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Consumer Alert

Investment Scams- "Beware of Quick Moneymaking Schemes

This Consumer Alert pertains to the prohibition of certain misleading business practices of investment scams, i.e. money - making schemes and chain letters

What are Money Making - Schemes?

Money - making schemes, also called " get-rich-quick schemes", are schemes that accept money (deposit) from the public with the promise to pay back that amount plus profit. Participants are required to give money to promoters and at the same time enlist new participants in order to benefit. Often these schemes only last for a restricted period of time and cannot fulfill their promise indefinitely.

Many consumers are usually fascinated by any ideas of money - making schemes promising instant wealth. A further attraction of these schemes is the perception that the money will keep rolling in with little or no effort by the participants and promises that the hardest part will be to count one's money. By participating in these schemes, some consumers are handsomely rewarded. Unfortunately, experience has shown that approximately 80% of consumers lose their money.

Types of Money - Making Schemes

Pyramid Promotional Schemes

A "pyramid scheme" means any plan or operation by which a participant gives consideration for the opportunity to receive compensation, which is derived primarily from the person's introduction of other persons into the plan or operation rather than from the sale of products by the participant or other persons introduced into the plan or operation. In other words, you receive money from recruiting other people into the scheme rather than from buying/selling any product.

Most people call any "easy money - making scheme" or " money - revolving scheme" a "pyramid scheme". Pyramid Promotional Schemes are schemes that concentrate on the commission earned by participants for recruiting new members, but ignoring the marketing or selling of an actual product. An example of pyramid promotional schemes that the Minister of Trade and Industry has declared illegal include Newport Business Club (Gazette No 18292 of 17 September 1997).

Binary Schemes

South African consumers have recently been confronted by a new type of scheme called an "unlimited binary" or " binary matrix" by the promoters. A "binary" scheme is a particular type of pyramid. Most of these schemes are operated on the Internet, are particularly deceiving and many thousands of participants are at risk of losing the money they pay to participate therein. An example of binary schemes that the Minister of Trade and Industry has declared illegal include SkyBiz (Gazette No 24053 of 8 November 2002).

A binary scheme is a scheme in which:

• A participant is required to sell at least two of an entry's products or packages/products to two different persons who are in turn each required to sell to two further participants who are in turn required to sell to two further participants and the process is repeated;
• Each participant is assigned two downlines or legs, which could be labeled left and right, or A and B, whatever the case may be;
• Any further buyers who buy products from a participant are assigned below these left and right legs in the first available node, from top to bottom and left to right in the matrix;
• Participants receive commission for all sales, or batches of sales, no matter how many levels there are in their downlines;
• The commissions paid are dependant on a particular ratio that must be maintained between the sales on the left and right legs, such as a 1/3 rule. The "1/3 rule" would require that, in order to receive commissions, at least 1/3 of the sales credited to a participant's downline must come from one of the two legs; and
• The maximum earnings per week or month per participant are limited to a certain amount but this need not be the case.

The Table below illustrates the percentage of participants who will not earn commissions. It is assumed that each and every participant succeeds in selling two products to two different buyers. Each leg contains 50 percent of a participant's total downline and the 1/3 rule applies. It is further assumed that the participants will receive R75 for each batch of nine products sold.

Table- Amounts received by participants

(a) Enrolment level (first participant)	(b) Participants residing at level (n)	(c) Total number of participants in matrix	(d) Batches of 9 sales each (integers only) Column © from last row up divided by 9	(e) Amount received by participants in column (b)
(n=0)	1st participant	1	2047¸ 9 = 227	1(227 x R75) = R17 025
1	2	3	1023¸ 9 = 113	2(113 X R75) = R16 950
2	4	7	511¸ 9 = 56	4(56 X R75) = R16 800
3	8	15	255¸ 9 = 28	8(28 X R75) = R16 800
4	16	31	127¸ 9 = 14	16(14 X R75) = R16 800
5	32	63	63¸ 9 = 7	32(7 X R75) = R16 800
6	64	127	31¸ 9 = 3	64(3 X R75) = R14 400
7	128	255	15¸ 9 = 1	128(1 X R75) = R9 600
8	256	511	7¸ 9 = 0	256(0 X R75) = R0
9	512	1023	3¸ 9 = 0	512(0 X R75) = R0
10	1024	2047	0¸ 9 = 0	1024(0 X R75) = R0

Multiplication Schemes

In term of Gazette Notice No. 27052 of 2 December 2004, A multiplication scheme exists when a natural or a juristic person offers or promises or guarantees an effective annual interest rate of 20 per cent and more above the REPO rate as determined by the South African Reserve Bank, to any consumers, investor or participant, whether or not the consumer, investor or participant becomes a member of the lending party. The applicable REPO rate is the rate that applied at the date of the investment or commencement of participation.

These schemes appear to be widespread in South Africa and they usually flourish among the less sophisticated and poorest sectors of the community. They are characterized by the fact that would - be participants are offered huge returns for relatively small "investments" after a relatively short period. The amounts paid by participants cannot be regarded as investments in the usual sense of the word, even though the promoters of these schemes refer to them as investments.

These schemes are called multiplication schemes because of words such as;" Multiply your money by 2 in 6 weeks" and is based on an actual multiplication scheme. For example, such schemes will require the participants to invest R450 each and promises that they, (participants) would each receive R900 on their investments after six weeks, and that the promoters do not take any money for themselves and do not deposit the money received into a bank account and hence no interest is received.

Duration of the multiplication scheme's life cycle:

The life cycle of a multiplication scheme can be extended by:

• Offering lower returns;
• Extending the period between the date of the investment and the pay-out date;
• Controlling the number of new entrants per cycle, whether the cycle is days, weeks, months or years; and,
• Reducing the amount appropriated by the promoters.

The promoters of multiplication schemes always 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 and at the same point over the relatively short term these schemes were bound to collapse.

Chain Letters

In Chain Letter Schemes participants receive a letter by post and are asked not to break the chain and to send a sum of money to the names on the list. The participant then sends the money, adds his/her name to the bottom of the list, deletes the name at the top and makes a number of copies, depending on the number of names on the list. These copies are then sent to other persons, and if they participate, the cycle repeats itself. In variation of the ordinary chain letter, the promoter ensures that his/her name stays on the list and payments by new participants to preceding participants are controlled. An example of chain letters that the Minister of Trade and Industry has declared illegal include: Dunamus Marketing CC & Other (Gazette Notice No. 18972 of 12 June 1998).

Why are some Money-Making schemes illegal?

The Department of Trade and Industry through the Consumer Affairs Committee (CAFCOM) is constantly monitoring and investigating money - making schemes. The CAFCOM administers the Consumer Affairs (Unfair Business Practices) Act, No 71 of 1988. The purpose of this Act is to provide for the prohibition or control of unfair business practices and for matters connected with this. An "unfair business practice" is any business practice likely to have the effect of harming the relations between businesses and consumers.

On 9 June 1999, in terms of Gazette Notice No. 20169, the Minister of Trade and Industry declared that any person who operates a multiplication scheme offering or promising or guaranteeing investors an effective annual interest rate above the REPO rate is engaging in an illegal activity. Any interest promised higher than 30% per annum is illegal.

Also according to the Banks Act, 1990 (Act No. 94 of 1990), only public companies that are registered as banks in terms of the Act as well as institutions exempted from the provisions of the Act, like some stokvels and unit trusts, may conduct the business of a bank. Because money - making schemes conduct the business of a bank, though they are not registered in terms of the Banks Act, they contravene the law by accepting deposits.

Penalties and Fines

The Consumer Affairs (Unfair Business Practices) Act, 71 of 1988, is an enabling piece of legislation. It confers wide investigative powers on the Committee and recommends corrective action to the Minister to ensure the discontinuance of unfair business practices. If the Minister accepts the recommendation of the Committee, an order is published in the Government Gazette.

An infringement of an order by the Minister is a criminal offence, punishable by a fine of R200 000 or five years imprisonment or both a fine and imprisonment.

What action can you take

If you suspect or hear of any money - making schemes or you need further information or advice, please contact the Consumer Helpline through the following:

Customer Contact Center at 0861 843 384 (ask for the consumer help line) or facsimile (012) 394 2436
Or write to the dti at:
the dti
Consumer Complaints
Consumer and Corporate Regulation Division
Private Bag X84
PRETORIA
0001

Other Services:

The Education and Compliance directorate issues this information as part of an overall education service to consumers. The directorate also offers the following services:

• Advisory opinions and clarifications
• Presentations
• Information materials

Section 12 (6) states the Minister of Trade and industry, by virtue of the powers vested in him and after having considered a report by the Committee in relation to an investigation of which notice was given in the Gazette and being of the opinion that unfair business practice exists which is not in the public interest, declare any business or type of business practice to be unlawful either generally or in respect of a particular area.

2 The purpose of the Consumer Affairs (Unfair Business Practices) Act, No 71 of 1988 is to provide the prohibition or control of unfair business practices and for matters connected with this. An "unfair business practice" is any practice likely to have the effect of harming the relations between the businesses and consumers