What you need to know about ponzi scheme and where it come from?

Pyramid schemes focus on recruiting members by offering services or products in exchange for money – small amounts initially but the requested sum gradually increases to meet the promised “privileges”.

“Managers” in such schemes often use psychological manipulation and personal relationships in order to engage and ultimately recruit candidates.

The prime incentive they offer is usually the opportunity to earn an additional income, which many would find appealing especially in times of financial hardship.

Where do pyramid schemes come from?

This type of business model has been around since at least 1919. The term “ponzi scheme” used in the English speaking world to refer to such fraudulent practices was coined after Carlo (Charles) Ponzi, an Italian immigrant to the United States.

Ponzi urged his prospects to invest in his company, The Security Exchange Company, promising a 50% profit on the money invested every 45 days or 100% profit in 90 days.

Many went for the offer but were not aware where the money was coming from; Ponzi was in fact using the money entrusted to him by new investors to pay earlier ones and so on, thereby keeping the money flowing and maintaining the image of a healthy business.

The fraud lasted about a year until a local newspaper brought to light how the business was operating, prompting thousands of investors to ask for their money back. Ponzi had to pay two million dollars in three days and the scheme collapsed.

Many have since copied the pyramid model earning significant sums in the process.

Pyramid schemes became illegal in Cyprus in 2015 and the law stipulates that anyone organising, managing, operating or promoting such schemes, if convicted, is subject to a prison sentence of maximum five years, a fine of €200,000 or both sentences together.

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