Redundancy rates rise, Pyramid schemes return

It has been reported by many media and investigative journalism programmes that the number of illegal pyramid schemes is on the rise.

This fresh outcrop seems to be particularly prevalent in South Wales (our back garden, so hence why I am writing about it), and to be on the rise thanks in part to the credit crunch. Many of these new schemes also try to add legitimacy through charity donation, and as one of my interests is in raising money for charity through old mobile phone donation through schemes run by SimuSimu in partnership with local councils, it is personally disturbing that both individuals and charities are being wholly mislead.

Since the introduction of the Gambling Act 2005, pyramid schemes are wholly illegal in the United Kingdom. If you want to know in detail about how these schemes work then please read the guidance at consumerdirect.gov.uk. Pyramid or sometimes called gift giving schemes work by a layered pot of money creation:
- one member donates an amount, and then recruits two or more additional members who form the second layer
- these people in turn donate the same amount each, and recruit two or more additional members to create a third layer

Most of these schemes then pay out to the first member, once the entire fourth+ layer is full. Now, if the scheme is based on just recruiting two additional members, and pays out on layer four being full, and each member puts in £1000 (typical investments are around £3000 per member at present - a decent Christmas budget), then the first member would get a sum of £15,000 on payout: Wow!

This return on investment is why people join - but here's the problem. To get that sum you need to find 14 other people to join, and then keep joining for the scheme to pay out. A scheme in the Isle of Wight in 2001 collapsed in six months because it ran out of people, and almost made the local NatWest branch network run out of cash. In 1998, the newly liberalised country of Albania almost collapsed due to imploding pyramid schemes. Pyramid schemes need to suck in new members at such rates, that the Isle of Wight trading standards office used the illustration that if membership was only drawn from new members, then the entire world's population would be needed with 18months to fulfil the Isle of Wight scheme.

So how come people are getting money out of the scheme? Well often, the first member is the scheme runner - all they have to do is find 14 more people and they have at last £15,000 in their pocket. May be a few more lucky early people do as well, but by layer 10 there is a need for at least 1,000 people. To keep people being drawn in, much like bingo their are prises for turning up or reaching specific layers, which are withdrawn from the prize fund - and these "cost" fee's go to the originator, the only person who makes a guaranteed return.

These are the reasons why since the introduction of the Gambling Act 2005, pyramid schemes are wholly illegal in the United Kingdom. If you want to know in detail about how these schemes work then please read the guidance at consumerdirect.gov.uk.

In 2001, new schemes appeared which targeted their audiences and tried to get around the then bad publicity. They used names like Hearts, or the classical Women empowering Women. The new scheme which has appeared in South Wales and Bristol areas uses the name Take and Gift or Gift and Take, which increase "costs" by adding a legitimising charity gift - but they are all illegal pyramid schemes.

Be very aware with your money. As a first step with your redundancy cheque, however big or small, take some free advice from either the local citizen's advice bureau or your local bank manager. And if you think you have been approached to join a pyramid scheme, please remember that they are illegal and that you are highly unlikely to get your money back.

Look after yourself, and Good Luck!