Pyramid schemes are on the rise – but do those who join up deserve prosecution or compensation?

Branislav Hock, Associate Professor in Economic Crime and Compliance, University of Portsmouth

Let’s say we invite you to invest £1,000 in our new and brilliant business. We promise you an impressive return on your money, and all we ask is that you persuade a few of your friends to invest the same amount. They in turn will need to find some more investors. But remember, we’re all in this together, and everyone will end up richer.

Sound too good to be true? That’s because it is. Such an offer would be an example of a pyramid scheme, which is illegal in most countries. But such schemes, often promoted on social media with promises of cash and luxurious lifestyles, are rising at an alarming rate – 59% annually – in the UK.

If you do join one, you are highly likely to lose money. UK authorities once estimated that in the UK millions of people every year lose several hundred pounds.

On top of the likely financial loss, people who participate in pyramid schemes may also face legal punishment. But if you were to join a pyramid and recruit new members, does that make you a victim because you lost money, or a criminal because your actions caused others to lose out too?

Another legal grey area comes in distinguishing which money-making schemes are actually against the law. Some are completely fraudulent, like the UK-based Give and Take scheme, which promised members £24,000 in cash handed over during “champagne celebration nights”. (Its founders were jailed.)

Other schemes, which offer specialist training or “secrets” to getting rich quick, can be harmful but not fraudulent. Our research shows that many of those are operating in a legal hinterland.

Our research also reveals that policing authorities around the world are understandably confused about this strange legal situation – especially how difficult it is to draw a clear line between victims and offenders.

Some countries, like Australia, consider the vast majority of pyramid scheme participants to be offenders. Others, such as the US, treat those same people as victims who deserve compensation for the financial harm they have suffered.

Our work aimed to clarify the situation, and we ended up identifying seven distinct categories of pyramid scheme participants. Some should be considered perpetrators, others victims, and others somewhere between the two, as illustrated in the following table.

A wide scope of involvement. Author provided., Author provided

We found that each pyramid scheme participant deserves different treatment according to their knowledge, engagement and status. Some should be protected and compensated, others left alone, and those at the tip of the pyramid should be punished.

A balancing act

This is the kind of distinction that could help to clarify the situation for police authorities dealing with the increasing presence of pyramid schemes. The first step should be a better understanding of the specific characteristics of the people involved – a proper consideration of their role, their awareness, and the level of their financial gain or loss.

Governments also need to work on finding the right balance between punishment and reform. Yet another complication comes from the fact that pyramid schemes could arguably fall under multiple legal categories, including consumer law, competition law and fraud law.

This means that different authorities with competing priorities may all be involved. While some have more powers to support victims, others might be interested in prosecuting fraudsters, so it is important to coordinate policing.

Those police authorities also need the resources to be able to keep a closer eye on the harm caused by pyramid schemes – which is not always financial, as many victims may go on to suffer psychologically. And aside from the economic damage done to individuals, they are a drain on a struggling wider economy.

During a cost of living crisis, the appeal of pyramid schemes to those who are unaware of the gamble they are taking is likely to increase. With the desperation that comes with a turbulent economy, many people may see a pyramid scheme as an opportunity to transform their life.

But amid all the confusion and legal complications that surround pyramid schemes, the simple rule to remember is the one money making schemes that sound too good to be true. Avoid them.

The Government of New Zealand has previously funded Branislav Hock's research on pyramid schemes but not directly related to this article.

The Government of New Zealand has previously funded research conducted by me on Pyramid Schemes, but not relevant to this article. I am a member of the Labour Party, but not active.