PYRAMID SCHEMES & THE LAW

MALINDU ABEYNAYAKE
Third Year Law Student
Faculty of Law - University of Colombo
Email: malinduabe@gmail.com

What is a Pyramid Scheme?

Pyramid schemes are a form of financial fraud in which participants are promised high returns

for recruiting new members into the scheme. These schemes are unsustainable and

eventually collapse, leaving the majority of participants with significant losses. The use of

pyramid schemes is illegal in many countries around the world, and the law is designed to

protect consumers from falling victim to these fraudulent activities.

Pyramid schemes typically begin with a single individual or a small group of individuals who

promote an investment opportunity that promises high returns with little effort. These

individuals recruit new members into the scheme, and each new member is required to make

a payment to the person who recruited them. This payment is typically characterized as an

investment or membership fee, and the amount required to join the scheme can range from

a few hundred dollars to tens of thousands of dollars.

Once a new member has joined the scheme, they are encouraged to recruit more members

themselves. The new member then receives a portion of the payments made by the

individuals they have recruited. This process continues, with each new member recruiting

more individuals and receiving a percentage of the payments made by those individuals.

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The result is a pyramid-shaped structure, with a few individuals at the top receiving the

majority of the payments, and a large number of individuals at the bottom receiving very little.

Pyramid schemes are often presented as legitimate investment opportunities, but in reality,

they are nothing more than illegal Ponzi schemes. Ponzi schemes work by using the payments

made by new investors to pay off earlier investors, creating the illusion of high returns.

However, as the scheme grows, it becomes more difficult to find new investors to pay off

earlier investors, and the scheme eventually collapses.

Pyramid Schemes & The Law

The use of pyramid schemes is illegal in many countries, including the United States. In the

United States, pyramid schemes are illegal under the Federal Trade Commission Act, which

prohibits unfair or deceptive business practices. The law defines a pyramid scheme as a

business model where participants pay money to join the scheme and are promised payments

for recruiting new members. The payments are not based on the sale of a legitimate product

or service, but on the recruitment of new members. Pyramid schemes are also illegal under

state laws in all 50 states.

In the United Kingdom, pyramid schemes are illegal under the Consumer Protection from

Unfair Trading Regulations 2008. The law prohibits pyramid schemes and other unfair business

practices that harm consumers. In addition, the Financial Conduct Authority regulates

financial products and services in the UK and can take legal action against companies that

engage in pyramid schemes.

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Pyramid Schemes & The Law in Sri Lanka

In Sri Lanka, pyramid schemes are illegal under several laws, including the Banking Act, the

Finance Business Act, and the Payment Devices Frauds Act. These laws prohibit the

promotion, operation, or participation in any scheme or arrangement that involves the

solicitation of funds from the public with the promise of high returns, without any underlying

economic activity or the provision of a legitimate product or service.

According to the Central Bank of Sri Lanka, pyramid schemes are a serious threat to the

stability of the financial system and can cause significant financial harm to consumers. The

Central Bank has issued several warnings to the public about the dangers of pyramid schemes

and has advised consumers to be cautious when approached with investment opportunities

that seem too good to be true.

~ Here are some acts and articles regarding pyramid schemes and the law in Sri Lanka:

• Banking Act No. 30 of 1988 - Section 82A: This section prohibits any person from

engaging in or promoting any scheme or arrangement involving the solicitation of

funds from the public with the promise of high returns, without any underlying

economic activity or the provision of a legitimate product or service.

• Finance Business Act No. 42 of 2011 - Section 51A: This section prohibits any person

from engaging in or promoting any scheme or arrangement involving the solicitation

of funds from the public with the promise of high returns, without any underlying

economic activity or the provision of a legitimate product or service.

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 • Payment Devices Frauds Act No. 30 of 2006 - Section 3(1): This section prohibits any

person from using a payment device to commit fraud or to engage in any scheme or

arrangement involving the solicitation of funds from the public with the promise of

high returns, without any underlying economic activity or the provision of a legitimate

product or service.

• "Sri Lanka Central Bank warns against pyramid schemes" - Article published in the Daily

FT on March 6, 2020: This article reports on a warning issued by the Central Bank of

Sri Lanka against pyramid schemes and highlights the risks associated with these

fraudulent business models.

• "Pyramid Schemes: A Growing Scam in Sri Lanka" - Article published in the Sunday

Observer on September 1, 2019: This article provides an overview of pyramid schemes

in Sri Lanka, their impact on consumers, and the legal framework in place to prevent

them.

• "Pyramid Schemes: What You Need to Know" - Informational article published on the

website of the Securities and Exchange Commission of Sri Lanka: This article provides

information on how pyramid schemes operate, the risks associated with them, and

how to identify and avoid them.

The Securities and Exchange Commission of Sri Lanka has also taken steps to crack down on

pyramid schemes in the country. In 2016, the Commission established a task force to

investigate pyramid schemes and take legal action against those who promote or participate

in these illegal activities. The task force works closely with law enforcement agencies to

identify and prosecute individuals who engage in pyramid schemes, and has been successful

in shutting down several schemes in recent years.

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In one example, in 2019, the Securities and Exchange Commission of Sri Lanka shut down a

pyramid scheme that had defrauded more than 40,000 people out of an estimated 4 billion

rupees. The scheme had been promoted as a network marketing opportunity that offered high

returns for recruiting new members. The Commission found that the scheme had no

underlying economic activity and was simply a fraudulent scheme that relied on the

recruitment of new members to generate funds. In 2020, a man was sentenced to 10 years in

prison and fined 50,000 rupees for his involvement in a pyramid scheme that had defrauded

more than 900 people out of an estimated 100 million rupees.

Those found guilty of participating in pyramid schemes can face significant fines and

imprisonment under the law. In the United States, individuals convicted of participating in

pyramid schemes can face fines of up to $5 million and imprisonment for up to 10 years. In

the United Kingdom, individuals can face unlimited fines and imprisonment for up to two

years. In Sri Lanka, those found guilty of participating in pyramid schemes can face fines and

imprisonment of up to 10 years.

In order to protect consumers from falling victim to pyramid schemes, it is important to be

able to recognize the signs of a pyramid scheme. These signs include promises of high returns

with little effort, the requirement to recruit new members in order to make money, and a lack

of a tangible product or service being offered. Consumers should also be wary of investment

opportunities that require large upfront payments or that use high-pressure sales tactics to

encourage participation.

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Conclusion

In conclusion, pyramid schemes are illegal and fraudulent activities that can cause significant

harm to consumers. The law is designed to protect consumers from falling victim to these

schemes, and individuals who participate in pyramid schemes can face significant legal

consequences. By being aware of the signs of a pyramid scheme and avoiding investment

opportunities that seem too good to be true, consumers can protect themselves from financial

fraud and avoid falling victim to these illegal activities.