Financial Times

Quest for easy money
Easy money schemes are spreading rapidly in Sri Lanka as we reported last week. Almost everybody seems to know somebody who is either involved in such schemes or knows someone who is. Gullible members of the public are being lured into joining such scams with astonishing ease.

The tragedy is that even after we exposed the dangers of such schemes people are still willing to join them. However, some reported having difficulty in finding new recruits after The Sunday Times FT-LBR expose last week.

Schemes that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. Or in other words reaches the point of saturation when thousands of participants are unable to find anyone to sell to.

When that happens most members lose their money. Only those at the top, who joined in the beginning, make money. It is their success that lures others to join in the initial stages of such scams.

Promoters of pyramid schemes operating in developing countries are known to worm their way into the confidence of ruling party politicians and top bureaucrats so that when questions do begin to be asked, investigations are launched or when the media starts nosing around they are in a position to suppress such probes or fob off inquisitive reporters.

The companies peddling such schemes are usually headquartered in such exotic locations as the Bahamas or British Virgin Islands. These are tax havens where few questions are asked of anyone wanting to set up an office there. The ownership of such companies is difficult to identify as our own regulators have found in attempts to investigate share purchases in local listed firms.

One of the tactics used by promoters of pyramid schemes is to try to convince potential recruits that theirs is not a pyramid scheme. This is to counter laws against pyramid schemes and the knowledge among more intelligent members of the public that only those at the very top earn money and the vast majority lose money.

What is alarming about the spread of such quick money schemes here is that they are being promoted by respectable members of society. The involvement of bank staff in promoting such schemes has reached such proportions that even the Sri Lanka Banks' Association was compelled to issue a statement warning the public.

Banks have another reason to be concerned - such easy money schemes would obviously divert money away from the conventional banking system. Promoters of such scams are also known to seek out countries with weak jurisdictions. Sri Lanka is a good example. As we revealed in our investigative story last week, Sri Lanka does not yet have the laws making such scams illegal.

It is heartening to know that the Central Bank has draft new legislation to combat pyramiding but what is required is urgent action to prevent such schemes from spreading further. The new Banking Act prohibits pyramid schemes. But it may be too late to wait for the ponderous process of passing new laws, especially given the preoccupation of our lawmakers with other issues.

It is sad that so long after the economy was opened up and successive waves of reforms launched by different governments there are still no laws to protect the public from such frauds. Even the Consumer Affairs Authority, an entity that was set up relatively recently, has no provisions to combat such scams.

The best the authorities can do under the existing legal framework is to try to attack those peddling such schemes using existing regulations. These are customs and foreign exchange rules under which the relevant authorities have already begun investigations. The authorities should also consider raising public awareness of the dangers of such schemes.

Back to Business