Most people call any "easy money making scheme" or "money revolving scheme" a "pyramid scheme". In many cases the structure of the schemes does not resemble a pure pyramid and the Committee, for various reasons, preferred to call these schemes "money revolving schemes". A "pyramid" implies that there is a broad base of consumers or participants at the base or lowest level of the scheme. Some schemes are structured in such a way that this is not the case. Another reason for the Committee's reluctance to call these schemes "pyramids" is that mot organizational structures of companies, government departments, the police and the armed forces resemble a pyramid structure. One will, however, not be able to stop the popular parlance of the word "Pyramid" and the Committee will also henceforth use the word pyramid. Should the Minister accept the recommendations of the Committee, it is suggested that these schemes be referred to as illegal pyramids.

The following are a few examples of "pyramid" schemes. The examples are in no way exhaustive. There are numerous variations on each scheme and the number of different schemes is limited only by the extent of human ingenuity. In this report reference is made to "investments" by consumers or the amounts paid to participate in a particular scheme. These "investments" are at times called "contributions", "donations" and sometimes other similar words are used. The Committee does not regard these "investments" as investments in the narrow sense of the word, but for ease of reading these "investments" will not be in inverted commas.

A brochure of a money revolving scheme stated: "Multiply your money by 5 in 24 hours". In this scheme a registration fee of R200 was payable by new members and existing members were required to pay only R100. Participants could invest as many times as they wished. In other pamphlets advertising the same scheme it was stated: "Multiply your money by 3 in 14 days".

"ABC" (Pty) Ltd was another multiplication scheme. The "pay out date" of this scheme was 10 weeks after the investment was made. The amount invested could vary between R110 and R5 500. The return was 2.7272 times the amount invested, for example "... invest R110 and get R300". The return on a R990 investment was R2 700.

The "XYZ Assistance Society" operated four schemes, namely the Super Save Policy, Suppose-U-Die, Get-U-Go policy and the Easy-Go-Policy. The investments in the "Suppose-U-Die" scheme "matured" after three months. The brochure of "XYZ Assistance Society" stated inter alia: "All principles on the policy are compulsory to be observed. Then confirm with the office for your payment details and day". The following sets out the "benefits" participants could allegedly enjoy:-

Sun Multiserve (Sun) was a well-known multiplication scheme. During October 1995 the Committee received a complaint from the South African Police Services about Sun. Participants paid an R50 membership fee and could then invest various amounts. The following are examples of the returns promised in 11 to 12 weeks: R1 200 would grow to R4 000, R5 000 to R20 000 and R58 000 to R200 000. A member had to introduce four new members to Sun before enjoying the promised returns. This condition was waived by the time the scheme was flourishing. Sun paid returns in excess of 1 000 per cent but invested at less than 10 percent in an ordinary savings account at a financial institution. The South African Reserve Bank (SARB) stepped in and froze the assets of Sun in terms of the Banks Act.

Hundreds of disgruntled Sun investors protested in front of the SARB building in Pretoria against the closure of Sun. The demonstration enjoyed national television coverage. The action of the SARB ensured that the scheme was stopped and that not more consumers lost their money. The consumers who lost their investments were unreasonably prejudiced. This came about, not by the actions of the SARB, but by the self destructive characteristics of the scheme. Only those people who are total financial illiterates can believe that a scheme such as Sun could carry on indefinitely paying returns in excess of 1 000 per cent while the funds were invested by them at less than 10 percent.

The brochure of the "MCIC" was written in one of South Africa's official languages. The following is a direct translation into English of some phrases used:

"We pay out, twice a week, i.e. Monday and Wednesday. Come our people, money earns more interest, if you come to us all your dreams will come true with MASAKHANE, you can also be assisted". The following sets out the "returns') participants could enjoy:

Even over a relatively short term these schemes are bound to collapse. The amounts promised are grandiose and utterly unattainable. The impossible dreams of the majority of participants could never be realised. The promoters used these schemes for obtaining money from desperate consumers. All that happens in these schemes, is that Paul is robbed to pay Peter. Multiplication schemes usually flourish among the less sophisticated and poorest sectors of the community. People participating in these schemes would be familiar with stokfels, which are run on a basis of trust and able to deliver according to the rules. This would give them a false sense of security.

There are many variations of chain letters. Ordinary chain letters invariably operate as follows: A person receives a letter by post and is asked not to break the chain and to send a sum of money to the names on the list. The participant then sends off the money, adds his 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. These chain letters are usually not very profitable for the promoters, because there is no way to monitor whether a new participant has forwarded monies to the names on the list.

In a variation of the ordinary chain letter the promoter ensures that hislher name stays on the list and payments by new participants to preceding participants are controlled. An example of such a chain letter was operated by an entity called Dunamus CC. This entity was investigated by the Committee in terms of section 8(1)(a) of the Act. The detail of this scheme is set out in the Committee's Report No 60: Dunamus Marketing CC and Others.

The explanation of the scheme showed that a new participant needed to recruit a number of other participants in order to recoup his or her payment and make a profit. The amount paid by a new participant went into the pockets of the members of Dunamus CC and the other participants. New participants had to recruit at least five other participants to recoup their payments. These five new participants needed to recruit at least 25 new participants to recoup their payments and these 25 participants had to recruit another 125 participants. The scheme thus required exponential growth in the number of participants to enable the previous participants to recoup their investments. Any chain letter scheme is subject to an exogenous "switch off" of the scheme (see section 6.3).

It is difficult to identify a particular section of the community that participates in these schemes. The attitude of most participants is to "... get in quickly and get out quickly" to make a "profit" while the scheme lasts. The cost of participating in chain letter schemes is usually lower than the other types of schemes.

Two examples of these schemes which were investigated by the Committee on a formal basis were Newport Business Club and Rainbow Business Club. The Newport scheme was set out on pages 12 and 13 of Government Gazette No 18292 dated 17 September 1997 and that of Rainbow on pages 34 and 35 of Government Gazette No 18531 dated 12 December 1997.

Both schemes allowed each member, provided the member advanced to the status of a "senior partner", to start his own small "pyramid". The Newport Business Club consisted of a great number of en commandite partnerships and each partnership was characterised by a separate "pyramid structure". These structures were not the same. For example, member A could canvass ten new members and member B three new members. Each new member thus canvassed by A and B would probably enroll various numbers of other new members. The number of people in each structure differed amongst each partnership. In general, however, the business club was also characterised by a Pyramid structure in the sense that the promoters found themselves at the top, netting a considerable amount of the money paid by new members.

In the case of Rainbow new members had to pay 610 000. Of this amount 64 800 was paid to the person or persons who canvassed the new member and the remaining R5 200 went to Rainbow. The entrance fee in the Newport case was 614 000. Of this amount R5 300 was paid as commissions to existing partners who canvassed the new members, 64 740 was paid to the "executive partners, assistant marketing directors, marketing directors and the regional directors".

The remaining R3 960 was for the account of the Newport Business Club. Part of this was expended on administrative and other costs of the partnership business. The remainder was then allegedly invested.

Theoretical models of schemes such as Newport and Rainbow seem to indicate that a stable growth rate in the number of members could eventually result. But, and this is important, a stable growth rate does not attract members to such schemes. The only factor that really attracts members is the phase of rapid growth where fortunes could, and have been made, within months, if not weeks. Prospective members were told at the meetings held by Newport that an individual could earn up to 6153 900 after nine periods, whether these periods were weeks or months. A declaration of the growth rate inevitably leads to a compliant decrease of interest in the scheme. It would seem that this decline in interest is an exogenous "switch off" of the scheme. A "switch off" of the scheme would lead to its collapse.

The potential "advantage" to a consumer who became a partner or member was the right to recruit and introduce new members. A considerable part (R5 300 plus R4 740 or 71.71 per cent of R14 000) of the new members' payment served to fund the recruitment costs, that is, the commissions paid to existing members who had recruited the new members and also the management of the scheme. The incentive to new members to recoup their initial cash payment lay in the introduction of further new members on which this scheme was dependent The greater the number of new members introduced, the sooner the recoupment of the original cash payment.

In the Newport case the Committee calculated that at any time at least 75 per cent and possibly more of the members would have been at risk of not recouping their investments. This applied to the total number of members, irrespective of at what stage they joined the scheme. An analysis of the commissions earned by Newport members showed that 61 per cent of the members had not recouped any of their monies and another 30 per cent recouped some monies, but less than R14 000. Only 9 per cent earned more than R14 000. These percentages were identical at the stage where Newport had 1 671 members and again at a later stage when the scheme had 6 354 participants. The overwhelming majority of consumers who participated in the Newport and Rainbow schemes were unreasonably prejudiced. Whether the schemes would have come to an end during whichever period, an overwhelming majority of participants would have lost their investments.

Three persons received R10.9 million, R2.1 million and R4 million respectively in the Newport scheme. These amounts included "management commissions". The top 30 earners each received more than R226 000. These rewards were financed by those 91 per cent who had not recouped their payments of R14 000. These percentages were almost identical to those calculated during the investigation into the Rainbow Business Club and may be indicative of the trend in these types of schemes.

Pyramid schemes can be regarded as "up-market" schemes, although it has come to the attention of the Committee that people of the lower income groups and poorer communities do at times get involved in these schemes. When they do so they usually borrow funds from friends or relatives or take out additional mortgages on their homes. These participants were even more severely prejudiced than the more affluent participants. They dreamt of escaping from their debt ridden struggles for existence. Instead they were plunged deeper into debt.