Digital technology is the most outstanding and defining mark of the twenty-first century. It has brought immense opportunities, challenged conventional limitations and fast forwarded the world into a tech-driven society. We are in the process of moving from a market economy to a market society, where market forces increasingly and often aggressively assert dominance in all aspects of life. Technology, by happenstance or deliberation, has become the enabler of such assertion. Even as opportunities abound in a “techno-market society”, there are scammers and fraudsters who use every opportunity provided by digital platforms to defraud and swindle ignorant consumers. The expansion of e-commerce and its entities provided both market and means to engage in such online scams and schemes. Pyramid promotional scheme is a case in point.

The raging pandemic increased online presence of netizens exponentially. Pyramid schemes, disguised as legit businesses, have found new victims as new forms of promising scams are introduced now and then. Recently, there were reports in both mainstream and social media on the emergence and proliferation of such scams. The timing of such scams is also manifestly and deliberately planned. The scammers have sought to swindle us at a time when we have lost economic opportunities; when income levels are at their drooping low points; when many people are looking for alternative economic opportunities; and when online presence of people have increased both in duration and number. This short article will explain pyramid schemes: their definition, nature, modus operandi (although it differs), characteristics, and their status under the laws of Bhutan.

Pyramid schemes—sometimes also known as “franchise fraud” or “chain referral schemes”— are business and marketing frauds that recruit members by paying compensation (or payment) that is derived primarily from the introduction of new participants into the scheme rather than from the sale of any goods or services. In other words, the contributions of new members essentially fund the compensation paid to existing members. Many countries including Bhutan have made it illegal so as to protect consumers. Consumer laws of those countries have flagged pyramid schemes as unfair trade practices violating consumer rights. Some might argue why it is illegal to have a recruitment-based online business model that makes profit and caters to its subscribers. These were also arguments advanced by the promoters of such schemes. However, reality is far from rhetoric. Since pyramid schemes are solely referral-based, the primary source of income is through recruitment of new members. When recruitment of new members ceases, members at the bottom of the pyramid structure will not receive the promised bonuses or owner rights. The recruitment of members is going to exhaust at one point of level, and the pyramid will collapse thereby resulting in members of the public, especially those at the bottom of the scheme, losing their money. The members at the lower ring of the pyramid will not receive benefit or any economic returns, while those at top swindle on the participation payments of hundreds of members below them.

More often than not pyramid schemes are confused with ponzi schemes. While the two share huge similarities, they are distinct in certain aspects. Ponzi scheme is an investment fraud where early investors profit on new investors, and new investors only get profits if even more investors invest in the scheme. It requires fraudulent investment. Pyramid scheme, on the other hand, relies on active recruitment of members. It gives opportunity to the victim to make money via recruitment. Both of these schemes are illegal in most countries including Bhutan. Much more controversial model of business is multi-level marketing (MLM). MLM is a marketing strategy where investors recruit a workforce to help sell a real product. They get sales commission as incentives. While MLM is said to be legal, one should take caution to invest or subscribe in such a business. This is because recent studies have found that many pyramid and ponzi schemes are masquerading as an MLM. The scammers have simply used certain products and packages to disguise the “pyramid or ponzi” nature of the business. For instance, Josefin Aronsson, an expert on pyramid schemes, stated that “The key issue is how the profits are made, whether it is primarily through the recruitment of new participants or through the sale of a product intended for an end customer.” She added that some pyramid schemes, to hide their true nature, may include the sale of products such as educational packages. “In certain arrangements, in addition to the acquisition process, there is also the sale of a product. This can sometimes be called a start-up package, training package or be presented as an investment. In such a case, a participant sells training packages to new participants – which is the same as recruiting new participants. Such an arrangement is to be considered as a pyramid scheme”, she says. The Australian Competition & Consumer Commission also stated that “some pyramid scheme promoters disguise their true purpose by introducing products that are overpriced, of poor quality, difficult to sell or of little value.” As such one should take utmost caution and do due diligence to invest in such a business.

In Bhutan pyramid scheme is classified as an unfair trade practice. Section 38 (xiii) of Consumer Protection Rules and Regulations 2015 states that it is an unfair trade practice to “[establish, operate or promote] a pyramid promotional scheme where a consumer receives compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products.” The word “primarily” is purposive. It means that the compensation scheme to its participants in a pyramid promotional model of business is derived primarily from recruitment. There may be products to sell but as long as the recruitment is the primary modality of operation, then, it may qualify to be a pyramid scheme. The Court of Justice of the European Union (ECJ), while interpreting its Directive on pyramid scheme (Point 14) which has a very similar wording to Section 38 (xiii) above, stated that a “prohibited pyramid promotional scheme would exist within the meaning of the provision even if there is only an indirect link between the contributions paid by new members of the scheme and the compensation paid to existing members.”  The ECJ noted that to qualify as a pyramid promotional scheme, it requires (i) payment of a financial contribution by the participants; and (ii) a link between the payments made by new members and the compensation received by existing members. It further stated that the financial link need not necessarily be direct. “It suffices that there is an indirect link between the contributions paid by new members and the compensation received by existing members.” To interpret Point 14 differently, the Court argued, “would deprive this provision of its effectiveness as it would become easy to circumvent the absolute prohibition of pyramid promotional schemes by making the link indirect.”

Pyramid schemes may also violate other provisions of the Consumer Protection Act of Bhutan 2012. The Office of Consumer Protection had declared certain businesses such as MagneSSa Bhutan and Orien’s Bhutan, Crowd1, and OnPassive as pyramid schemes. It was found that such pyramid schemes also engaged in misleading representation, misleading advertisement, and infringement of consumer rights in contravention of Consumer Protection Act of Bhutan 2012 and Consumer Protection Rules and Regulations 2015. Therefore, it is illegal to even promote such schemes. Doing so has huge and adverse legal consequences. If one is an innocent and ignorant member of such a scheme, one will lose all investments made, and those at the top of the pyramid will swindle and rob you with false promises and under the pretence of legitimate digital business.

Contributed by Tashi Norbu


JSW School of Law

The views expressed are solely my own.