“Due to the global pandemic, I find myself in a dire financial position. I am contemplating investing my money in an investment scheme promising a substantial profit margin. Is it a Ponzi or pyramid scheme?  Is it too good to be true?  Is it legal?”
According to section 43 (2) of the Consumer Protection Act 68 of 2008 (hereinafter, referred to as “the CPA”), a person must not directly or indirectly promote, or knowingly join, enter, or participate in: 

a) a multiplication scheme, as described in subsection (3); 
b) a pyramid scheme, as described in subsection (4); 
c) a chain letter scheme, as described in subsection (5); or 
d) any other scheme declared by the Minister in terms of subsection (6), or cause any other person to do so. 

A multiplication scheme exists when a person offers, promises or guarantees to any consumer, investor or participant an effective annual interest rate, as calculated in the prescribed manner, that is at least 20 per cent above the REPO Rate determined by the South African Reserve Bank as at the date of investment or commencement of participation, irrespective of whether the consumer, investor or participant becomes a member of the lending party.  These type of schemes are commonly known as a Ponzi scheme and are always illegal. 

The promoters of multiplication schemes guarantee that they can achieve the necessary returns to fulfil their commitments. They are, however, reluctant to divulge to others how this is achieved. The truth of the matter is that those who enter the schemes first are paid from the income derived from those who enter the scheme at a later date. 


How do you identify a Ponzi scheme?
• They promise abnormally high investment returns, higher than those offered by financial institutions (e.g. 30% and more).
• They often promise guaranteed returns. No return is ever guaranteed; all investments carry some risk.
• Make sure that you understand what you’re investing in and be wary of too-good-to-be-true business models. If you don't properly understand the business model, don't invest.
• The scheme owners will try and pressure you into reinvesting your profits, as they need these profits to pay other people’s returns.
• Only invest your money with credible institutions registered at the Financial Services Board that you have researched properly.
• You will usually be introduced to the scheme by friends or family members who have made some money. They make use of this marketing ploy, as you tend to trust family and friends. But remember, they need to recruit new members to be able to pay interest to older members. 

An arrangement, agreement, practice, or scheme can be identified as a pyramid scheme if: 
a) participants in the scheme receive compensation derived primarily from their respective recruitment of other persons as participants, rather than from the sale of any goods or services; or 
b) the emphasis in the promotion of the scheme indicates an arrangement or practice contemplated in paragraph (a).  

What are the characteristics of a pyramid scheme?
• You are offered high returns and your returns increase with the number of people you recruit to the scheme;
• You are requested to make an initial 'startup' deposit as an investment into the scheme;
• You are required to recruit others and will be offered bonuses for recruiting others;
• The scheme has multiple levels of members, all collecting commission on a single transaction; 
• The scheme is not authorised by or registered as a financial services provider; and 
• If it sounds too good to be true, it probably is.  
A pyramid scheme is often illegal, but this is not always the case. If there is no sale of goods or services, the pyramid scheme may be illegal. Examples of legal pyramid schemes are the sale of cosmetics and health products, such as Avon or Herbalife, where goods are sold in exchange for money. If it is determined that goods and services are mere smoke screens while the main object of the scheme is money, the pyramid scheme will be deemed illegal. 

An arrangement, agreement, practice or scheme can be identified as a chain letter scheme if: 
a) it has various levels of participation;
b) existing participants canvass and recruit new participants; or
c) each successive newly recruited participant: 
 upon joining:
• is required to pay certain consideration, which is distributed to one, some or all of the previously existing participants, irrespective of whether the new participant receives any goods or services in exchange for that consideration; and 
• is assigned to the lowest level of participation in the scheme; and 
 upon recruiting further new participants, or upon those new participants’ recruiting further new participants, and so on in continual succession:
• may participate in the distribution of the consideration paid by any such new recruit; and 
• move to a higher level within the scheme, until being removed from the scheme after reaching the highest level. 

Be aware of money schemes with guaranteed returns of more than 30% per year. Only invest your money at registered institutions such as the Reserve Bank or registered financial services providers. Know what you are investing your money in and if a proposal seems too-good-to-be-true, remember, it probably is.