FINANCIAL PYRAMIDS: THE ROOT OF THE ISSUE AND WAYS OF ERADICATING

To start talking about the problem we should find out what is a financial pyramid and how does it look like.

Financial pyramid is a method of providing income to the participants by attracting new investors. Schemes like that are considered cheating. Participants promised to have high income if they attract more people to the scheme. As a rule the information about the founders of the pyramid is unknown. Those who are closer to the top of the pyramid get money from contributions of people who are situated “lower” in the structure. But the life of the pyramid is limited. Sooner or later every pyramid scheme ends as the number of new investors soon becomes fewer and fewer and there is no possibility to pay the income to the contributors. As the result the system fails and people just lose their money. The more members are there in the pyramid, the lower the chance for them to get their money back.

Here are some examples of the biggest pyramid schemes in the modern history:

- The “MMM” company was created in 1993. It began selling fake shares in 1994. About 10-15 million contributors suffered after the collapse of the pyramid;

- Bernard L. Madoff Investment Securities LLC started it activities in 1960. This company had existed till 2008 cheated more than 3 million people worldwide;

- The insurance company “Stock reserve” offered the services of insurance and promised their clients 30 percent of annual payments of insurance contributions. As the result people from USA, Russia, Europe, Turkey, Libya, Afghanistan, Kazakhstan had lost for about 10 million dollars;

- Over the past few years, Kazakhstan has suppressed the activity of 23 financial pyramids. Number of victims of the scam has reached 5000 people on the sum over 1 billion tenge

Theку are many examples worldwide. Financial pyramids are out of law in such countries as: United States, United Kingdom, Albania, Australia, Austria, Brazil, Canada, China, Colombia, Denmark, Ukraine and etc. the main problem is that most of the pyramids try to look like companies using network marketing (MLM companies).

There a lot of reasons that motivate people to engage in pyramid schemes. Firstly it is people's desire to get rich quick in the absence of financial literacy. The psychologist Aidar Kainazarov says that people who participate in the pyramid have such qualities of character such as greed, greed, laziness, daydreaming, detachment from reality. The same qualities in the past prevented them from getting a good education, therefore they are on the low social ladder and they have to look for additional income.

Nowadays in the century of modern technologies pyramid schemes fill the spaces of the Internet. And as the result the chance to find out the creator of the scheme becomes almost impossible. Experts warn that it is very difficult to qualify this type of financial fraud. This is the result of quick growth of financial pyramids which spread their activities worldwide. The legislation against pyramid organizers in some countries is not so effective as it should be. For example: in the USA court in Houston convicted Texas billionaire Allen Stanford, found guilty of fraud. For the creation of a "Ponzi scheme" - the corporation Stanford Financial Group - businessman received 110 years prison sentence. At the same time the worldwide known Sergey Mavrodi after his first prison sentence tried to begin two more similar projects (MMM-2011 and MMM-2012). It shows the size of the gap between legal systems in different countries and incompetence of the law towards the criminals in this matter.

The most effective way to prevent the development of financial pyramids is to increase financial literacy among the people. If people understand the meaning of the problem it will be more difficult to create such a schemes.

USEFUL LINKS:

General information:

http://pyramidschemealert.org/ - Web site dedicated to the problem

http://en.wikipedia.org/wiki/Pyramid_scheme - The principle of the pyramid scheem

http://www.neatorama.com/2008/12/22/9-most-brazen-ponzi-schemes-in-history/ - 9 Most Brazen Ponzi Schemes in History

http://www.forbes.com/sites/investopedia/2014/03/18/what-is-a-pyramid-scheme/ - What Is A Pyramid Scheme?

Some video material:

https://www.youtube.com/watch?v=zZiw15VgWoI – Difference between financial pyramids and network marketing

https://www.youtube.com/watch?v=WKG0Rlv6uIE - Spotlight with Sergey Mavrodi, MMM financial pyramid founder

Date: 2014-12-21; view: 1033