Pyramid schemes make money by recruiting businesses or people rather than by selling a legitimate product or providing a service – even if they are selling a product.
New participants make a payment to join, known as a ‘participation payment’. To make any money in the scheme the participant must recruit others to join who will pay a participation payment with the recruiter gaining a recruitment payment, either financial or non-financial.
A court can consider several factors when identifying a pyramid scheme. The Australian Consumer Law (ACL) does not limit the matters a court can consider, however the following characteristics can be used to help identify a pyramid scheme:
- unrealistic claims in regard to future profits;
- the sales and/or promotional material push recruitment very hard;
- recruitment payments are a substantial reason to join.
A business or person must not participate in, or attempt to persuade others to participate in, a pyramid scheme. The maximum civil and criminal penalties are $1.1 million for a body corporate and $220,000 for an individual.