Multi-level marketing (MLM) is a business model where independent distributors sell products and recruit others to the same, receiving commissions on their own sales and the sales of the people they recruit. The MLM model can often be used for fraudulent purposes, especially in investing.

How pyramid investment scams work

Decorative image: How pyramid investment scams work

In a pyramid investment scam, the “returns” mainly come from recruiting new investors, who are drawn to the scheme by the promise of quick and high returns ranging, in many cases, from 10 to 30% a month. However, with this type of scheme, there is nothing actually generating significant returns. Participants can only make money if other people put money in.

Any semblance of economic activity is merely a ruse to create the illusion that everything is on the level. However, dig a little deeper and you will find there’s not enough activity to generate the promised income and returns. Most of the investors will get a pittance of their investment back.

Victims are often approached on social media platforms, at conferences or by well-meaning community members looking to share a golden investment opportunity. The scammers use persuasion techniques such as the promise of financial freedom, a chance for personal growth and (often fake) success stories.

The scheme is fuelled by the prospect of a constant stream of new investors. Victims are incentivized to recruit others by the promise of commissions or a percentage of the amounts that are invested. Because of this, anyone engaging in recruitment may be considered as illegally acting as a securities dealer or adviser in violation of the Securities Act.

The fraudsters sometimes ask for the money to be invested in crypto to help cover their tracks when the time comes to follow the money trail.

Compensation, levels and lies

  • Pyramid investment schemes use complex, if not incomprehensible, compensation structures, with multiple options, bonuses and calculation methods that vary based on the number of people recruited or amounts invested.
  • The victims are incentivized to invest more money by the opportunity to access tiers with names like “gold,” “platinum,” “elite,” “premium,” or “VIP.” According to the fraudsters’ (false) promises, the higher the tier, the higher the returns they will earn.

One thing is certain: the scheme will fall apart when the fraud is discovered or the investor pipeline begins to dry up.

Most victims will suffer substantial losses, and the fraudsters will vanish with the money.

Red flags

To protect yourself from potential pyramid scams, it’s important to know how to recognize them. Here are some red flags to help you avoid this type of fraud:

  • You’re promised quick, high returns for zero risk.
  • You’re pressured to recruit other investors.
  • You’re offered rates of return that increase with the size of the investment.
  • The individual or firm offering you the investment opportunity isn’t registered with the AMF.
  • The documentation provided is sparse or hard to obtain. You can’t get hold of a prospectus or audited financial statements.

Tips and tricks to avoid this type of fraud

  • Make sure firms or individuals that contact you are in the Register of firms and individuals authorized to practise and contact them using their information in the register, rather than the information they give you. When in doubt, contact our Information Centre.
  • Be careful if someone promises you money to recruit new people, whether the fraudsters refer to them as investors, partners, associates or by some other term.
  • Be careful if you’re offered a return that increases with the size of the investment.
  • Take some time to think things through before investing any money. Don’t let yourself be pressured.
  • Ask for official documents, such as a prospectus or financial statements.
  • Ask questions. Make sure you fully understand the features and risks of the investments you’re offered.
  • Be cautious. Don’t fall for promises of high returns for zero risk.

What to do if you fall victim to fraud?

Anyone can be a victim of fraud, so don’t beat yourself up.

  • Refer to the You’re a victim of fraud? web page to find out what to do, and contact the AMF if the fraud involves purported investments.
  • You should also break off all communications with the person or persons involved and stop sending money.

Be careful: Fraudsters often target their victims more than once. They may contact you claiming to be a lawyer, financial institution or firm specializing in financial fraud cases and offer to recover the money you lost.

Warning

Be vigilant!

See our website for Investor warnings about individuals and organizations that solicit Québec investors in accordance MLM principles.

End of the warning