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Pyramid schemes: What are they and how can you avoid them?

People lose millions of pounds to pyramid schemes every year. But what are they and how can you protect yourself?

In the 12 months up to October 2020, Brits lost as much as £35 million to pyramid schemes.

As this suggests, they aren’t always easy to spot. Here we break down how they work, and most importantly, how you can avoid them.

What is a pyramid scheme?

According to Action Fraud, the UK’s national reporting centre for fraud and cybercrime, a pyramid scheme "involves an unsustainable business which rewards people for enrolling others into a business that offers a non-existent or worthless product."

The scheme's only source of income is new and existing members paying them money. Those buying into the organisation rarely, if ever, see any returns.

How does a pyramid scheme work?

Pyramid schemes start with a single person, or a small group of people reaching out to a number of individuals with promises about making lots of money quickly.

To get started, the new recruits need to invest a certain amount of money into the business, buy set amounts of products each month or pay hefty commissions. In return, they’re promised lots of money through recruiting more people.

The founders of the scheme make the lion’s share of the money, while those further down the pyramid as well as those joining later on, rarely make much money.

As the pyramid grows and new members join, those higher up make more money, while those at the bottom have to replicate the expansion to make money themselves.

What types of pyramid schemes are there?

Pyramid schemes can exist in a wide range of sectors and can come in a few different forms.

Some pyramid schemes have been run entirely through chain mail, where people continuously circulate emails recruiting more individuals.

Other schemes can be run through investment clubs . These clubs are entirely legitimate normally and are a way for people to pool together money to invest in causes and organisations.

But due to the collective nature of investing clubs, they can also be targeted by pyramid schemes that start fake clubs by convincing people to invest.

They then each get a small portion of the money by recruiting more and more people, all while continuing to invest.

Are pyramid schemes illegal?

Yes. Like all scams and money-making schemes, pyramid schemes are illegal.

Very simply, those running pyramid schemes are getting rich through siphoning funds from late-stage joiners who will almost certainly never make any money.

Ultimately these schemes are get-rich-quick promises that take people’s hard-earned savings for good.