Pyramid Scheme or FOREX Trading

Aug 22, 2020 Letters

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DEAR EDITOR,

I’ll start off by saying that I have seen the advertising flooding Facebook and other social media and they are indeed very alluring. Who wouldn’t want to get rich quick without trying and all from the comforts of your very own home with just a few clicks? Some might actually be tempted enough to ‘invest’ their hard-earned money in these hard times to their own detriment possibly.
So will these FOREX trading opportunities give you untold riches or are they simply a pyramid scheme? I’ll try to explain simply without the complicated textbook definitions that are used to convince people one way or the other. I decided to write this because I see many of my friends falling prey to this scheme and many I know are honest individuals who work hard, save and are simply looking to make some extra money and to ‘save for the future’.
First off, pyramid schemes are a scam. They are marketed as being very legitimate and offering great opportunity but they are simply ‘rip-offs’. So what should you be looking for? Well let’s identify some red flags:
1) Those who are the promoters of a pyramid scheme try to recruit new persons by enticing them with messages of what they will be able to earn. Some of the appealing pitches would include, “change your life and work from home”, “leave your job and be your own boss”, “get financial freedom”. If you’ve seen such messages being used as the primary marketing attraction then it is likely a pyramid scheme with promises that are too good to be true.
Pyramid schemes are created in such a way that they need a constant supply of new participants and of course their ‘money’ to keep the business flowing and they do so through ‘out of the world’ promises’. Your income would not mainly be based on the selling of a product (FOREX) but on how many people you are able to recruit.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Is the scheme you’re investing in giving the vast majority, if not all, of your income, through your ability to attract other people? If so, then chances are it’s a pyramid and a scam.
2) Pyramid schemes often offer extravagant rewards and bonuses for ‘investors’/participants who are able to meet certain goals such as bringing in a number of new recruits or attending a certain number of trainings and advertise these to bait the unsuspecting.
𝐀𝐒𝐊 𝐘�y𝐔𝐑𝐒𝐄𝐋𝐅: Is the scheme you’re investing in giving higher rewards or so-called bonuses based on the number of new persons that you are able to bring in and attaching fancy marketing names and levels to that number such as ‘Diamond’, ‘Platinum’, ‘Crown’, ‘Conqueror’? If so, then chances are it’s a pyramid and a scam.
3) Pyramid schemes usually require repeated fees for such things as so-called ‘training sessions’ or expensive marketing materials.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Is the scheme you’re investing in charging ‘fees’ for training sessions and other materials? If so, then chances are it’s a pyramid and a scam.
4) Pyramid schemes play on emotions and generally use ‘high-pressure sales tactics’. You will hear such lines as ‘act now or you’ll lose the opportunity to work from home and gain financial freedom’. The ploy is to encourage emotional buying and reduce the time you take to research the scheme.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Is the scheme you’re investing in using such marketing lines? If so, then chances are it’s a pyramid and a scam.
5) Pyramid schemes require new investors to pay a fee for the right to sell the products to others or in other words, pay a fee for the right to recruit others into the scheme so as to gain rewards/income for bringing more people in and not rewards/income related to the actual product sales (FOREX).
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Is the scheme you’re investing in requiring a fee for the right to recruit others? If so, then chances are it’s a pyramid and a scam.
6) Pyramid schemes under the guise of FOREX traders, do not have actual brokers who are the promoters of the scheme. Therefore, the person who brings you on to the scheme is not a broker who can actually trade and chances are that the company you are signing up with is not a broker either. This means that all trades will be done through someone else; not the person who brings you on or the company you are joining with.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Is the person bringing me on to the scheme or the company, which I’m joining up with a broker? If not, then chances are it’s a pyramid and a scam.
7) Pyramid schemes do not have regulatory clearance.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Does the scheme have regulatory clearance and has the Guyana Securities Council given authorization? If not, then chances are it’s a pyramid and a scam.
8) Pyramid schemes usually defend themselves by claiming to be Multi-Level Marketing (MLM). MLM is basically a method of selling products directly to consumers without the in-between ‘retailer’. The products are sold through a network of salespersons and when the MLM is set-up, it resembles that of a pyramid with each salesperson recruiting and training additional salespersons to earn commission on others they get to join on. The pyramidal structure of MLM companies allows many pyramid schemes to be passed off using this fancy name but there is a distinct difference between the two.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Does the scheme you’re investing in pay you based on your actual product sales to customers without you having to recruit new customers so as to earn income or is your income primarily based on how many people you recruit? If it’s primarily based on the number of persons you recruit then chances are it’s a pyramid and a scam.
9) Pyramid schemes tend to involve the sale of products (in this case FOREX) through salespersons so as to show legitimacy. This is, however, a mere smokescreen that is done simply to sidestep the regulatory bodies and attempt to show that the potential for profit stem from the sale of products and not from recruiting other investors. This allows them to claim that they are not a pyramid scheme but rather an elaborate Multi-Level Marketing company. The bottom line is that if the majority of your income comes from the recruiting of new investors rather than the sale of the product itself (FOREX) then it is a pyramid regardless of the explanation.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Does the majority of your income come from the recruiting of new investors rather than FOREX trading? If so, then chances are it’s a pyramid and a scam.
10) Pyramid schemes usually offer products of little or doubtful value that serve as a simple tool to promote the scheme while the real value lays in recruiting new persons.
𝐀𝐒𝐊 𝐘𝐎𝐔𝐑𝐒𝐄𝐋𝐅: Is the product being offered of doubtful value? Is the income derived from trading FOREX little and in most cases doubtful? If so, then chances are it’s a pyramid and a scam.
As a note, FOREX trading in itself is not illegal and not a pyramid scheme. However, it is not the trading of FOREX that is the issue but the requirement for you to recruit others or pay monthly fees if you want to learn from certain persons. When your income is primarily through the recruiting of others then you have moved away from FOREX trading and entered the realms of a pyramid scheme.
FOREX trading in itself is legal; however, the act of recruiting persons for a fee and the promise of a financial return that is dependent on the recruitment of additional participants is illegal. The Guyana Consumer Affairs Act, No. 13 of 2011 states that “For the purposes of this section, the term “pyramid selling scheme” means a scheme — that provides for the supply of goods or services or both for reward; and that, to many participants, constitutes primarily an opportunity to sell an investment opportunity rather than an opportunity to supply goods or services; and that is unfair, or is likely to be unfair, to many of the participants in that —
(i) the financial rewards of many of the participants are dependent on the recruitment of additional participants; and
(ii) the number of additional participants that must be recruited to produce reasonable rewards to participants is either not attainable, or is not likely to be attained, by many of the participants.”
Note well “financial rewards of many of the participants are dependent on the recruitment of additional participants”. If you trade FOREX, trade FOREX but there’s a difference between FOREX trading and the companies that operate the scheme.
The reality is that most of those on social media today openly promoting FOREX trading are not FOREX traders but in fact, mere recruiters or salespersons and the majority of their income earned is based on commission from bringing more people in.
When you’re joining a pyramid scheme, you are made to purchase a product which in this case will be training modules, seminars, videos, and the opportunity to market and bring more people on board that are provided by more experienced traders. After you purchase the product, you are then added to the recruiter’s downline. This means that the person who recruited you gets a commission for bringing you on board. That person will also get a commission when you recruit someone else into the scheme (your own downline).
Most of these FOREX trading schemes offer memberships where you are awarded a certain rank and then offered the chance to grow your rank through recruiting people and the higher up the ranks you go, the more you earn as there will be more people in your downline.
Since only a very small number of traders will actually make profits off of trading (most analysts estimate less than 10%); the focus then shifts from trading and the profits earned there to attracting new members in an attempt to move up the ranks, increase their own downline and earn commission from you and those you recruit.
That’s your problem right there; it is not the FOREX trading but the fact that the majority of income earned may be from recruiting rather than trading.
In addition, for those who believe that FOREX trading in your free time or lunch break on your phone or home laptop is your way to financial security and a long-term investment plan then you are grossly mistaken. FOREX trading is risky, complicated and even money managers with years of training and experience fail. According to the Institutional Investor (2020), a Federal Trade Commission complain is that these FOREX traders/teachers “tell prospects that it’s a ground-floor opportunity because for the first time ever, you can make money off the product and not by recruiting and it’s not true at all. They are selling people the fake dream that the big bucks come from trading, not recruiting.”
Pyramid schemes offer the promise of high returns from a small initial investment upfront. However, while the early investors usually do gain some sort of return on their money and become motivated by this success, the truth is that the ‘investment opportunity’ does not really exist and the initial return is simply funded by money that is paid in by other members of the scheme. When the investor numbers start to drop, the scammers will close the scheme and we will hear from them no more.
Bloomberg noted in a 2014 article that 68% of investors had net losses from trading currencies in the prior year; while some stats indicate as much as 90% of traders lose money. Keep that in mind 68% and now couple that with the fact that many are trying to beat the odds and get rich in their free time with basic training in a complex market. I’ll stop there as this is not about the actual pros and cons of FOREX trading but about pyramid schemes that can be disguised as such.

Terrence Jaskaran
Chartered Accountant

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