Financial pyramid

Initially, the expression was used in Russian to denote a developed financial network with centralized control (for example, “N. M. Rothschild & Sons” is at the very top of the giant financial pyramid ” ^[5] ).

The English equivalent ( English pyramid scheme ) was used to denote scam in the 1970s ^{[6] [7]} .

According to the publication Kommersant-Vlast , the term “Financial Pyramid” in the modern sense in the Russian language has spread after the collapse of JSC MMM . For the first time in the press, he is found in an article by Igor Nitkin:

Apparently, MMM does not have much money. Otherwise, how can we explain the fact that of all the points of purchase of shares yesterday and the day before only one worked? And although the company may well get out by taking a bank loan, since interest rates on them are now low, it seems that something is broken in the smooth-running mechanism of JSC MMM and the financial pyramid may collapse.

- Igor Nitkin “The stock price of MMM JSC fell” (July 28, 1994, the newspaper Kommersant-Daily ) ^[8]

In the USA, the first “pyramid” was created by Charles Ponzi (Ponti) , an emigrant from Italy. In August 1919, one of the Spanish businessmen in a letter to Charles sent an international return coupon . Having found out the details of the coupon circulation, Ponzi found that the ratio of exchange rates of currencies makes it possible to profitably resell coupons purchased in several European countries in the USA . Ponzi established The Securities and Exchange Company (SXC) and persuaded several investors to finance his proposed scam in exchange for a promissory note , promising them 50 percent profit from transatlantic trade in 45 days or even 100% in 90 days, which significantly exceeded similar payments of issuers of other securities . In fact, Ponzi was not going to buy coupons. The fact is that an international return coupon could only be exchanged for postage stamps, and not for cash - that is, coupons were not suitable as a speculation tool. This information was not secret - if desired, any of the contributors could find out. However, by July 1920, Ponzi was selling his bills in the amount of up to 250 thousand dollars a day. The excitement was fueled, including by the press (in particular, the ), which published paid approvals .

The pyramid collapsed after being published in , which estimated that in order to cover the investments made by his company, 160 million coupons would have to be in circulation - and in those years only around 27 were on hand thousand pieces. On August 10, 1920, when the company was closed and familiarized with its internal accounting, federal agents discovered that SXC hadn’t invested money at all, but simply paid interest on the proceeds from the sale of new issues of its bonds. Fortunately for investors, part of the money was found and returned. On average, each depositor received about 37% of the nominal value of the bill.

A tragic story is associated with the emergence of financial pyramids in Albania in 1996-1997. Seven large pyramids attracted about $ 2 billion, which amounted to 30% of the country's annual GDP. After the collapse of the pyramids in 1997, the government had to draw an army to restore order and pacify angry investors. People died. The government led by Alexander Mexi resigned.

Very often, in the eyes of the average layman, the “financial pyramid” and “fraud” are synonyms. However, in fact, this is not always the same. When undertaking a long-term project, its initiator may make mistakes in his forecasts, and then the financial pyramid is a simple consequence of a design error. In an effort to correct such a mistake and extend the life of the project, the project owner undertakes additional lending to the project in the hope of correcting things in the future. However, in fact, most of the funds raised go to payments on project obligations to early investors.

But even when the intent to seize investor funds through fraud ( fraud ) is evident, not all injured persons can be recognized as victims in the relevant criminal cases, if it is proved in court that the funds collected from the depositors were not appropriated, but went to interim payments. That is, the money was not appropriated (or rather, it was, but not the funds of the victims themselves, but the funds of the first investors who are not victims) and qualifying as “fraud” becomes problematic. Previously, such actions were interpreted as "false entrepreneurship." However, in April 2010, article 173 on false entrepreneurship was excluded from the Russian Criminal Code ^[9] .

A telling example was the story of attempts to prosecute Sergei Mavrodi for organizing the MMM-2011 pyramid . They could bring a criminal case only on the grounds of complicity in illegal business ^[10] , and not at all in fraud.

The Soviet popularizer of science, Ya. I. Perelman, in Living Mathematics describes the “pyramid” variant as the organization of an action that took place in pre-revolutionary Russia for the purchase of bicycles through a “fan-shaped” collection of money by correspondence ^[11] .

Examples from recent history:

• In 1992 AOZT Russian House of the Selenga began its activity, which at its last stage turned into a financial pyramid. Until 1997, about 2.5 million people entered into contracts worth nearly 3 trillion non-denominated rubles.
• In 1993, OJSC MMM registered its first share issue prospectus, which they began to actively sell in February 1994 . The activities of "MMM" was subsequently described as a financial pyramid, which, according to various estimates, affected 10-15 million investors.
• In 1993, the Khopyor-Invest Investment Company LLP appeared, which lasted until 1997 and owed 8 billion non-denominated rubles.
• In 1993 - 1994, the company " Vlastilina " in the Moscow region deceived investors in the amount of 550 billion rubles.
• Also at the same time as MMM was the company Severn Regional Non-Governmental Pension Fund , a financial pyramid in the form of a pension fund.
• In 1993 - 1998 , State Short-term Bonds (T-bills) became very popular. The state was forced to borrow money in order to finance payments and interest on previously made debts (external and internal, part of which were GKOs themselves). To attract new funds, the state was forced to continuously increase the borrowing rate. The default of 1998 was due to the fact that new issues of T-bills were not bought even with a yield of 300% per annum, payments on old debts became impossible.
• In 1996, Chara Bank turned into a financial pyramid.
• In 2005 - 2010, Intway World Corporation had branches in almost all major cities of Russia , as well as in Ukraine and Kazakhstan . The organizers were Russian citizens. The company positioned itself as an “ MLM structure” in the financial sector. The “goods” were “business packages”, securities, fictitious exchanges on the Internet and products supposedly protecting against diseases and harmful radiation. According to experts, tens of thousands of citizens in Russia , Ukraine and Kazakhstan became victims of fraudsters ^[12] .

Currently, examples of financial pyramids in Russia are:

• “Binar” (MyBinar), its successor is the “ NewPRO program ” ^[13] and its clone is the “SuperProgik program”.
• MMM-2011 is a new project of the founder of JSC MMM Sergey Mavrodi , launched by him in January 2011 and closed in June 2012.
• MMM 2012 is a financial pyramid founded by Sergei Mavrodi on May 31, 2012 .
• Give1 Get4 is a financial pyramid disguised as a social project and gift transfer. ^[fourteen]
• SETinBOX - a financial pyramid disguised as a paid social network that provides discounts to users, is a follower of Talk Fusion ^[15] .
• Goldenbirds - a network financial pyramid in the form of a browser game ^[16] .
• Cashbury - recognized as a financial pyramid in September 2018 - the company did not conduct any real economic actions, but promised a yield of up to 600%, which attracted several tens of thousands of people ^{[17] [18]} .

Only on February 16, 2016, the State Duma adopted in the second reading a bill on liability for the organization of financial pyramids ^[4] .

On March 9, 2016, amendments to the Code of Administrative Offenses of the Russian Federation introduced liability for raising funds in the absence of investment or entrepreneurial activity ^[19]

In Ukraine, the scale of financial pyramids was also significant:

• King's Capital - damage of the order of 180 million dollars.
• Lionebank-Ukraine - damage of the order of 10 million dollars.
• MMCIS - the damage is estimated at $ 70 million ^[20] .
• Projects by Pavel Krymov ^[21] : Questra World, Atlantic Global Asset Management (AGAM), Forex Trend, Panteon Finance ^[22] and others ^[23] . According to preliminary data, the damage amounted to about 300 million dollars. However, a native of Zaporozhye Pavel Krymov is a rather international phenomenon. After the collapse of Forex Trend, he was hiding in Latvia, has illegal dual citizenship - Ukraine and Lithuania ^[24] . He was detained in Moscow ^[25] , and will go on trial in Kazakhstan ^[26] .

With the development of telecommunications, the number of financial pyramids in which financial transactions and attracting participants through the Internet is increasing. A distinctive feature of such pyramids is the ability of the recipient of funds to remain anonymous. This greatly complicates the tracking of cash flows, bringing to legal liability, it is almost impossible to return the money.

One of the largest Internet pyramids was the virtual exchange Stock Generation organized by Sergey Mavrodi ^[27] .

Other examples: “Binar” (MyBinar) ^[28] , its heir “ NewPRO program ”, its clone “SuperProgik program” ^[29] , Mavrodi MMM-2011 and MMM-2012 projects, projects disguised as pseudo-trust management of brokers MMCIS (Index Top 20) ^[30] and MillTrade (Gold 7).

The pyramid schemes are also the majority of hype projects , which in their organization are similar to investment funds with very high returns.

Another type of pyramid scheme is the version of mutual financial assistance systems or mutual assistance cash desks, in which financial obligations are masked by the type of voluntary contributions and non-repayable donations. An example of such a system is “Give1 Get4” ^[14] , “MMM-global”.

• In 2018, the Central Bank of Russia launched an online robot to search for financial pyramids ^[31] .

It is very difficult to distinguish a financial pyramid from a company that uses network marketing to sell products or services. An article in Money Magazine notes that the legal structures in network marketing consist of distributors for whom the bulk of the money comes from the sale of specific goods in person and by lower-level people they invited ^[32] . For example, in a lawsuit lasting from 1975 to 1979, it was determined that the Amway sales and marketing plan was not an illegal pyramid scheme.

Fred Hochsztein, an assistant to Florida's chief attorney, notes that some network marketing firms are legal, but many of them are not. Illegal companies give their distributors the opportunity to make money not by selling goods, but by charging fees for joining the company for new distributors ^[32] .

Even legitimate companies often do not notify potential distributors of the true costs and efforts that will be required for a sustainable income in this business, while mailing lists and company brochures contain generous promises ^[32] . For example, according to Amway, an average working distributor earns $ 76 per month ^[32] .

A number of companies are constantly debating whether they are network marketing companies or financial pyramids (for example, Talk Fusion ^{[33] [34]} , Setinbox, Emgoldex ^{[35] [36]} and its counterpart Swissgolden ^[37] ).

• Since April 2016, the creation of a financial pyramid in Russia is considered to be “large-scale activities to raise funds and (or) other property of individuals and (or) legal entities, in which the payment of income and (or) the provision of other benefits to persons whose cash and (or) other property previously attracted, carried out at the expense of attracted funds and (or) other property of other individuals and (or) legal entities in the absence of investment and (or) other legitimate entrepreneurial or other activities, communication constant with the use of borrowed funds and (or) other property, in the amount commensurate with the volume of borrowed funds and (or) other property " ^[38] and such activities are punishable by imprisonment for up to 6 years.

• Payments to participants in the pyramid that are not clearly related to sales
• The presence of advertising promising interest payments (or some other form of income from the spent funds) with an income level obviously higher than the average for the borrowing market. Quite often, the absence of risk is promised with a relatively high yield. For reference: in April 2016, the rational rate is about 15-20% per annum .
• The focus of fund managers is exclusively on PR . Competent sellers, pompous presentations, websites, advertising mailings - everything tells the shareholders how lucky they are and how much they can earn. However, no specific information is provided that can be cross-checked on the basis of data from independent sources. Often this minus is presented as part of a strategy for the non-dissemination of strategically significant information: "Now we can’t reveal all the secrets to you, this information is confidential." An investment company or fund is required to provide information on its activities from the first day of its existence - annual balances, financial reports , transaction reports , etc. If the fund carries out operations on the stock exchange on behalf of shareholders, it must also provide all the data - which companies shares are in the assets, what is their profitability, etc. This information can be verified on the basis of the documents disclosed, they cannot be declared secret.
• The use of specific terms, such as Forex , Stocks, Futures , Trading , etc., which may be incomprehensible to non-professionals.
• Transfer of invested money to a large number of countries (in Russia they received, in Switzerland they insured, in the USA they bought shares). As a result, the ability to observe, control and get back is lost.
• Anonymity of organizers and coordinators.
• A substantial fee for starting participation, but, nevertheless, available to a wide range of people (for example, $ 300-500). This allows you to cover a wide mass, which is easily reconciled with the loss of such funds without appeal to the judiciary.
• Lack of office, official registration, charter, permission to carry out activities in the country.
• In carrying out the activities of the fund in the United States, one may encounter a lack of registration of fund shareholders as American taxpayers. A typical situation in this case is the proposal of various workarounds, instead of the "expensive and troublesome" registration in the American tax system. This leads to the inability in a crisis situation to apply to the Securities and Exchange Commission , the body in the United States for the supervision of financial irregularities.
• Insurance of fund transactions in another country (for example, in Switzerland) in order to minimize risks. Since the two countries usually differ from each other in the field of financial and economic laws and practices, this can lead to the application of other legislative norms than if insurance occurred within the framework of one country. For example, a similar situation is regarded by US tax authorities as an attempt to withdraw funds from taxation.

The Central Bank of the Russian Federation identifies several features common to all “financial pyramids”: ^[39]

• lack of a license of the FCSM / FSFM of Russia or the Bank of Russia to carry out activities to raise funds;
• promise of high profitability, several times higher than the market level;
• guarantee of profitability (which is prohibited on the securities market);
• massive advertising in the media, the Internet with the promise of high returns;
• lack of any information on the financial position of the organization;
• payment of funds to new participants from funds contributed by other investors earlier;
• lack of own fixed assets, other expensive assets;
• There is no precise definition of the organization’s activities.

Citizens should, first of all, pay attention to offers on the profitability of attracted funds - if it significantly exceeds the offers of banking institutions, then there is a high probability of loss of such investments.

An equally important point is the non-transparency of investment mechanisms by such organizations, as well as the absence of clear signs of economic activity. For example, an organization’s advertisement promises high interest rates by investing in highly profitable stock market instruments, but monitoring shows that the organization does not actually trade on the stock exchange.

It should also be understood that, although high-yield exchange instruments do exist, they are also high-risk ones, otherwise everyone used them, ignoring the low-yield ones.

• Ponzi scheme
• Madoff, Bernard
• Economic bubble
• Pseudo-cooperative
• Financial Pyramids in Albania

• The ten largest financial speculators according to Forbes .
• An article in the journal Our Money: Russian folk Pyramids
• Financial pyramids (list at bottom of page)
• Naked King Dress or MLM on IT. Article by Sergey Golubitsky about Talk Fusion

• Волобуев А. Ф. Хищения с использованием небанковских финансовых учреждений // журнал «Законность». — 2000. — № 7 . — С. 39—41 .
• Вугальтер А. Л. Фундаментальная экономия. Динамика. — М. : Экономика, 2007. — ISBN 978-5-282-02671-9 .
• Кэрролл Р. Т. Финансовая пирамида // Энциклопедия заблуждений: собрание невероятных фактов, удивительных открытий и опасных поверий . — М. : Издательский дом «Вильямс», 2005. — 672 с. — ISBN 5-8459-0830-2 , ISBN 0-471-27242-6 .
• Ванг Уоллес. Как не стать жертвой хакеров и мошенников в Internet. — М. : ООО «ДиаСофтЮП», 2005. — ISBN 5-93772-156-X .
• Роберт Шиллер. Иррациональный оптимизм. Как безрассудное поведение управляет рынками = Irrational Exuberance. Second Edition Revised & Updated. — М. : Альпина Паблишер , 2013. — 422 с. — ISBN 978-5-9614-1845-3 .
• Юрасов А. В. Электронная коммерция: Учеб. пособие. — М. : Дело, 2003. — ISBN 5-7749-0320-6 .