There’s an adage that, unfortunately, is almost always accurate: if something seems too good to be true, it is.

Pyramid schemes have a tendency of springing up during times of economic difficulty as they traditionally offer impressive rates of return. That is just the first hallmark of the pyramid scheme, however, some others being:

• affordable rates of initial investment;
• an opportunity to invest in an industry which is known to be profitable but which you know little or nothing about;
• a complicated investment structure;
• impressive sales materials, including presentations in reputable hotels;
• word-of-mouth recruitment of investors (this is the crucial element);
• difficulty in withdrawing money from the scheme.

A recent twist on the operation of these schemes is that, in addition to impressive sales materials, members can be provided with online accounts showing their balance and profits to date. Just like a real investment.

Before getting into the detail of what the law on pyramid schemes is, I should of course point out that they are criminal enterprises: it is a criminal offence to establish or promote such a scheme, or to induce others to join it.

Pyramid schemes are an international phenomenon. They are known as ponzi schemes in the US, the most famous example in recent years being that of Bernie Madoff. There have been laws on pyramid schemes in Ireland for decades but the most recent law is contained in the Consumer Protection Act 2007, which calls them “pyramid promotional schemes” and defines them as follows:

a scheme by which a person gives consideration in money or money’s worth, or gives a gift in money or money’s worth, for an opportunity to receive compensation derived primarily from the introduction of other persons into the scheme rather than from the supply or consumption of a product

In plainer language: a scheme which primarily pays you for introducing others to the scheme. They are called pyramid schemes because each time a new investor joins (s)he must recruit more, maybe 5 or 10 members, adding layers of investors beneath each existing layer. The more members that join, the greater pressure there is to recruit even more so that the earlier members get their return.

Eventually members begin to demand the return of their investment. The operators of the scheme will usually tell them that “now isn’t a good time”, or “the market isn’t good, wait a while longer and you’ll earn even more”. Finally, someone loses patience and visits a solicitor or the Gardaí. The pyramid usually collapses straight away and, unfortunately, it is unlikely that investors will get their money back.

Under section 65 of the 2007 Act, the relevant offences are of:

• establishing, operating or promoting a pyramid scheme,
• knowingly participating, or
• inducing or attempting to induce another person to participate.

It is interesting that one is guilty of an offence of participating in the scheme only if one knowingly does so. There appears to be no requirement of knowledge of the nature of the scheme in order to commit the other offences (ie. inducing others to join). In addition, section 78 provides that it is not a defence to say that one relied on information provided by third parties or carried out due diligence.

The penalties for pyramid scheme offences are significant: a fine of up to €150,000 or imprisonment up to 5 years (or both). In addition, any agreements with the scheme promoter are void and unenforceable.

Be alert to any investment opportunity which seems to have the characteristics I outlined above. If you have invested in a scheme and are concerned that it might be a pyramid promotional scheme, talk to your solicitor or local Gardaí. If you think one is operating in your area, do likewise or report it to the National Consumer Agency. The collapse of a pyramid scheme means people will lose money but collapsing it sooner rather than later could save some of your neighbours money.

And remember, more than anything else: if it seems too good to be true, it is.

• Criminal Law