Protect Seniors from Pyramid Schemes

With the growing senior population in America, financial elder abuse has been classified as an epidemic. The Gerontological Society of America (GSA) recently devoted an entire issue of their publication, Public Policy & Aging Report, to the growing problem. The GSA wants to alert financial institutions, seniors and families that scammers wrest almost $3 billion each year from unwitting older adults, and they agree with other experts that elder financial exploitation is “the crime of the 21st century.”

Financial elder abuse might be as obvious as a family member, trusted friend or caregiver stealing from an older adult. Increasingly, online schemes such as phishing, phony sweepstakes and the infamous “grandparent scam” target vulnerable elders. And many scammers take advantage of the fact that Americans are living longer, sometimes with inadequate savings and investments, and find themselves needing employment to supplement Social Security. These con artists concoct a never-ending variety of phony work-at-home schemes and investment “opportunities.”

Investor.gov, an online consumer portal from the U.S. Securities and Exchange Commission (SEC), recently warned that seniors who wish to earn money after retirement may be vulnerable to being taken in by pyramid schemes, which are increasingly promoted through social media, internet advertising and other online sources. Pyramid schemes masquerade as legitimate multi-level marketing programs, where participants are paid not only for products they sell, but also products sold by distributors in their “downline.”

If you are an older adult, or you have senior friends, relatives or clients who are seeking moneymaking opportunities, share the following information from the SEC:

Pyramid scheme promoters may go to great lengths to make a program look like a business, such as a legitimate multilevel marketing (MLM) program. But the fraudsters use money paid by new recruits to pay off earlier stage investors (usually recruits as well). At some point, the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and people lose their money.

When fraudsters attempt to make money solely by recruiting new participants into a program, that is a pyramid scheme, and there is only one possible mathematical result—collapse. Imagine if one participant must find six other participants, who, in turn, must find six new recruits each. In only 11 layers of the “downline,” you would need more participants than the entire population of the United States to maintain the scheme.

These are some of the hallmarks of a pyramid scheme:

• Emphasis on recruiting. If a program focuses solely on recruiting others to join the program for a fee, it is likely a pyramid scheme. Be skeptical if you will receive more compensation for recruiting others than for product sales.
• No genuine product or service is sold. Exercise caution if what is being sold as part of the business is hard to value, like so-called “tech” services or products such as mass-licensed e-books or online advertising on little-used websites. Some fraudsters choose fancy-sounding “products” to make it harder to prove the company is a bogus pyramid scheme.
• Promises of high returns in a short time period. Be skeptical of promises of fast cash—it could mean that commissions are being paid out of money from new recruits rather than revenue generated by product sales.
• Easy money or passive income. There is no such thing as a free lunch. If you are offered compensation in exchange for doing little work such as making payments, recruiting others, or placing online advertisements on obscure websites, you may be part of an illegal pyramid scheme.
• No demonstrated revenue from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), showing that the company generates revenue from selling its products or services to people outside the program. As a general rule, legitimate multilevel marketing companies derive revenue primarily from selling products, not from recruiting members.
• Complex commission structure. Be concerned unless commissions are based on products or services that you or your recruits sell to people outside the program. If you do not understand how you will be compensated, be cautious.

Source: IlluminAge AgeWise, with information from the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy. Find more information here.