The financial pyramid – the essence, signs and responsibility

The financial pyramid is strongly associated with deception. Such projects are gaining momentum and becoming more diverse than in the 90s. People’s naivety leads to misunderstandings: not everyone can recognize the pyramid in time, and sometimes confuse it with network marketing.

What is a financial pyramid??

man looks at the pyramid

An investment or financial pyramid is a way to generate income for those who come up with it. The essence of the financial pyramid is to constantly attract money at the expense of new participants. The first investors receive income from the contributions of “fresh” investors. The principle of the financial pyramid is when the lower rows “feed” the upper.

The scheme is not always disclosed by the organizers, and the sources of income are silent. Instead, they call insignificant sources or even fictitious ones. The fact of concealment or substitution of data is considered fraud.

Mathematicians and economists say that the redistribution of deposits between participants cannot work forever, so such a monetary scheme collapses. Participants will not be profitable for long. Usually only the first members get more than they invested, the last gets nothing. Repayment of obligations to everyone is impossible.

History of financial pyramids

jo lo

The first financial pyramids date back to the 17th-18th centuries. The economic history of many countries knows a lot of such examples..

In 1717, John Law, a French entrepreneur and a prominent figure in the royal court, issued 20,000 shares at a price of 500 livres. He said that the French fleet found gold in the Mississippi, where locals will endow all the French with their wealth. Law launched powerful advertising, and his status inspired confidence in investors.

A few months later, stocks rose to 5,000 livres. But the company of Luo could not keep the price artificially for a long time and after six months the bubble burst. This enterprise almost ruined France: the financial crisis began, goods disappeared from the shelves, and the dissatisfaction of depositors turned into a panic.

Robert Harley

Around the same time, in England, Robert Harley opened the South Seas Company. She promised to give shareholders the exclusive right to trade with the Spanish part of South America. The only asset of the company was the public debt of England.

Important persons became investors, even Isaac Newton invested money there. Harley used their names for advertising, attracting new contributors. As a result, the rights were not as complete as I thought to found. Organization declared bankrupt.

The largest financial pyramids

Lou Perlman


The Portuguese Pyramid


Emigrant Don Branco opened her bank in 1970 and promised depositors a 10% return on deposits each month. For 14 years, the system worked, and Branko received the nickname “people’s banker.” When the pyramid collapsed, reporting on obligations became impossible, and the woman was sentenced to 10 years.


Shares of Lou Perlman


The creator of the music group Backstreet Boys spent some time in prison for financial fraud. In 1981, he organized fictitious firms and placed shares on the stock exchange, publishing fake reports on their profits.

The scheme lasted 20 years, stocks increased in price during this time, but then Lu received 25 years in prison and a millionth fine. Shareholders even after recovering part of the money lost $ 300 million.


Saed Shah’s Pyramid


In 2005, a Pakistani teacher, Saed Shah, began telling his neighbors that he had a secret stock trading program. The shah found 10 depositors, paid them interest and received dozens more.

Over a year and a half, he gathered 300 thousand people who gave a total of $ 1 billion. At first they wanted to make Shah the head of the region, but when the pyramid collapsed, he was convicted of fraud.

The financial pyramids of the 90s. in Russia

Sergey Mavrodi


Mmm


Sergey Mavrodi founded the largest pyramid of the XX century, the number of participants in which exceeded 15 million. AOOT “MMM” since 1992 accepted cash deposits in exchange for its shares. They promised income at 200% per month. In 1994, due to a tax conflict, the exchange rate fell, the company went bankrupt. The amount of debt amounted to 5 billion rubles.


Sovereign


In 1992, the company “Vlastilina” appeared in the Moscow region. It was founded by Valentina Solovyova, who took deposits at high interest and was engaged in the sale of cars and apartments at low prices..

Solovyova made a proposal to the new employee of the company. She asked to give her 3 million 900 thousand rubles each and in return promised a Moskvich car, which then cost 8 million rubles. Valentina fulfilled the agreement, and the glory of “Lord” scattered throughout the country. Even famous personalities invested there: Alla Pugacheva, Philip Kirkorov, Alexander Rosenbaum, Yuri Loza, Lolita and others.

Disruptions in payments began in 1994, and Solovyova’s sentence was pronounced in 1999. The amount of damage amounted to 537 billion undenominated rubles and $ 2.5 million..


Russian house of Selenga


In 1992, the company “Russian House of Selenga” appeared in Volgograd, which opened 70 branches throughout the country in a year. Money was returned in the form of payments on deposits, was attracted to the opening of a network of supermarkets and travel agencies.

In 1996, the creators of the pyramid – Sergei Gruzin and Alexander Salomadin – were arrested. They received from investors almost 3 trillion rubles, spent a third on the maintenance of the company, and deceived 2.5 million people.

Types and types of financial pyramids

man signs a document


Layered


Each new participant pays an entrance fee, which is distributed between those who invited him and a participant at a higher level. Beginner invites others and receives his income from them.

The reason for the collapse is the lack of participants. When the number of users stops growing, the last participants suffer heavy losses. Usually such a pyramid is covered by trade or highly profitable investment..


Single-level or Ponzi scheme


The scheme was named after Charles Ponti (Ponzi), an Italian expat who made the first financial pyramid in the United States..

New members are not attracted to old ones. The first investors receive income from the personal money of the organizers and think that it will always be so. They begin to confirm the financial strategy and recommend that their friends invest.

Signs of a financial pyramid


1. Payments not related to sales


If they say that you will receive, for example, 5% from each shampoo sold by you and your neighbor, most likely this is network marketing.

If no one says that the number of shares, vouchers or goods sold will affect payments, then this looks like a fraudulent scheme where the income comes from the contributions of new investors.


2. You are promised an easy and unrealistic income.


In the pyramid advertisements, profitability figures are higher than the market average. Mentioned of the absence of risks, quick enrichment, called the specific amount of money that you will receive. For example, “Get guaranteed + 100% profitability every week without special knowledge and skills”.

This interest payment is not rational. It exceeds the offers of any financial institutions. Russian banks give a deposit rate of 7-8% per year. In addition, it is prohibited by law to guarantee profitability in the securities market and it is necessary to warn the investor about the risk of losing money.


3. They require enough money from you, but it’s impossible to monitor the movement of funds


Usually the entry fee in the pyramids is large, but affordable for people. This way you can reach a maximum of investors who will accept the loss of funds in the event of a collapse.

At the same time, money constantly “travels”: you are told that fund transactions are insured in one country, and the purchase and sale of shares in another.


4. Company managers only think about PR


If during a presentation, on a website or in booklets they constantly tell how shareholders are lucky, but at the same time do not give accurate information (annual balances, financial statements, a list of assets) that can be verified in independent sources, this is a pyramid.

Such schemes are characterized by aggressive media advertising (for example, Robert Harley’s South Seas Company was supported by writers Dafoe and Swift for money).


5. Inexplicable terms in conversation with organizers


Organizers of financial pyramids constantly use “smart words”: trading, futures, forex, options. Such vocabulary should scare off, but in practice it intrigues and attracts new investors.


6. Organizers remain anonymous, and the company has many secrets


If the organization does not have an office, an exact definition of activities and a charter, and most importantly, licenses of the FCSM / FSFM of Russia or the Bank of Russia, it is better not to contact it.

In addition, such companies usually do not have their own fixed assets and other capital assets. They may tell you that work secrets are not specifically disclosed, because this is confidential and strategically important information..


7. Investment mechanisms are opaque, and the company has no signs of economic activity


For example, you were promised high interest when investing in high-yield stock market instruments. You monitor and find out that the company is not on the stock exchange and it does not trade.

Responsibility for the financial pyramid

lawyer

The pyramids are recognized illegal in many countries, and in the UAE and China, in general, you can get the death penalty for this. Some states did not begin to introduce a separate article in criminal law, therefore they qualify financial pyramids as different crimes (for example, illegal entrepreneurial activity).


Compare pyramids with fraud is not entirely correct


If an entrepreneur made a mistake when creating a long-term project, the financial pyramid becomes simply an unpleasant consequence, which is avoided by additional lending..

But even with the deliberate possession of someone else’s money, it is not always possible to punish the organizers – if they prove in court that the money went to interim payments, and were not fully appropriated. By and large, the only money that the organizers of the pyramids appropriate is the deposits of the first investors.

But the trick is that the first depositors are not victims, as they received their money back (at the expense of the last and really deceived depositors). Therefore, such crimes are difficult to define as “fraud”. In our country, such cases until 2010 fell into the category of “pseudo-enterprises” (until the liquidation of 173 articles).


Responsibility in Russia


The financial pyramid and Russian legislation are linked by article 172.2 of the Criminal Code of the Russian Federation. For its organization, you can be imprisoned for six years or less. At the same time, it is necessary to prove that there was no legal investment or entrepreneurial activity, and the money of the new participants went to pay income to the old participants.


Can the victim from the financial pyramid receive compensation?


It depends on what kind of pyramid you became a victim of.. Contact to the Federal Public-State Fund for the Protection of the Rights of Shareholders and Depositors.

If the pyramid is in their database, you will receive compensation, the maximum amount of which is 35,000 rubles (this is a reimbursed contribution without interest and minus the profit you made). WWII veterans can get up to 250? 000 rubles.


Where to report on the financial pyramid


If you became a victim, made a claim in the name of fraudsters and did not give you an answer, write a statement to the police or prosecutor’s office of the Russian Federation. To do this, collect documents that confirm your money transfers. Team up with other victims to sue.

If any organization makes you suspicious, write to the Central Bank of Russia through online reception.

Where to look at the list of financial pyramids?


Since 2014, a separate unit of the Central Bank, the Main Directorate for Combating Unscrupulous Open Market Practices, has been engaged in pyramids. It analyzes the information that comes through citizens’ appeals and appears in the media, and also helps law enforcement agencies..

In 2018, the Central Bank launched an online robot – it tracks the financial pyramids in Russia. Information about the results is posted on the official website after the fact, i.e. when the pyramid is already opened, and its work is stopped.

On the website of the Federal Fund for the Protection of the Rights of Depositors and Shareholders, you can study “Registry legal entities and individual entrepreneurs whose depositors are paid compensation ”.

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