According to section 43 (2) of the Consumer Protection Act 68 of 2008 (hereinafter, referred to as “the CPA”), a person must not directly or indirectly promote, or knowingly join, enter, or participate in:

  1. a multiplication scheme, as described in subsection (3);
  2. a pyramid scheme, as described in subsection (4);
  3. a chain letter scheme, as described in subsection (5); or
  4. any other scheme declared by the Minister in terms of subsection (6), or cause any other person to do so.
A multiplication scheme exists when a person offers, promises or guarantees to any consumer, investor or participant an effective annual interest rate, as calculated in the prescribed manner, that is at least 20 per cent above the REPO Rate determined by the South African Reserve Bank as at the date of investment or commencement of participation, irrespective of whether the consumer, investor or participant becomes a member of the lending party. These type of schemes are commonly known as a Ponzi scheme and are always illegal.

The promoters of multiplication schemes guarantee that they can achieve the necessary returns to fulfil their commitments. They are, however, reluctant to divulge to others how this is achieved. The truth of the matter is that those who enter the schemes first are paid from the income derived from those who enter the scheme at a later date.

How do you identify a Ponzi scheme?

An arrangement, agreement, practice, or scheme can be identified as a pyramid scheme if:

  1. participants in the scheme receive compensation derived primarily from their respective recruitment of other persons as participants, rather than from the sale of any goods or services; or
  2. the emphasis in the promotion of the scheme indicates an arrangement or practice contemplated in paragraph (a).
What are the characteristics of a pyramid scheme?

A pyramid scheme is often illegal, but this is not always the case. If there is no sale of goods or services, the pyramid scheme may be illegal. Examples of legal pyramid schemes are the sale of cosmetics and health products, such as Avon or Herbalife, where goods are sold in exchange for money. If it is determined that goods and services are mere smoke screens while the main object of the scheme is money, the pyramid scheme will be deemed illegal.

An arrangement, agreement, practice or scheme can be identified as a chain letter scheme if:

  1. it has various levels of participation;
  2. existing participants canvass and recruit new participants; or
  3. each successive newly recruited participant:
Be aware of money schemes with guaranteed returns of more than 30% per year. Only invest your money at registered institutions such as the Reserve Bank or registered financial services providers. Know what you are investing your money in and if a proposal seems too-good-to-be-true, remember, it probably is.

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This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)