Over the years, one of the recurring methods of scam artists is to use pyramid structures to lure people who want to earn a fast buck.
The scam artists rely on consumers' inherent greed to make their schemes work. But when these schemes collapse, the willing victims want someone to retrieve their money and squeal about the lack of regulation to protect them.
Pyramid structures can, however, be both legal and illegal. To be legal, they must have a product attached. The legal operators prefer their structures to be known as multi-level marketing or network marketing to distance themselves from the crooks. The only problem is that some of the undesirables now also claim to be multi-level marketers.
All pyramid schemes, whether legal or illegal, are structured in much the same way: one person recruits a layer of people (normally four or five) below him or her to whom he or she sells products or from whom he or she collects money. These people in turn recruit another layer of people, and so on. Every person up the pyramid receives a slice of the money paid over or made by those at the levels below him or her.
So the higher up the pyramid you are and the more people who join the scheme, the more money you make. The only problem is that pyramid schemes are very fragile for many reasons. It is normally those at the top of the pyramid or who design the scheme who make the money, while the last to join lose out.
Most of the illegal operations fall foul of the Banks Act because they solicit or accept "deposits" from the general public as a regular feature of their business.
To quote the most recent report of the Registrar of Banks: "A deposit can be described as an amount of money paid by one person to another subject to an agreement in terms of which an equal amount or any part thereof will be repaid on demand, on a specified or unspecified date, or in agreed upon circumstances."
Last year, the Reserve Bank closed down 40 illegal schemes. And to make matters worse, pyramid selling has been attached to very dubious property "investment" schemes.
Legal but questionable
Although many pyramid schemes may be legal because they have a product attached, this does not mean it is wise for you to invest or even to participate in them.
Take, for instance, the perfectly legal pyramid scheme Balltron, which uses various financial products, including a savings product called Savetron.
Balltron demonstrated its financial acumen by giving J Arthur W Brown's Fidentia the task of investing the R45 million that individuals invested in Savetron.
Then there is the Pietermaritzburg-based pyramid scheme U-Care, which has a novel product: it collects money for charity.
U-Care is managed by the very unpleasant and aggressive Mike Ollemans, who resorts to legal threats whenever someone in the media questions the scheme.
U-Care's members pay a monthly subscription of R120. Of this, a miserly 20 percent goes to charities. But the management company, Corpclo2297, takes a generous 20 percent.
The remaining 60 percent is devoted to paying the various levels of the pyramid and for other inducements to the members.
My view is that if Ollemans and his associates, Stan Carruthers and Elco Geldenhuys, are really concerned about charity, they should reduce Corpclo2297 and the members' take significantly and increase the proportion going to charities to well over 60 percent.
And if the U-Care members themselves are really concerned about the charities, they should rather pay 100 percent directly to the charities of their choice instead of making Ollemans and his company wealthy.
U-Care is definitely one I would give a miss.
Value for money?
Pyramid schemes do not stop at these smaller operations that tack on a product to make the structure legal. Clientele Life is a listed company that has been using legal pyramid structures for the past nine years to sell its products.
Clientele Life uses a legal pyramid system as a distribution channel for its life assurance risk and savings products. But the question remains whether people sign up for the benefits of the pyramid structure rather than to get value for money from the policy they purchase.
Up to 75.75 percent of every premium paid can disappear in commissions that are paid to up to six levels of the pyramid.
Clientele Life is extremely coy about the other costs, but after all the commissions have been deducted, the benefits, particularly of any savings component, are likely to be minimal. The main reason people will maintain the policies, no matter how worthless, will be for the earnings from the pyramid structure.
But Clientele Life chief executive Gavin Soll admits that the pyramids are never perfect and as a result only about 25 percent of each premium goes to the commissions.
What is worrying is that more than 50 percent of every premium paid disappears in costs, which include the payments to six levels of the pyramid.
Clientele Life uses what it calls independent field advertisers (IFAs) - not to be confused with independent financial advisers - to introduce people to its products.
The job of an IFA is to get potential customers to attend a meeting at which a Clientele Life employee will explain and sell the products to them. This is done to meet the requirements of the Financial Advisory and Intermediary Services Act. The employee is registered with the Financial Services Board (FSB) as an agent of the company. Clientele Life is registered with the FSB as a Financial Services Provider. In other words, the FSB is satisfied with Clientele Life's sales methods.
The IFAs receive a "commission" for three years based on the size of the policy premium and only when the premium is paid. After three years, the IFAs qualify for "bonuses" if they have reached certain sales targets. The IFAs receive further payments based on a percentage of the income of the IFAs they recruit.
Soll claims this model enables savings and risk assurance products to be made available at cost-effective premiums to lower-income consumers, who may not otherwise be able to access the products.
He says 85 percent of sales go to people who have not bought a life assurance product before.
This system of selling life assurance products is used extensively in India, where there is a massive low-income market.
The main things that concern me are that people who buy formal financial products should understand what they are buying, and that a policy should be bought and sold to meet the policyholder's needs.
You definitely should not be purchasing the products to take advantage of pyramid-earning structures, which can be very fragile, as has been proved time and again.