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Discussion on Pyramid/Ponzi Scheme(s)

ROYAL MONETARY AUTHORITY OF BHUTANRESEARCH AND STATISTICS DIVISION

(FINANCIAL LITERACY PROGRAM)MARCH 15, 2010

GOPAL GIRIResearch Officer

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OutlineBackgroundPyramid/Ponzi Schemes in Bhutan

ImplicationsCorrectives Measures General tips

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BackgroundPyramid scheme (also generally referred as

Ponzi scheme)- named after Charles Ponzi (1882)

Difference between Ponzi-Pyramid??PONZI SCHEME PYRAMID SCHEME

A ponzi scheme (chain marketing scheme/plan) is an investment

scheme in which the returns are paid to earlier investors, entirely

out of money paid into the scheme by the later investors.

There is no real investment opportunity. The ponzi

masterminds gathers all relevant funds from new investors and

then distributes them. Similar to pyramid scheme, the ponzi scheme requires continuous

recruits and involves no physical products to sell.

A pyramid scheme (sales scheme) involves the

exchange of money primarily for enrolling other people into

the scheme. It is also known as "endless chain"," binary

compensation", or matrix marketing". The pyramid

schemes involves hierarchy. The success of pyramid scheme rest

solely on the exponential growth of new members.

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Background

How Pyramid/Ponzi works? Eight balls modal OR Airplane game

The "eight-ball" model contains a total of 15 members. Note that unlike in the picture, the triangular setup in the cue game of eight-ball corresponds to an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15.

No matter how large the model becomes before collapse, approximately 88% of all people will lose.

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BackgroundTypes of pyramid schemes

1. Sales or product-based schemes (Eg. Amway) 2. Financial-non-product schemes, variously

known as cash only scams or “naked” pyramid schemes. (Eg. Skyquest Com, Internet scams)

Many variations of the basic pyramid scheme

and often try to pass themselves off as legitimate “multilevel marketing” (MLM) or "direct selling".

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Forms of Pyramid/Ponzi SchemesList of Pyramid/Ponzi scheme banned in Bhutan

* Basil International Limited * LIC* Skyquest Com * RCM* Goldquest * Royal networks* Dhealth * EVM* Sahara * Tainse* Rose Valley * Caniby* Suraksha * Biodisc* Astha * Vanson* Royal Vision Care* K-Link* Amway

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Spread of Pyramid/PonziPyramid/Ponzi are illegal in the

following countries:

Albania Iceland Nepal Philippines

Australia Italy MalaysiaPoland

Brazil Germany Canada Colombia

Bulgaria Hungary Portugal Thailand

China Japan South Africa UK

France Mexico Sri Lanka USA

Iran Netherlands New Zealand Romania

Norway Switzerland BHUTAN

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Targets of Pyramid/Ponzi SchemesMostly in developing countries,

where

- People are unfamiliar of market economy

- FIs are undeveloped and inefficient

- Limited or no regulatory capability

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Implications Affects banking system-

operations and banks safety and soundness

Currency drain and loss of savings

Cases of violence, bankruptcy, divorces, loss of credit, ruin of relationships and even suicides

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Promoters of Pyramids/Ponzis and their Strategies

Great promises and fascinating success stories

Brainwash on easiest way to make money and fortune- ‘Get-Rich-Quick’ schemes. The schemes works because “there are gullible people who want to make a fast buck without sweating for it.”

Camouflaged in the language of religion, personal freedom, or fun and games-

Only Winners TALK and Losers DO NOT

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Corrective Measures

Public education and awareness campaign- both Government and Media can play a vital role

Call on Law enforcement agencies and Justice Department

The RMA’s concern- A number of notifications has been issued in the recent past to general public and FIs.

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General tips to public/businessmen

Step 1 Beware of any scheme that requires you to invest money in a franchise that

gives you commissions for recruiting other distributors. Any "job" that depends on your making money based on how many people you sign up is most likely a pyramid scheme and should be avoided.

Step 2 Avoid any plan that requires you to spend money on high-priced products

offered by the company which hires you. Make sure that keeping inventory of these products, beyond necessary items such as order forms or catalogs, is not a requirement.

Step 3 Find out if the plan involves a training program. Legitimate companies offer

training materials and classes. If the plan involves simply being handed a "kit" and having you start on your own, it most likely falls under a pyramid scheme.

Step 4 Take your time when making a decision about getting involved in a plan. Do

not be pressured into making an instant decision. Research the company involved before signing a contract, if one is offered.

Step 5 Consult with the local authorities about the company offering this plan

before engaging into such activities. If it sounds too good to be true, it usually is.

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Home To Take

BEWARE! Public/businessmen/investors

REMEMBER all Pyramid/Ponzi schemes are considered illegal in Bhutan- subject to PERSECUTION for fraud under the Law of the Kingdom of Bhutan

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Further Queries: gopalgiri@rma.org.bt.

OR dial it to: 323111 (218)