Internet Safety Tutorial

Lesson #5 - Multi-Level Marketing And Other Scams

One of the biggest problems with the internet today is also one of it's greatest advantages.  We now communicate with people in a whole new manner.  From e-mail to Chat to Instant Messengers, we are now in constant contact with the most distant of friends.  Unfortunately, this contact leaves us vulnerable to a new level of fraud.

What is a Multi-Level Marketing Scheme?

For most of us that grew up in the 70's and 80's, multi-level marketing schemes, (or MLM's, Ponsi Schemes, and Pyramid schemes) aren't all that new.  Amway and Avon have been legalized pyramid schemes that have been around 30 to 40 years.  The basic premise of an MLM is that someone offers a product, and then charges you a fee in order to have you sell that product to someone else.  In turn, you charge people under you a fee to sell that product, and so on.  Each person receives commissions for products sold by people below him, meaning that profit can eventually be made with no effort.  As the MLM gets bigger, it's commissions may change, but it's fundamental concept stays the same;  All MLM's are designed to make the people at the top rich at the expense of the people at the bottom.

The Pyramid concept helps show this the best.  As more people join to the bottom of a pyramid, the base gets wider and wider.  This means more money flows from the bottom of the pyramid, to the top.  The wider the base gets, the more money and less work that has to be done.

So what is wrong with MLM's?

Groups like Amway, Tupperware, Mary Kay, and Avon have made many people rich using them.  Although tit is mostly the people at the top of the pyramid that succeed, some moderate success is possible to mid-level entries.  The problem is that most MLM's don't work this way.

With the rise of the internet, a new form of MLM was created.  These new MLM's started offering services instead of products.  Unfortunately, most of these services were of no real value.  They called these services "Gifting Clubs", because you gave a monetary gift to the people above you in order to have your name listed as the next to receive monetary gifts.  In other words, you had to pay thousands of dollars to the people above you in order to receive money from the people under you.  Does this sound reasonable to you?  Apparently, it was to many people.

The gift clubs are what are commonly referred to as Ponzi Schemes.  Charles Ponzi was an Italian immigrant who lived in New York City during the late 1910's through the early 1920's.   A Ponzi scheme is an investment scheme in which returns are paid to earlier investors, entirely out of money paid into the scheme by newer investors.  Eventually, there is no money left to pay new entrants into the club, and it falls apart.   In Charles Ponzi's case, he used a Postal Coupon system.  This involved promising people a 50% return on their money within 40 days of them sending him the money.  He would take the money sent to him by later entrants to pay new entrants into the scheme.  As the number of new entrants dwindled, the pressure to pay people the promised 50% return caused the scheme to fail.  Ponzi was convicted of fraud, but not before bilking investors for over $9,500,000.  In today's money, that is the approximate equivalent of $2.7 Billion Dollars.

Essentially, most MLM's, Gift Clubs, and Pyramid schemes work this way.  They pay the people at the top of the scheme through the money and efforts of the people at the bottom.  Unfortunately, some of these schemes are either legal, or run through countries that have no laws against them.  This means that by joining one of these schemes you have very little protection for your investment.

Internet MLMs - The New Ponzi Schemes

The new generation of Ponzi schemes run in a simple fashion.  All of us have received the e-mail telling us how they can make us $3000 a week by simply doing one action.  This can be selling credit reports, mailing lists, and other activities which by themselves are not illegal.  What occurs next is VERY illegal, and can cost you a fortune.

The credit reports or mailing lists you sell are simply a product that pyramid schemes must sell in order to lure people in.  The money taken in selling the reports is funneled up the pyramid to pay earlier entrants.  Without this "product" to sell, no one can be lured.  But by offering this product and stating "there is nothing else to buy", the pyramid scheme gains it's victims.

The next part of the scheme changes depending on the originator.  Some sell you reports that you are supposed to re-sell.  In other words, you must sell in order to make back the money it cost you to start.  Some tell you you must register to un-lock software, and some require you to buy additional products in order to get more money from you.  The end result is that they always take more money then they give.  There is always something more to buy; audio and video selling aids, promotional materials, additional retail products, and anything else they can sell for money.  

So why does anyone ever sign up?

So it's blatantly obvious how thin these schemes really are.  Their content is suspect to anyone willing to step back and take a serious look.  So who do MLM's and pyramid schemes lure their victims?

The first and most common trick is to play on the aged.  Not only do they seen the need for more money, as health care bills run up and retirement funds run down.  So anyone promising an easy return on their money is a savior to these people.  Fortunately, internet scam artists have a difficult time reaching this market as it is resistant to emotionless e-mails.

The other way they gain control is by luring you in with bigger and better programs.  Every e-mail that you receive generally has a return e-mail address that allows you to remove yourself from their list.  Don't use this button.  Unfortunately, as much as this may seem like a door slamming in their face, it actually is doing the opposite.  By admitting you read the e-mail, you have let them know that there is someone on the other side reading the e-mail.

From there you will receive more e-mails from different programs.  Most of the time you will pass them over, or click the remove button further letting them know you are there.  Eventually, they will write something that will catch your eye.  Some try pornography, others use contests.  But whatever their methods, they will eventually get you to look.  Then it is simply a matter or odds.

There is a segment of the population that requires the hope that these scams promise.  When they reach this segment, it's just a matter of time before they take that segment's money.  It's not the poor that they target; it's actually the opposite.  The poor don't have money to give, where the well-off have extra money to spend.  Just because you're rich doesn't mean you're less susceptible to these scams.  It's human nature to want more, no matter how fat your wallet or how deep your pockets may be.

In Conclusion...

Ponzi Schemes have been around since the dawn of time.  Charles Ponzi was the first to have it named for him simply for his audacity and unscrupulous nature.  In a time ready for change and crying out for economic prosperity, he used our very human nature against us to make his own personal fortune.  Internet scam artists are just as creative, and just as unscrupulous.  When you get that e-mail that tells you that you can be making $4000 a week for 2 hours or work, throw it in the trash; It's not worth reading any further.  

If just my writings here aren't enough to change your mind, look at some of the following web sites.  They contain real stories of real people that were swindled by internet scam artists.  Then realize how easy it would be for those people to be you.


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