Scamwatch: pyramid schemes

Stay one step ahead of the fraudsters with our series of articles on the scams they use to trick you out of your hard-earned cash.

This week, pyramid schemes where participants are urged to hand over cash to join the bottom of a "pyramid" to receive a payout when they get to the top.

How does it work?

Pyramid schemes involve a group of people investing a sum of money before persuading their friends and families to do the same - all in the hope of receiving a cash windfall, or in some cases free stuff.

The idea behidn the most common type of pyramid scheme is that as more people pay into the scheme, earlier investors are pushed to the top of the pyramid, at which point they receive a payout funded by the latest participants to join the bottom rung.

However, the problem is that later investors rarely receive the payout because the pyramid collapses, leaving them out of pocket.

This was the case for 88% of the women who took part in the Give and Take or Key to a Fortune pyramid scheme that swept the country between 2008 and 2009.

The women behind the scheme, which required people to invest £3,000 in the hope of receiving £24,000 when they reached the top of the pyramid, were this month found guilty of fleecing at least 10,000 victims.

How can I avoid being caught out?

It is always a good idea to be wary of any investment that seems too good to be true, especially if the people proposing it use hard sell tactics such as rushing you to make a decision.

Even though they seem tempting, it is also worth remembering that pyramid schemes always collapse eventually and you are very unlikely to receive a cash windfall.

I've been defrauded. What should I do?

If you have been caught out by a pyramid scheme, you should report the fraud to Action Fraud (0300 123 2040) so that it can stop the people running the scheme from luring in any more investors.

You are unlikely to be able to get your money back, but don't be tempted to involve your friends and family in a bid to reach the top of the pyramid.

After all, even if they do push you to the top by investing, they are still highly likely to lose out. And that means you risk destroying your relationships with your loved ones, as well as losing out financially.

Promoting a pyramid scheme could also lead to you being prosecuted under the Consumer Protection from Unfair Trading Act 2008.

Related articles...

Scamwatch: latest phone fraud

Scamwatch: iCloud fraud

Summer Scamwatch: holiday fraud