands exponentially, further recruiting becomes impossible and the business becomes unsustainable.
In Australia, pyramid schemes are illegal and regulated by the Australian Competition and Consumer Commission (ACCC). Ponzi schemes, on the other hand, are not specifically mentioned in Australian law, but they are a form of financial fraud and are therefore illegal. If you suspect that you have been a victim of a Ponzi scheme, you can report it to the Australian Securities and Investments Commission (ASIC) or the Australian Taxation Office (ATO).
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How to report a pyramid scheme
Pyramid schemes are illegal in Australia. If you suspect that you have encountered one, you can report it to the Australian Competition and Consumer Commission (ACCC) via its Scamwatch website or report a scam page. Alternatively, you can report the business to the Australian Securities and Investments Commission (ASIC).
When reporting to the ACCC, it is helpful to include all the details of the contact you received, such as emails, text messages, or screenshots of any online interactions. You should also include any information about the business, such as its name, website, and any other contact details. If you have provided any personal or financial details to the suspected pyramid scheme, contact your bank immediately.
When reporting to the ASIC, it is useful to include all the details of the contact you received, such as the email, text message, or a screenshot of any online interactions. You can also report the business to your State Fair Trading office.
Additionally, you can check the company on the Direct Selling Australia (DSA) website to see if they are listed as a legitimate business. DSA represents organisations that deal with goods and services sold directly to consumers. They suggest being wary of any "get rich quick" claims or assurances of easy money and passive income. Reputable companies will also buy back unsold and marketable inventory at the purchase or a discounted price.
Remember, ignorance is not a defence under the law. If you recruit others into a pyramid scheme, you could be held personally liable, even if you didn't realise it was a pyramid scheme.
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The legality of multi-level marketing schemes
Pyramid schemes are illegal in Australia, and so is participation in or promotion of such a scheme. These schemes are based on recruiting people rather than selling valuable products to customers. They make money by recruiting businesses or people rather than by selling legitimate products or services. Even if a product or service is involved, the main focus is on recruitment. In a pyramid scheme, the only way for members to make a profit is to recruit new members who will do the same thing—sell the same product and recruit more members. This inevitably leads to the collapse of the scheme, as the number of people willing to join dries up. When this happens, relationships and even marriages can be destroyed over money lost in the scam.
Pyramid schemes can sometimes disguise themselves as legitimate multi-level marketing (MLM) schemes, as the two function in similar ways. However, MLM schemes profit from selling products or services to the general public, not from recruiting new members. Legitimate MLM schemes are legal in Australia, but it is always a good idea to understand the business model and contract before joining one.
If you suspect a business of being a pyramid scheme, you can report it to the Australian Securities and Investments Commission (ASIC). You can also find information about what to do if you have lost money to a scam on the Scamwatch website. Ponzi schemes are similar to pyramid schemes and are also illegal in Australia. They are typically framed as 'investments' with high returns, but there is no real investment, and the money paid out comes from funds collected from new investors.
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Frequently asked questions
Yes, pyramid schemes are illegal in Australia. It is also illegal for any business or person to participate in or promote a pyramid scheme.
Pyramid schemes are based on recruiting people rather than selling valuable products to customers. For all members to make a profit, there would have to be an endless supply of new members. These schemes inevitably collapse, and new members can lose a lot of money.
In a pyramid scheme, participants are often asked to make two payments: one to join and another to recruit new members. The only way for people to make money in a pyramid scheme is by recruiting others rather than by selling the product or service.
Pyramid schemes may disguise themselves as legitimate multi-level marketing (MLM) schemes. MLM schemes profit from selling products or services to the general public, while pyramid schemes make money through recruitment. Pyramid schemes often use buzzwords like "AI" and "crypto" and promise high returns.
If you suspect a business or scheme to be a pyramid scheme, you can report it to the Australian Securities and Investments Commission (ASIC) or Scamwatch, run by the Australian Competition and Consumer Commission (ACCC). It is important to gather and provide as many details as possible, such as emails, text messages, or screenshots of online interactions.
