SAARCFINANCE seminar on combating pyramid schemes

SAARCFINANCE members raised concerns on widely spreading pyramid type investment networks in the region and their potential adverse economic, social and political implications at a meeting held in Washington D.C. As a result, the Central Bank of Sri Lanka was entrusted with the task of hosting a regional seminar on combating pyramid schemes which was held on June 03.

Resource persons for the seminar were Christopher Jarvis and Robert FitzPatrick. Jarvis from the International Monetary Fund is currently serving as the Mission Chief for Maldives. Following his research on pyramid schemes, he has published an IMF Working Paper titled "The Rise and Fall of Pyramid Schemes in Albania."

FitzPatrick, founded and serves as president of Pyramid Scheme Alert, the first international association to expose and prevent pyramid scheme frauds. He is also the author of several books and articles including the "False Profits", the first book to critically examine the multi level marketing industry.

Delegates from Central Banks of six SAARCFINANCE member countries, including India, Nepal, Bhutan, Bangladesh, Maldives and Sri Lanka participated in the seminar and shared experiences through presentations of country papers.

Assistant Governor, Dr. A. G. Karunasena highlighted the potential adverse implications of pyramid-type investments as it threatens both economic and price stability and financial system stability, which could pose the risk of destabilising an economy.

He stated that with the expansion of pyramid schemes, the public might be tempted to borrow from financial institutions to participate in such schemes with the expectation of repaying the loans from their expected returns. It is a mathematical certainty that the pyramid schemes will collapse leaving a large number of loses and a very few gainers.

Jarvis said that unfamiliarity with market institutions and practices, undeveloped and inefficient banking systems and gimmicks to lure investors were the most common reasons why pyramid schemes spread in an economy. Remedying these faults would pave way towards curbing the spread of these schemes.

Fitzpatrick, calling pyramid schemes a new form of fraud in global market economies, said that these schemes include a concept of an "endless chain" where the trick is on the distributors who are induced to buy products and also keep inducing others into buying products and joining the chain. He also touched on the continuing trend to legalise these schemes by yielding to pressure and allowing types of schemes, which they had formerly outlawed.

In India the multi level marketing schemes were two pronged: Price Chit Scheme and Money Circulation Scheme (Pyramid). However, a legislative action to ban the schemes was taken following an in depth study of the impact of these activities.

Similarly, Gold Quest, perhaps the most popular of the pyramid schemes, spread rapidly within Nepal, which resulted in a circular declaring Gold Quest illegal. Nepal does not have any pyramid schemes in existence at present as domestic schemes that were launched, collapsed due to lack of response from the public.

In the Maldives, the authorities noticed that these schemes thrived best amongst young people, due to the rise in Internet usage and unemployment. However, due to the concealed nature of these operations, the Monetary Authority has not been able to play a proactive role in combating the scheme apart from issuing public notices.

Speaking on the Lankan experience, Lankan delegation stated that a large amount of foreign currency was channelled out of the country due to the operations of a product based pyramid schemes or multi level marketing schemes. Investigations are currently being conducted by the Controller of Exchange under the Exchange Control Act.

In addition, the recent amendments to the Banking Act in 2005, has prohibited the operation of pyramid schemes and those who contravene such provisions shall be liable to heavy fines and/or imprisonment.

The law has empowered the Central Bank to conduct investigations in to such schemes. Further, a request has also been made to the relevant authorities to explore the possibility of taking action under the provisions of the Consumer Affairs Authority.