Ponzi and Pyramid Schemes - Research Paper Example

?Ponzi and Pyramid Schemes By Definition Ponzi and Pyramid schemes are illegal and very hazardous. They are ‘get-rich-quick’ methods that can cost many people a lot of money. At present, Ponzi and Pyramid schemes appear in a number of forms that it is difficult to identify them instantly. However, all the forms of these schemes share one common characteristic and that is, they all assure customers or investors big profit based on recruiting others to join their plan, instead of generating profits from some genuine deal or trade of products. Though, some forms of these schemes can claim to sell a product, but that product is actually a camouflage to hide their Pyramid arrangement (Roberts et al., 2007; ScamWatch, 2012; Valentine, 1998; Roos, 2012). Basically, there are two tell-tale symbols that a business item or product is only being employed to cover a Pyramid scheme i.e. Stock loading and lack of corporate sales. In case of stock loading a business support program persuades workers to purchase more products than they could ever trade, frequently at inflated costs. In this scenario, the top management of an organization and Pyramid launcher generates considerable profits, even without bringing that product into the marketplace (Roberts et al., 2007; ScamWatch, 2012; Valentine, 1998; Roos, 2012). In addition, the people behind the scenes generate a lot of money for inventory that just accumulates in their basements. In this scenario, lack of retail sales is as well a red flag that ensures the life of a Pyramid. A lot of Pyramid schemes claim that their product is selling like hot cakes. However, the fact is that the sales happen simply among people within the Pyramid system or to new recruits joining the Pyramid scheme and not to the general public (Roberts et al., 2007; ScamWatch, 2012; Valentine, 1998; Roos, 2012). A Ponzi scheme is closely related to a Pyramid for the reason that it rotates around endless recruiting. However, in a Ponzi scheme the promoter normally has no product to put up for sale and pays no charges to investors who employ new "associates”. Additionally, the advertiser generates income by attracting a stream of people, assuring them a very high rate of return on immediate deals. Normally, in Ponzi scheme, there is no actual investment chance, and the promoter immediately makes use of the cash from new recruits to disburse obligations payable for a longer-standing to the associates of the plan. In simple word, there is an appearance that satisfactorily reviews this plan: It is known as "stealing from Peter to pay Paul." A number of law enforcement officials describe a Ponzi system as a "Peter-Paul" scam (Roberts et al., 2007; Valentine, 1998; Roos, 2012). Moreover, Ponzi schemes are trapping a lot of investors who have large sums to spend and who are allegedly knowledgeable and money-wise sophisticated (Rowe, 2000). Applicable law regulating the shame The business and methodology behind a Ponzi scheme, definitely has a triangular arrangement. The traitor is at the top most position. He is the chief of repeatedly growing stairs of investors. Though, there is dissimilarity between how both traditional Pyramid and Ponzi systems are executed. The vital difference between a Pyramid and Ponzi system is that a Ponzi plotter will simply ask its victim to invest in a deal. They will not ask them to perform any other activity or job except to invest money. They will ask their victims to wait until their investment is refunded. The Ponzi schemer is the brain behind the entire scheme and is simply shuffling money from one place to another. Moreover, a Pyramid scheme launcher offers an opportunity to its victim to generate money himself. Hence, it requires additional work, for instance, they can ask him to buy a franchise or license and start employing more people like himself. The staff will frequently disburse the recruiter a part of his income. All the same, Pyramid schemes are illegal. Moreover, a number of legal businesses, such as Mary Kay and The Pampered Chef, have been developed around the Pyramid thought. However, the environment of Ponzi schemes essentially depends on security frauds. For instance, it involves convincing someone to spend cash that would not, in reality be invested. To mark till now the majority of people carry on utilizing the terms interchangeably, as well as a lot of texts categorize Ponzi schemes as a kind of Pyramid system (Roberts et al., 2007; Clark & McGrath, 2012). One of the major problems with Ponzi and pyramid schemes is that they are similar to lawful multistage business schemes; their illegality can be determined only through a macroscopic observation (Gunestas et al., 2010). The description of Ponzi and Pyramid Schemes is given by the Internal Revenue Service (IRS) and the applicable laws and legal principles dealing with such schemes are given at Rev. Proc. 2009-20 in Section 4.01 and Rev. Rule. 2009-9. According to IRS, these schemes are known as Specified Fraudulent Arrangements, where “a specified fraudulent arrangement is a deal in which investors give cash or property to a participant (ii) reports income amounts to the investors that are incompletely or completely fictitious (iii) purports to earn income for the investors; (iv) makes payments, if any, of purported income or principal to some investors from amounts that other investors invested in the fraudulent arrangement; and (v) appropriates some or all of the investors’ cash or property” (Lehman, 2011). In order to deal with these crimes, the common principle is that a good belief, non collusive agreement or settlement entered into to stop legal action will “ascertain” the charge for returning income, thus establishing a lack of an unobstructed right to income for purposes of Section 1341 (Lehman, 2011). Measures to prevent Investment business engages selling, buying, subscribing or guaranteeing investments as an agent. However, it is essential to get a license from the authorities before performing any of the above mentioned activities. A Ponzi scheme can be recognized as a free form of an investment company product. Furthermore, it is essential that we seek recommendation from the Financial Services Commission before we take part in any such activity. Even if we have a license issued by the Financial Services Commission, we should not connect with the companies selling, promoting, or subscribing to these schemes because this too would be illegal. (Be Legal, 2011; MONEY MATTERS BVI, 2012; Roberts et al., 2007). The Ponzi scheme covers-up the source of money as well as lures people into the faith that the system will continually produce funds. The Investment and Securities Business Act, inevitably asks a person running a business of any type to have a license. Hence, running an investment business without the required license is an offense. Moreover, the most excellent protection beside fraudulent methods is to be conscientious and careful (Be Legal, 2011; MONEY MATTERS BVI, 2012; Roberts et al., 2007). Any cases that knows Gold Mine International Business (www.goldmineint.com) is a worldwide business that is making use of Pyramid scheme to sell its products. It attracts customer to make a pyramid of clients. At each level the root node will attain higher profits. This scheme uses the innocence of people to sell its products and make huge profit at the management end (BlogPost, 2009). A San Diego-based telephone equipment leasing corporation known as Amtgel Communications, offered to sell pay phones to shareholders for several thousand dollars and then instantly lease them back, trace them, and service them. With this scheme, the corporation earned more than $60,000 in four years (1992 to 1996) (SdaDefend, 2002). Recommendations With the advancements in information technology, new tools and techniques are emerging to perform such kind of frauds. Now Ponzi and Pyramid scheme builders use the internet to get more people to join their network. In this scenario, they develop a web site, social network, online brochure or an email, which contains a lot of marketing stuff to attract readers. As a result, the user takes interest to invest in these schemes. However, before investing in such kind of schemes people must investigate them thoroughly. They should inquire from related sources and search for information on the internet. If someone is a victim of such crimes, they should instantly inform others, especially the government authorities so that they can take accurate measures against such crimes. Some strict rules and regulations must be implemented to deal against such crimes. Moreover, people need to be careful while spending money on the internet. References BeLegal, 2011. Protecting Yourself from Pyramid or “Ponzi” Schemes. [Online] Available at: http://belegal.com/wordpress/protecting-yourself-from-pyramid-or-ponzi-schemes/ [Accessed 22 February 2012]. BlogPost, 2009. GOLDMINE INTERNATIONAL SCAM (GMI SCAM). [Online] Available at: ry 2012]. Gunestas, M., Mehmet, M. & Wijesekera, D., 2010. Detecting Ponzi and Pyramid Business Schemes in Choreographed Web Services. IFIP Advances in Information and Communication Technology, 337(2010), pp.133-50. Lehman, R.S., 2011. Favorable Tax Consequences – Ponzi Schemes And The Clawback. [Online] Available at: http://www.lehmantaxlaw.com/ponzi-schemes-tax-loss/favorable-tax-consequences-%E2%80%93-ponzi-schemes-and-the-clawback/ [Accessed 01 March 2012]. MONEY MATTERS BVI, 2012. Ponzi or Pyramid Scheme. [Online] Available at: http://moneymattersbvi.com/ProtectingYourMoney/AvoidingFraud/PonziorPyramidScheme.aspx#FraudulentSchemes [Accessed 26 February 2012]. Roberts, R.R., Dollar, R. & Kraynak, J., 2007. Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership. Kaplan Publishing. Roos, D., 2012. How Pyramid Schemes Work. [Online] Available at: http://money.howstuffworks.com/pyramid-scheme.htm [Accessed 24 February 2012]. Rowe, B.R., 2000. PONZI SCHEMES. [Online] Available at: http://extension.usu.edu/boxelder/files/uploads/fl-ff05.pdf [Accessed 28 February 2012]. ScamWatch, 2012. Pyramid schemes. [Online] Available at: http://www.scamwatch.gov.au/content/index.phtml/tag/PyramidSchemes [Accessed 24 February 2012]. SdaDefend, 2002. Ponzi and Other Frauds. [Online] Available at: http://www.sdadefend.com/MINDEX-P-Q/Ponzi-K.pdf [Accessed 02 March 2012]. Valentine, D.A., 1998. INTERNATIONAL MONETARY FUND'S SEMINAR ON CURRENT LEGAL ISSUES AFFECTING CENTRAL BANKS. [Online] Available at: http://www.ftc.gov/speeches/other/dvimf16.shtm [Accessed 22 February 2012]. Read More