In a recent scandal that has sent shockwaves, E-Creator a fraudulent company operating in Zimbabwe, preyed on individuals by offering a service that involved sharing positive reviews on global e-commerce platforms. The company, posing as a legitimate opportunity, required people to pay registration fees ranging from US$15 to US$300 and follow specific guidelines while posting reviews.
However, the truth behind E-Creator revealed it to be a pyramid scheme, deceiving people and leading to significant financial losses. The founder, Zhao, vanished with over USD $1 million, leaving victims devastated. The company's scam lasted only a few months, starting in April 2023 and abruptly shutting down in July 2023. This article aims to shed light on the nature of pyramid schemes and the E-Creator pyramid scheme serves as a striking example of the harm caused by such fraudulent schemes.
What are pyramid or Ponzi schemes?
The term "Ponzi scheme" originated from Charles Ponzi, who deceived investors in the 1920s through a scheme involving speculative investments in postage stamps.
Pyramid schemes are prevalent scams that operate on a "trickle-up" economic theory. In these schemes, individuals are enticed to invest in something that promises quick wealth. A portion of their investment is then passed up the hierarchy to more senior members within the club or company.
The mechanics of pyramid schemes involve a network of recruiters who actively seek new participants. These recruiters receive a portion of the initial investments made by their recruits, while other parts of the proceeds are distributed to higher-ranking members.
Once someone becomes involved in the scheme, they are expected or heavily incentivised to become recruiters themselves, actively seeking out new people who are willing to join and pay the required fees. The recruitment process is crucial because it determines how individuals are compensated within the scheme.
How do pyramid schemes work?
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It all begins with one individual: A pyramid scheme starts with a founder, often positioned at the top of the pyramid, who recruits a small group of people to promote a product or service.
New recruits become recruiters: These newly recruited members are motivated to bring in additional participants, earning a percentage of the profits generated by those they recruit, while also passing a portion of their earnings to the founder.
The pattern continues: Each new member continues the cycle by recruiting more individuals, leading to money being funneled up the pyramid. As the pyramid expands, it becomes increasingly challenging for new members to make substantial profits. This is primarily due to the significant amount of money being distributed to the various levels above them.
In Zimbabwe, there have been several reported cases of pyramid schemes that have targeted and defrauded individuals of their hard-earned money. Some of the alleged scammers include MMM Global, Bitcom Interchange, Elamante Global and the recent E-Creator among others. These schemes promised high returns and operated by using funds from new investors to pay off existing ones.
Why do pyramid schemes collapse?
Pyramid schemes, despite their deceptive tactics, cannot escape their inevitable collapse. Here's a breakdown of why these schemes crumble:
Lack of a sustainable product or service: Pyramid schemes prioritize recruitment over offering legitimate products or services. Without a sustainable product, the scheme fails to generate genuine value or long-term revenue.
Recruitment dependency: Success in pyramid schemes relies on a constant influx of new recruits to pay returns to existing members. As the pool of potential participants shrinks, it becomes increasingly difficult to sustain the scheme.
Saturation point: Every pyramid scheme reaches a saturation point where there are no more individuals left to join. As recruitment slows down, the funds necessary to pay out returns to earlier investors dry up, leading to the scheme's inevitable collapse.
Unsustainable financial obligations: Pyramid schemes entice participants with unrealistic promises of high returns that cannot be sustained indefinitely. As the number of participants grows, the financial obligations become unmanageable, adding to the fragility of the scheme.
Lack of external revenue: Unlike legitimate businesses, pyramid schemes solely rely on funds contributed by participants within the scheme. Without diversified revenue streams from external sources, these schemes remain vulnerable to failure.
Negative reputation: Over time, pyramid schemes gain a negative reputation. As awareness of their deceptive nature spreads, potential recruits become cautious, hindering the scheme's ability to sustain itself.
No real value creation: Pyramid schemes contribute nothing of tangible value to the economy. Instead, they merely redistribute funds within the scheme, resulting in a net loss for most participants.
Mathematical impossibility: The structure of pyramid schemes is mathematically unsustainable. The number of recruits required to sustain the scheme eventually exceeds the population or market size, making it impossible to maintain.
How to protect yourself
When it comes to pyramid schemes, staying cautious and vigilant is key to protecting yourself. If approached by someone who appears to be recruiting you for a pyramid scheme, it is important to approach the situation with caution.
Take your time to consider the opportunity and never make a commitment on the spot. Request additional time to evaluate the proposal and gather more information.
Seeking advice from friends and family members can be valuable in such situations.
Consult with them to see if they have encountered similar pitches or if they have any insights or warnings regarding the scheme. Their perspective and experiences may provide valuable information that can help you make an informed decision.
Conduct thorough research into the details of what the person is presenting. Look for any red flags or warning signs.
Educate yourself about the scheme and its potential risks before making any commitments.
Request written information about the business, including its strategy, financial information, how profits are earned, and how commissions are distributed. Having this information in writing allows you to carefully review and analyse the details.
Ultimately, trust your instincts. If something feels off or too good to be true, it likely is. If you have doubts or suspicions about a scheme, it is better to err on the side of caution and refrain from participating.
What to do if you've fallen victim to a pyramid scheme
If you find yourself ensnared in a pyramid scheme, it is important to take action to mitigate the damage and protect yourself.
First and foremost, leave the scheme as soon as possible. Prioritize your own well-being and exit the group. The promise of additional earnings is not worth prolonging your involvement and risking further losses.
Sharing your experience can also be beneficial. Consider sharing your story to raise awareness and help others avoid falling victim to similar scams.
You can do this through online platforms, social media, or by reporting to consumer advocacy organisations. By sharing your experience, you may be able to prevent others from becoming victims of pyramid schemes.
Unfortunately, if there are people seeking financial gain, there will always be individuals who try to take advantage of others. It is essential to stay informed, remain cautious, and report any suspicious activities to protect yourself and others from falling victim to pyramid schemes.
In conclusion the E-Creator scandal serves as a stark reminder of the dangers associated with pyramid schemes. While unsuspecting victims find themselves entangled in their web, it is essential to remain vigilant and educate oneself about the red flags associated with such fraudulent operations.
- Zuze writes in his personal capacity. His interests are in socio-economic policies, public finance management, informal sector, domestic resource mobilisation, mineral resource governance, illicit financial flows and taxation. These weekly New Perspectives articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852
