Ponzi and pyramid schemes are two common types of white-collar crimes. They are similar in that they involve tricking individuals out of money, but there are differences in how they are committed and how they are treated under the law. Both Ponzi schemes and Pyramid schemes are illegal.

The difference between Ponzi schemes and Pyramid schemes is

• A Ponzi scheme only requires its victims to invest in something, to receive a higher return of the investment later pay date.
• A Pyramid scheme offers a victim the opportunity to make money by recruiting more people into the scam.

If you have been charged with a criminal offence such as a crime involving a Ponzi or Pyramid scheme, it is important to hire an experienced criminal defence lawyer as soon as possible.

Ponzi schemes

A Ponzi scheme is a fraudulent investment scam in which victims are enticed to buy into an investment that offers a more short-term, lower risk and higher return than other investments. In the scheme, people believe that are giving money to participate in legitimate investments, however, the money is actually paid to other investors who have also been promised profits. It does not come from any actual profit earned. Existing participants in the scheme are persuaded to keep reinvesting their money.

Offences and penalties

Ponzi schemes are generally considered a form of investment fraud under the law. The offence of fraud is found under Section 380 of the Criminal Code.

Fraud 

• 380(1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,

Punishment: Fraud may be prosecuted as an indictable or summary offence. Where the value of the fraud exceeds five thousand dollars punishment can be imprisonment for up-to fourteen years

Pyramid schemes

Pyramid schemes are another common financial scam. Pyramid schemes make money by having participants recruit other investors rather than by selling a legitimate product or providing a service. Although in some cases the scheme may offer products, the products will have very little value. Victims are pressured to participate, with the scammer saying things like the returns are guaranteed or risk-free.

In a typical Pyramid scheme, participants pay a large membership fee to participate. To make money, they must convince other people to join. However, there is no guarantee they will get any money back. The scheme eventually collapses, and the money is lost.

Multi-level Marketing (MLM) and Pyramid schemes

A pyramid scheme will often appear as a legitimate multi-level marketing (MLM) practice, a legal business model for selling goods and services. While a Pyramid scheme generates profits by members recruiting others, a MLM plan makes money primarily from the sale of products and distributors are paid a percentage of their recruits’ sales.

Offences and penalties

MLMs are dealt with in the federal Competition Act and are legitimate, provided that the business follows the specific requirements in the Act. The  Competition Act, Section 55.1 defines a “multi-level marketing plan” as

“a plan for the supply of a product whereby a participant in the plan receives compensation for the supply of the product to another participant in the plan who, in turn, receives compensation for the supply of the same or another product to other participants in the plan.”

Under section 55.1 of the Act, a MLM plan becomes an illegal Pyramid scheme, when:

• there is a payment for recruiting people (and not the sale of a product)
• there must be a purchase (other than a start-up kit which cannot be sold above cost) as a condition of participation
• participants must buy a large amount of inventory that cannot be resold or used within a reasonable amount of time (this is called “inventory loading”)
• a participant in the plan who is supplied with the product
• does not have a buy-back guarantee or a right to return the product in saleable condition
• is not informed of the existence of the guarantee or right and the manner in which it can be exercised.

Section 55.1(2) makes it illegal establish, operate, advertise or promote a scheme of pyramid selling.

Refer to the Competition Act for a full explanation of the terms.

Punishment: Any person who contravenes section 55 or 55.1 of the Completion Act can be fined up to $200,000 per count and/or imprisoned for up to one year on summary conviction, or face fines at the discretion of the court and/or be imprisoned for up to five years upon indictment.

What are the signs of a Ponzi scheme or Pyramid scheme?

If you are approached about an investment opportunity and are not sure if it is legitimate, there are things you can do to be sure:

• Listen for language used that includes phrases such as “high return”, “low risk”, and “limited time” or “you must act now”.
• Check that the person offering the investment is registered with your provincial securities regulator.
• Verify that the investment is legitimate by checking with another reliable source, such as a financial advisor or accountant.
• Research the offer being made and get independent advice.
• Never commit to something at high-pressure meetings or seminars.
• Ask yourself: Does this seem too good to be true?

How to report it

If you suspect you’re a victim of a Pyramid or Ponzi scheme or attempted scheme, or other type of financial or investment fraud, contact the Canadian Anti-Fraud Centre, your local police or RCMP.

Get help

To erase your criminal record, call toll-free 1-888-808-3628 or learn more at Pardon Partners. It’s easier than you think.

If you have been charged with a criminal offence, it is important to hire an experienced criminal defence lawyer as soon as possible. Contact our preferred criminal defence expert, Calvin Barry Criminal Lawyers for a free consultation at 416-938-5858 .

								
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