Pyramid schemes (Global)

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Pyramid schemes 🌍
World map.png
Location: Global
Definition: Recruitment of unsuspecting investors with promise of high returns
Keywords: Global Money Scheme Investment Fraud Triangle
Clusters: Market Functional ambivalence Gaming the system Camouflage Creating facades
Author: Leonie Schiffauer
Affiliation: Department of Social Anthropology, University of Cambridge, UK

By Leonie Schiffauer, Department of Social Anthropology, University of Cambridge, UK

Pyramid schemes are a type of financial fraud. Operators recruit unsuspecting investors with the promise of high returns. They claim to run successful business projects, but in fact early investors are paid with the money collected from later investors (a practice also known as ‘robbing Peter to pay Paul’). Products and services may be presented in order to mask the pyramid structure, but sales play only a marginal role, if any at all, in the schemes’ compensation formula. Essentially, pyramid schemes are money-transfer schemes that benefit a small number of people at the top of the pyramid while resulting in an eventual loss of money for the majority of investors. The rules regarding recruitment and recoupment of money vary, but whether or not one makes money depends almost entirely on one’s position in the pyramid. A pyramid scheme may survive for several years but, sooner or later, when growth stagnates, it will collapse.

Pyramid schemes are a global phenomenon and have been observed for at least several decades. Though they are illegal in most countries, pyramid schemes keep appearing in political economies as diverse as those of the United States, China, Colombia and Lesotho. New technologies such as the Internet appear to have facilitated and accelerated the recent worldwide proliferation of pyramid schemes (Valentine 1998[1]).

Illustration used to depict the general structure of pyramid schemes.

Pyramid schemes are sometimes confused with Ponzi schemes, which share the same underlying logic. The term Ponzi scheme goes back to Charles Ponzi, an Italian immigrant to the United States who in 1919 initiated a fraudulent scheme by promising investors that they make massive profits by purchasing international reply coupons and redeeming them in the US for postage stamps. Ponzi’s scheme was not sustainable over the long term, but for a while he managed to deceive his investors by paying early ones with the money he collected from later ones, while pocketing millions of dollars himself. Eventually, the fraud was detected and the scheme collapsed. In 1920, Ponzi was arrested, charged with fraud and imprisoned.

In both pyramid and Ponzi schemes, existing investors are financially compensated from the contributions made by new investors. But while investors in Ponzi schemes are (misleadingly) informed that they are earning returns simply from their investments, participants in pyramid schemes are usually aware that their income is dependent on the recruitment of new investors and that they themselves must recruit additional investors, who will themselves recruit new investors, and so on. This may at first sight seem an insignificant detail, but in fact it is important because the multilevel structure resulting from the recruitment strategy of many pyramid schemes makes them virtually indistinguishable from a fully legal business-model common in many parts or the world, that is, multilevel marketing (MLM).

MLM is a huge business. Worldwide, it involves more than one hundred million individuals who represent direct-selling companies. The companies built on this model do not have retail outlets for their mainly beauty- and health-related products but sell them directly to the customer via independent salespeople. The salespeople do not receive a salary, but are paid a commission on their own sales as well as on the sales of any subcontractors they succeed in recruiting. While some direct-selling companies have been accused of operating illegal pyramid schemes, many pyramid schemes claim to be direct-selling companies (Keep and Vander Nat 2014[2]).

Pyramid schemes can have devastating consequences, not only for investors but also for their families and whole communities. Participation may lead to financial ruin because people may invest their live savings and even sell their homes in order to invest in the schemes. Moreover, the schemes often provoke social conflict because investors are encouraged to put pressure on their friends and relatives to recruit them into the schemes. When the schemes collapse—as sooner or later they inevitably do—questions arise as to who bears responsibility for the disaster. Not only the initiators but also those who promoted the schemes locally—and who may well not have been aware of their illegality—face accusations of fraud.

Contrary to popular assumptions, participation in pyramid schemes is not always related to low education or financial illiteracy. Krige (2012: 73-4[3]), for example, draws attention to the fact that, in South Africa, people from various social backgrounds including doctors, lawyers and company managers have participated in pyramid schemes that were operated from prestigious business addresses and that claimed to be prosperous, global business-projects legally registered with the authorities.

Newly-emerging market economies appear particularly vulnerable to pyramid and Ponzi schemes. For example, a wave of schemes swept the former communist countries during their transition from socialism in the 1990s. Some of these schemes were huge in scale, such as the Caritas scheme launched in Romania in 1992; Caritas affected at least one in every five Romanian households and involved sums of money that came close to the country’s annual GDP (Verdery 1996: 174[4]). Similar schemes in Albania reached such a scale that their collapse provoked a recession in the national economy (Musaraj 2011: 85-6[5]). Russia’s MMM scheme—the most spectacular Ponzi scheme in any post-communist country so far—attracted 15 million investors over a period of six months; its collapse provoked a wave of suicides by despairing investors (Krechetnikov 2009[6]).

A number of anthropologists have suggested that the proliferation of pyramid schemes should be understood in the context of larger global developments. Comaroff and Comaroff (2001[7]) argue that, while high-risk finance and banking have reduced the international financial system to a virtual casino, speculation and gambling have emerged as powerful sources of value-creation. This is an unsettling experience for people both at the margins of the global economy and in developed countries, but in particular in societies that have recently undergone significant economic change. Disrupted lives and increasing inequality lead to feelings of exclusion from global prosperity; this may in turn enhance the attraction of economic structures such as pyramid schemes. Elaborating on this argument, Krige (2012[8]) emphasises that risk-taking in the context of pyramid schemes not only corresponds to what is happening in global financial markets, but also fits a neoliberal discourse that celebrates entrepreneurship and self-empowerment.

While the post-socialist surge of pyramid and Ponzi schemes provides a strong case in point, it is difficult to assess the impact of large-scale economic developments on the proliferation of pyramid schemes, in particular because little is known about their history. The study of pyramid schemes might benefit from approaches that take account of historical and macro-economic as well as socio-cultural and micro-economic factors in order to understand the appeal of such schemes in different times and different places.


Schiffauer, L. 2019. Marketing Hope: Get-Rich-Quick Schemes in Siberia. New York, Oxford: Berghahn.

Cox, John. 2018. Fast Money Schemes: Hope and Deception in Papua New Guinea. Bloomington: Indiana University Press,
  1. Valentine, D. 1998. ‘Pyramid Schemes,’ Federal Trade Commission, 13 May
  2. Keep, W. and Vander Nat, P. 2014. ‘Multilevel Marketing and Pyramid Schemes in the United States,’ Journal of Historical Research in Marketing, 6(2): 188-210.
  3. Krige, D. 2012. ‘Fields of Dreams, Fields of Schemes: Ponzi Finance and Multi-Level Marketing in South Africa,’ Africa, 83(1): 69-92.
  4. Verdery, K. 1996. What Was Socialism, and What Comes Next? Princeton: Princeton University Press.
  5. Musaraj, S. 2011. ‘Tales From Albarado: The Materiality of Pyramid Schemes in Postsocialist Albania,’ Cultural Anthropology, 26(1): 84-110.
  6. Krechetnikov A. 2009. ‘“MMM,” ili na vsiakogo mudretsa dovol’no prostoty,’ BBC Russian Service, 27 July
  7. Comaroff J. and Comaroff J. 2001. ‘Millennial Capitalism: First Thoughts on a Second Coming,’ in Comaroff J. and Comaroff J. (eds), Millennial Capitalism and the Culture of Neoliberalism. Durham/London: Duke University Press: 1-56
  8. Krige, D. 2012. ‘Fields of Dreams, Fields of Schemes: Ponzi Finance and Multi-Level Marketing in South Africa,’ Africa, 83(1): 69-92.