Pyramid schemes
Hello,
a friend of mine has joined a woman gifting circle which she is very fond of. But to me it is obvious that it is a pyramid scheme and I've tried to explain this to her. She refuses to believe me about it being illegal, so I'm hoping that if she gets to hear it from a lawyer that she'll understand.
The circle is called a "Mandala" and women pay a "gift" amount of money when they start as a "fire", before moving on to "water", then "air" and finally the "earth" status to receive a large payout from eight new women.
One person is the most senior in the group, "earth". She has recruited two people beneath her, who have each recruited two more, and they in turn two more. As a condition of entering the group, the eight most recent recruits each “gift" money to the most senior group member. She then moves out of the circle, which then splits into two circles. Her two recruits are now the most senior members of their own circles. Once the eight people who just bought into the group recruits two people, those two most-senior members each get the payout and the circle splits again.
They are having weekly supporting meetings where they discuss a lot of things, supporting each other, this is what my friend finds wonderful and doesn't want to let go. I've tried explaining that people will loose money, even if not her, but it doesn't get through. I've tried explaining the math with no luck
What are the legal issues and penalties with this here in Sweden, in Germany and the USA?
Lawline svarar
Hello and thank you for turning to Lawline with your question!
First of all, we cannot provide legal analyses regarding foreign legal systems. What I write below is thus solely based on Swedish legal sources, which by nature are only applicable in Sweden. I would be surprised however, if the legislation in Germany and the USA were much different. Finally, before I begin, I would like to say that none of us are lawyers. We're law students. But my graduation is only weeks away, and I feel more than comfortable answering this question.
Pyramid schemes (pyramidspel) are explicitly regulated in spellagen (SL). In 2 kap. 1 § SL it is stated that the term game is referring to pyramidspel, among others. According to 2 kap. 3 § 15 SL a pyramidspel is a game in which profits are derived from the contributions of future participants and where the probability of winning is determined by the number of participants who enter the game afterwards [after the contribution]. This Mandala-circle that you're talking about is definitely a pyramidspel. It's further said in the preparatory works that it's characteristic of a pyramidspel to be arranged in a pyramid-like structure, where the founder sits at the top of the pyramid. These kinds of games are dependent on an exponential increase in members. If such an increase is not provided, which it never is, the bottom layers will sooner or later collapse. Only the person at the top, "earth-girl" in this case, has a tangible chance of getting paid. For this reason, pyramidspel are not deemed suitable for the public. According to 3 kap. 3 § SL, anyone who provides games as defined by SL must have a license. According to 3 kap. 6 § SL, license can never be granted for pyramidspel. They are indeed illegal. According to 19 kap. 1 § SL, anyone who provides a game without having the appropriate license is guilty of unlawful gambling and sentenced to pay a fine or spend up to 2 years in prison. According to 19 kap. 2 § SL, the same goes for anyone who intentionally or by gross negligence promotes participation in such games. This is the crime which your friend could potentially be charged with. Furthermore, according to 19 kap. 9 § SL, contributions will be confiscated by the state. If Mandala ever runs into legal troubles, which it will one day or another, your friend won't ever see her money, neither her contributions nor the funds that she's entitled to according to the game's rules. These losses are not deductible when it comes to determining income tax. My advice to your friend is to cash out, get out and never speak of this to anyone ever again.
I won't get too much into this, but if Mandala is run as a business it's also – according Annex I point no. 14 of EU directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market – in all circumstances considered an unfair business practice to be "establishing, operating or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products". This is an EU directive and applies in Germany as well. Businesses caught in such acts will among other things be charged a fine for disrupting the market (29 § marknadsföringslagen).
Under certain circumstances which I don't feel the need to explain, recruiting people to join Mandala could also be considered fraud according to 9 kap. 1-3 §§ brottsbalken (the Penal Code) (BrB), usury according to 9 kap. 5 § BrB or dishonest conduct according to 9 kap. 8 § BrB. These crimes are punishable by fines or imprisonment for up to 6, 4 and 2 years respectively.
I hope this answers your question.
Regards,
