All discussions on retail investment products are focused on insurance, various mutual schemes, stocks and fixed income products. How naïve. Well, the big (untold) story of retail financial products is somewhere else, not in these regulated products. It is the widespread menace of chain-money schemes, or multi-level marketing (MLM) or pyramid schemes. As we know, the game is to enroll more and more members who would send money up the chain to a few privileged ones at the top. After a while, the whole thing becomes unsustainable because too many people are already in the scheme and it becomes difficult to enroll new victims. At that stage, the fraudsters simply abandon the pyramid and disappear with the money. Women, particularly homemakers, are easy targets because of the promise of quick returns and independent income. The amount of money lost in such schemes is humungous. Here are some major ones:
A few big scams here and there cannot be extrapolated, you could say. But what if I quote the Andhra Pradesh police, which in a note to the state government has said that there are 2,000 pyramid schemes operating in Hyderabad alone, and over 10,000 in the entire state? In the eyes of global experts, India has become the most fertile ground for such schemes. The one man who has made his mission to eradicate the menace of these schemes is a deputy inspector general of police in Hyderabad, V C Sajjanar. Though he does not get much support, we need a few hundred upright officers like him across India to be able to deal with continuous loot at such a massive scale.
Four decades ago, these were simply chain-money schemes. Money was collected with the promise of giving back extraordinary returns. Now they come under the garb of selling you some expensive products or some vague services: gold coins (Gold Quest), lifestyle products (QNet), surveys (Speak Asia), and so on. So, at any time, they have the fig leaf of providing some “value”. Even Amway, Oriflame and Tupperware rely on a model with recruitment and ever-expanding chain. For those at the end of the chain to get some crumbs and to sustain the whole chain, products have to be hugely expensive. Even then, most people make no money. New recruits are shown a dream — what people in the second link of the chain have achieved. But they are not told that no one beyond the top two or three layers really makes any money.
Dozens of countries consider pyramid schemes frauds and have banned them. These include Canada, the US, the UK, Mexico, most of the European Union, South Africa, Australia, China, Nepal, Sri Lanka and Iran. Why is there no action against such schemes in India? Here are some reasons:
There is no hint that the cancer of pyramid schemes will be stopped. With enormous money at their command, and through skilful use of the internet and social media, they seem more dangerous than ever. The ministry of finance and financial regulators may like to believe that they oversee the financial sector well. They are really deluding themselves. The money people lose in pyramid schemes is a few times the size of equity mutual funds or life insurance plans, on which millions of words are written and thousands of regulatory man-hours are spent. And all the literacy workshops funded by the government and industry would seem such a joke if pyramid schemes are allowed to flourish.
The writer is the editor of www.moneylife.in firstname.lastname@example.org