Recognize the structure, understand the risks, and protect yourself against this illegal form of fraud.
Definition
A pyramid scheme is a fraudulent structure where participants earn money by recruiting new participants, not through the sale of an actual product or service of value. Each new layer of participants finances the layers above it. The pyramid grows until there are not enough new participants — after which the bottom layers (the vast majority) lose everything. Mathematically, a pyramid scheme is doomed to collapse: after just thirteen doublings, the number of required participants exceeds the world population.
How do you recognize a pyramid scheme?
The most important signals are: the emphasis is on recruiting new participants, not on selling a product to end-users. A substantial entry fee is required. The promised income is unrealistically high. Pressure is applied to join quickly and recruit others. And the “product” — if there is one at all — is heavily overpriced or of questionable quality.
Pyramid scheme vs. legitimate MLM
Not every multi-level marketing (MLM) structure is automatically a pyramid scheme. The crucial difference lies in the source of income. In a legitimate MLM, actual products are sold to actual consumers — the income comes from product sales. In a pyramid scheme, the entry fee or mandatory purchase by new participants is the primary source of income. In practice, the distinction is sometimes difficult to make, and many structures operate in a gray area.
Criminal offense in the Netherlands
Setting up and promoting a pyramid scheme is a criminal offense in the Netherlands. Victims can file a criminal report as well as a civil damage claim against the organizers. With enough victims, a mass claim via a foundation can be the most effective route.
