Pyramid Selling Schemes

Mr WATKINS (Ryde - Minister for Fair Trading, and Minister for Sport and Recreation) [3.34 p.m.]: I move:

That this House:

(1) notes the recent explosion in illegal pyramid selling schemes;

(2) warns the people of New South Wales, particularly families and pensioners on the North Coast and in Sydney’s west, to be wary of get-rich-quick schemes; and

(3) calls on the Department of Fair Trading to continue its efforts to track down and expose these unscrupulous operators.

I wish to speak about the many get-rich-quick schemes that continually are appearing in this State. They are commonly known as pyramid schemes. As Minister for Fair Trading, I am concerned about these illegal schemes, which appear to be increasing, and about their potential to hurt consumers. Six months ago an international pyramid scheme with more than 18,000 Australian participants went out of business. The amount of money lost still cannot be determined. In 1997 another pyramid scheme involved an estimated 400,000 people across the country. A third scheme, broken up by Fair Trading, involved 200 inhabitants of just one New South Wales regional centre. Those 200 people lost around $400,000, or about $2,000 each.

Pyramid schemes are a costly and widespread problem. They are miserable cons. They frequently trap unsuspecting consumers, and leave them often thousands of dollars out of pocket. The Department of Fair Trading is continually warning the public about pyramid schemes. As with many consumer protection matters, it is best to stop people involving themselves in illegal schemes in the first place. It is best to act before the schemes collapse, taking participants’ money with them. Pyramid schemes have been with us for many years. It is tempting to say they are as old as the pyramids. However, no-one really knows where or how they originated. The pyramid name refers not to their age but to the way that they recruit their members. One person gets several others to join the scheme, those people then recruit more players, and so on.

A classic pyramid shape is built up. But the choicest position - at the pyramid’s apex - is taken by the person who begins the scheme. Latecomers find themselves at the bottom. Although they take many different forms, all schemes depend on the following: members are rewarded primarily for recruiting others; those at the higher levels get a share of the money paid in at the lower levels; if a product or service is sold, it is usually worthless; and people make money at the expense of others, often their relatives, friends and neighbours. This process of recruiting members is meant to be repeated forever, providing an endless chain of riches. It is a seductive prospect. But obviously this cannot occur.

One recent scheme, Joker 88, originally came from Germany. At its height in Australia it had 400,000 members. Joker 88 promised that an investment of $150 would be turned into $109,000, a hugely tempting proposition for most people. However, New South Wales Police estimated that there needed to be 874.8 million involved for all the participants to make their money. Plainly, that will never occur. Often, pyramid schemes are given a cloak of respectability by pretending that goods and services are being sold. The promoters pretend that the sale of goods or services is the organisation’s core business, but it is really the recruitment of new members that generates the income. However, pyramid schemes are distinguished from legal multilevel marketing schemes by the fact that the goods or services are usually of little value. They can be grossly overpriced, irrelevant to the scheme, or simply fictitious. They are not real products.

Recently the pyramid organisation Jewelway International collapsed, affecting an estimated 18,000 consumers across Australia. Those people were mainly Asian migrants to this country. Although Jewelway agents dealt in jewellery, the jewellery was poor quality and mass produced. It was not worth the big sums that Jewelway charged for it. The real purpose was the recruitment of agents. Jewelway International collapsed around the world after United States fair trading authorities successfully prosecuted it. The group was made to pay fines of $5 million to compensate over 200,000 United States consumers who lost money to the group. That indicates the very large scope of some pyramid schemes. In New South Wales, Fair Trading received around 90 complaints on one day after Jewelway closed here. Little could be done for those people. Their money was well and truly gone, and they had nothing to show for it except junk jewellery.

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The Department of Fair Trading has received a number of complaints about Giraffe World Australia. Giraffe World requires prospective members to purchase an under blanket for a bed, called a negative ion mat, or "ionmat". This product costs members an extraordinary $3,250. Since the middle of last year, Fair Trading has been referring New South Wales consumer complaints against Giraffe World to the Australian Competition and Consumer Commission [ACCC]. The ACCC is currently taking action against Giraffe World in the New South Wales Supreme Court for alleged pyramid operation. Giraffe World has been placed in voluntary administration in the hands of Ferrier Hodgson.

South Australian fair trading experts have identified 52 current and past Australian pyramid schemes. They include: Cash Daily MLM; Christopher Erickson Scheme; Concorde Game, the Plane Game, Golden Aeroplane; Family of Eagles; Flying Saucer and Flying Starship; Global Vision; Helping Women to Help Women; Income 200; Pentagono; Joker 88; Make a Million, and Treasury 2000. Others include the Women’s $1 Pyramid Scheme which urges women to send $1 to a name on the top of a list, and then send 10 copies of the list to friends. Pray for World Peace charges $45 to add a consumer’s name to a list. The consumers then get part of the $45 provided by every new member they recruit. And, of course, members are supposed to pray for world peace. The list literally goes on and on.

The great paradox with pyramid schemes is that Fair Trading receives few complaints about them. Most people would expect that when schemes collapse Fair Trading would be contacted by scores of angry consumers. But this simply does not happen. For example, in the past 18 months New South Wales Fair Trading received 51 complaints about the Edward L. Green program, a chain-letter scam, and only eight about the Concorde Game. From 1994 to 1996 there were 32 complaints about Joker 88, but nothing since. Similarly, no complaints have been received about Golden Sphere since late 1996 when 24 complaints were received. It appears that people cannot complain because they regard pyramid schemes as a gamble they lost. Or they may not want to dob in their friends, since friends, neighbours and relatives usually recruit people into these schemes. Or they may be embarrassed by their gullibility in giving their money away so easily.

People have been duped into believing that these schemes will lead to a life of luxury of making easy money. No-one should underestimate the emotions aroused when a pyramid scheme is running. Participants can lose all perspective. They get carried away by the apparent ease with which they can make money. Like gambling, people can be seized with a mania that lasts until the pyramid collapses. It can be exciting while it lasts. People who participate in pyramid schemes are motivated by one thing - making easy money. They believe they can make a large amount of money without doing anything to earn it, but unfortunately life is not so easy. It is a particular tragedy when poorer or depressed communities are targeted by pyramid scheme organisers. In particular, New South Wales rural communities affected by long-running drought and depressed prices for rural products can be vulnerable to pyramid promotions.

I am pleased to inform honourable members that my department was very successful six months ago in stopping Victorian Concorde Game organisers from moving into this State. After running large-scale pyramid schemes in rural Victoria they tried to set up the Concorde Game in Nyngan, Dubbo and Bourke. The Victorian principals hurriedly left the State after they were approached by my department. Local people who had a lesser role were let off with warnings. My department and Queensland Fair Trading are investigating a simple scheme originating in western Sydney. The Paradise Wins Promotion, which is described as a fun-type system, involves sending scratch lottery tickets and $10 to others in the network. It promises that participants will get 1,092 scratch lottery tickets each month from other members as long as they get three others to join.

Unfortunately, the promoter is under the delusion that the use of lottery tickets makes this scheme legal. Investigations are continuing into the scheme. Many people are hurt when pyramid schemes collapse. It is a mathematical certainty that they will end. They depend on an endless supply of new recruits, and this cannot occur. Only people at the peak of the pyramid are likely to make money. But the money comes from relatives, neighbours and friends, who may lose heavily themselves.

Pyramid schemes are illegal under both New South Wales and Federal law. The relevant sections are section 56 of the New South Wales Fair Trading Act and section 61 of the Commonwealth Trade Practices Act. Under the Fair Trading Act individuals face fines of up to $20,000, and corporations can be fined up to $110,000. Last year the Federal Court ordered the promoters of the Golden Sphere pyramid scheme to refund $550,000 to consumers who suffered financial loss when this scheme collapsed. The court also prevented the promoters from taking part in Golden Sphere or any
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similar scheme in future. I urge the House to support this motion.

Mr J. H. TURNER (Myall Lakes - Deputy Leader of the National Party) [3.44 p.m.]: The Opposition will not oppose this sensible and timely motion. However, with respect, we suggest that the Minister should have made a ministerial statement, which would have had more oomph in the wider world as against a debate in this House. It is the old adage: if it sounds too good to be true then it probably is. That is what occurs with pyramid selling and the various other schemes that the Minister mentioned. I am aware of some of them, including the astrology scam, and the poetry and horror story scam, which is a particularly nasty one for young people. Also there are the Spanish and Canadian lotteries. People are often fooled when they are asked to send $10 or $15, they think that that is not much to lose. Of course when that is multiplied by thousands of people, the scam operators are doing quite well.

Today is probably not the day to talk about the worst scheme of all, the Nigerian scam. We know as much work as possible has been done to stamp out that dangerous scheme - I understand that lives have been lost. The Minister, whilst covering the concept of pyramid selling, did not tell the public who may read his speech exactly what pyramid selling is, although he gave examples of the various companies involved. For the benefit of the wider community I will outline what pyramid selling is so they may be warned about its dangers. The Trade Practices Report states that pyramid selling has been described by the Trade Practices Commission as a trading scheme in which a promoter offers to sell to a participant both the right to sell a particular product or service and the right to introduce others into the scheme in the same way.

It is an unfair form of trading, because those at the top of the pyramid obtain their money not from selling the goods or services involved, but from selling positions in the pyramid to others. Pyramid, or multilevel selling, schemes became widespread in Australia in the early 1970s. The definition of the problem schemes, while excluding other acceptable forms of business activities, created difficulties with legislation. In 1972-73 the then Consumer Affairs Bureau said that problems existed in providing an exact definition of pyramid selling and added that such a scheme can generally be said to have the following two characteristics: first, persons are required to pay a fee to obtain the right to participate in the scheme; and, second, such persons receive financial reward or other benefit on recruiting other participants.

Section 61 of the Trade Practices Act is directed against pyramid selling, however a pyramid selling scheme is not prohibited. What is prohibited is conduct of a specified kind, which I cited earlier, if carried out in relation to such a scheme and the scheme is described in neutral terms as a trading scheme instead of a pyramid selling scheme. The Australian Trade Practices Reporter gave a couple of examples of prohibited conduct. It stated:

Section 61(1) covers the situation where a person is actually induced to make a payment as the result of a scheme. For the conduct to be caught, payment must be made to the promoter after the participant is induced by the prospect of receiving payments or benefits for introducing other participants.

The second offence contained within sec.61 is that of a promoter who attempts to induce a person (whether a participant in the scheme or not) to make a payment to him or to any other participant in the scheme . . .

A "prospect" within sec.61 is held out whether or not it infers a legally enforceable right . . . Such a prospect will constitute an "inducement" if it amounts to a substantial part of the inducement . . .

I turn now to section 56, to which the Minister made passing reference, and which relates to pyramid selling. Section 56 of the Fair Trading Act sets out clearly how the section may be contravened. I urge people who may be contemplating being involved in pyramid selling, either as participants or promoters, to make themselves very much aware of section 56 of the Act. It is written in plain English and it is quite evident in that part of the Act what one can and cannot do.

The Minister referred to a company called Giraffe - which has also recently been mentioned in the media - as having collapsed, causing great pain and anguish. I regret to say that it is more than a year since I brought to the Government’s attention the existence of Giraffe. I placed several questions on notice. Regrettably, the inevitable occurred with Giraffe, as it was allowed to continue. When I was shadow minister I found the department was very helpful but sometimes a bit slow. Unfortunately in this case it would appear that it was a bit slow after I gave fairly public notice that alarm bells were ringing with regard to Giraffe. I do not think one can be more public than placing questions on notice.

Obviously the Minister knows something that has prompted this motion. If alarm bells have been rung, and he did specifically refer to the North Coast, I hope his department moves swiftly to minimise any damage that might occur to innocent people. If he is referring to the North Coast I would remind him that a high number of retirees live there and some of them may be susceptible at times of
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low interest rates to investing in schemes that could return perceived higher dividends. If the Minister is aware of active schemes in that area, I hope his department acts quickly and publicly.

The Minister said that he would expect to receive complaints, but that that does not often occur. I have had a very high profile in relation to such scams in my electorate - some of which he mentioned and some of which I mentioned - but rarely do I receive feedback, although I do get some. That is probably because people do not want to let the public know that they have been conned. There is an obligation on the department to spread the word far and wide to warn people as early as possible if a scheme is operating or there is the smell of a scheme starting anywhere, so we can make sure the public is adequately protected from these predators who will let people be hurt when ultimately the scheme collapses around their ears.

Ms MEAGHER (Cabramatta - Parliamentary Secretary) [3.52 p.m.]: Two weeks ago I had a very troubling meeting with a senior leader of Sydney’s Chinese community. Pastor Victor Yeung of the Asian Christian Church of Cabramatta brought to my attention the case of a pyramid scheme that has been operating in Sydney’s west. Its origins date back to September 1990 and it is specific to the Chinese community. Twenty-two families lost thousands of dollars - for many their life savings. The scheme is called "Huai" which, in English, means "investment". Each member receives an equal share in Huai and must make regular financial contributions to remain in the scheme.

The matter has been investigated by the New South Wales Police Service, the New South Wales Ombudsman and the Department of Fair Trading. Unfortunately those taken in by the operators of Huai have lost all their money. That is very distressing to me and to the people of Cabramatta. Many newly-arrived immigrants rely on the assistance and advice they receive from members of their own community. Unfortunately, this is a clear case of an unscrupulous minority preying on the vulnerable within that community. Today I can reveal that the Huai scheme is operated by Mr David Chau and Ms Lily Wong under the name of Ya Li Fashion. Mr Chau and Ms Wong have since disappeared, taking with them thousands of dollars belonging to Cabramatta families.

Unfortunately, many of those who have been duped are reluctant to come forward and co-operate with authorities. They are reluctant because of embarrassment within their own community. I am taking this opportunity to warn the community about Huai and the operators of this disgraceful scheme. This is how the scheme works: the self-styled owners of Ya Li Fashion sought expressions of interest from persons wanting to invest in their allegedly flourishing business. They then approached several family friends who in turn contacted friends and asked them to join Huai. The joining fee was $1,000, followed by $500 to be paid on the eighteenth of every month.

In return, Mr Chau and Ms Wong promised participants $11,500 in cash. The money could be withdrawn before maturity if they found new members. When the scheme was due to mature in 1992 Mr Chau and Ms Wong could not be found. Their offices were vacant and they left no forwarding address. They escaped with an estimated $100,000. Behind every pyramid scheme there are stories of people losing hundreds or thousands of dollars. One person affected by Huai was Mr Zhi Hua Wang, a young man who worked hard for his savings. He lost $9,500. He worked in an Ashfield restaurant at night and studied electrical engineering in the daytime. Mr Wang fought to get his money but, unfortunately, he died in a workplace accident in 1995. His father, Mr Yue Yao Wang, took up the cause and found Mr Chau and Ms Wong. They said they would be able to return only $1,000. However, as it was legally a civil matter, it ended when Mr Wang died.

As part of the scheme, Huai’s organisers divested themselves of any property ownership. They transferred the ownership of their properties and investments into the names of relatives and friends. This meant that once Huai ceased to function investors were unable to take legal action to get back their investments. Mr Chau and Ms Wong have left nothing but misery and heartbreak in their wake. Pyramid schemes are a greedy con, a house of cards that depends on more and more victims joining. The lucky few at the top may make money but it is at the expense of the many at the bottom.

Basic pyramid scheme features are that members are rewarded primarily for recruiting others. Those at the higher levels get a share of the money paid in at lower levels. If a product or service is sold, it is usually worthless. People make money at other people’s expense - often their relatives, friends and neighbours. Sooner or later the pyramid will collapse when the supply of new members runs out. Under the Fair Trading Act people who take part in pyramid schemes face fines of up to $22,000, while corporations face fines of up to $110,000.

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Whether it is due to embarrassment or the protection of friends, few people complain when they lose money. New South Wales consumers should contact Fair Trading if they are approached by pyramid operators. People can protect their friends, neighbours and family by blowing the whistle on these get-rich-quick cons.

Mr NEWELL (Tweed) [3.57 p.m.]: I support the Minister for Fair Trading for raising concerns about pyramid schemes. A number of people in my electorate have had contact with pyramid promoters. Some people admit they have lost money. I thank these people for their courage in overcoming any embarrassment they may feel so as to warn others. I am worried about the effects of these insidious schemes on regional and rural New South Wales. Rural people deserve protection from these unscrupulous operators who are selling hollow promises.

Only two years ago a large number of Tweed residents took part in the illegal Joker 88 pyramid scheme, which originated in Germany. The organisers claimed $150 could be turned into $109,000 in a short time. Like all pyramid schemes, it depended on people recruiting their friends and relatives and making money from them. One very large Joker 88 meeting filled the auditorium at Seagulls Leagues Club. More than 2,000 people were present. Speakers at the meeting said the scheme was approved by overseas governments and police forces. Extreme pressure was put on people to join. Fair Trading began investigating the scheme as soon as it came to light. As a result of these investigations, the organisers quickly packed up and left the region, but not before damage had been done.

It appears that several hundreds of thousands of dollars was lost by Tweed residents burnt by Joker 88. New and recycled pyramid schemes are continually starting up in New South Wales, organised by local people or by overseas operators. I am advised that currently another scheme is operating in the Tweed, and Fair Trading fears a Queensland scheme will arrive in the area in the coming months. The scheme is called Edward L. Green after its American originator. It promisees $200,000 in 90 days or less. Participants pay $20 for reports from four other people on a provided list. The person then puts his or her name on the top of the list and sends it to 200 other people.

This scheme takes the form of a chain letter. It has been around for decades and various promoters have been prosecuted by both the Department of Fair Trading and the Australian Competition and Consumer Commission. Tweed residents should rip the letter up if they find it in the mailbox. The Syndicate Club, a Queensland-based scheme, was formed in mid-March this year. Though it started only in March already it has 5,000 Queensland members and is recruiting people in Western Australia. Syndicate Club members paid $100 dollars to join. They play Oz Lotto each week for free after they have signed up other people. They also get $25 from each new person’s $100 membership fee. Queensland’s fair trading department is investigating this company. I urge people of the Tweed not to take part in the Syndicate Club until investigations are complete.

Depressed prices for primary produce and crippling drought have created conditions where people in regional New South Wales are particularly vulnerable to get-rich-quick schemes. What alarms me is that pyramid promoters from other States are targeting communities in rural New South Wales. Honourable members may be aware that last year pyramid scheme operators were particularly active in rural Victoria. Current affairs program cameras filmed people outside public halls where pyramid meetings were being held. They were mostly working people, some still in their working clothes. Last year these Victorian pyramid operators began targeting New South Wales. Information provided to the Department of Fair Trading indicated that Victorians were trying to set up a so-called Concorde game in regional New South Wales centres.

In the Concorde game people buy a seat on an imaginary aircraft for $750. There are eight or more seats on the plane and participants move towards the front of the aircraft as they recruit others. When people reach the cockpit of the aircraft they become the pilot and leave with around $6000 - they hope. Several Concorde games can operate at once. This game appeared in Queanbeyan. The alleged organiser was a woman from Glenelg in South Australia who was subsequently prosecuted and fined more than $40,000 in Queanbeyan Local Court. I have been informed that the woman has now appealed that decision.

Detecting and disbanding these schemes is a continual job. Pyramid schemes are particularly dangerous in regional New South Wales because they work through networks of relatives and friends. When pyramid schemes collapse, the fallout can be unpleasant in small communities; recriminations can fly thick and fast. Rural communities in particular do not need to be divided by having friend against friend and relative against relative over money lost to pyramid schemes. Under the Fair Trading Act
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pyramid games are illegal. Penalties of up to $22,000 for individuals and $110,000 for corporations may be imposed. People from regional New South Wales should be aware that this law applies to anyone who participates in a pyramid scheme, not merely the organisers.

People not only risk losing their money, they also risk substantial court fines. I urge people in regional New South Wales not to become involved in pyramid schemes. These schemes create nothing: no goods, services or jobs. They take people’s savings and money that could go to local businesses. If these schemes appear in the local community, people should immediately contact the Department of Fair Trading.

Mr WATKINS (Ryde - Minister for Fair Trading, and Minister for Sport and Recreation) [4.02 a.m.], in reply: I thank the Opposition for its support for this motion and I thank those honourable members who spoke to it. The Deputy Leader of the National Party referred to a question he had placed on notice paper regarding the Giraffe Corporation. I thank him for reminding the House of that scheme and for raising it with the Government. I can report that by the time he had put that question on notice the Government had already acted. The department ensured that a full refund was obtained for two complainants. Preliminary inquiries had already been completed and the department had consulted also with the Australian Competition and Consumer Commission because the scheme was operating nationally.

That is evidence that the Department of Fair Trading is vigilant in tracking down and closing these schemes when they surface. The department acts quickly and publicly. It takes its responsibilities seriously, but there is a constant need to raise in a public forum such as this place the presence of pyramids games to remind the people of New South Wales not to take part in them. I appreciate the contributions of the three speakers, but particularly that of the honourable member for Cabramatta who referred to the painful impact on people from non-English speaking backgrounds. I thank the honourable member for Tweed for reminding us through his particular expertise of the impact on regional New South Wales. I hope their constituents and those in other constituencies take heed of that good advice.

New South Wales consumers should be warned that penalties apply to anyone who takes part in illegal pyramid schemes, not only the promoters. However, the Department of Fair Trading is obviously more interested in the organisers. Innocent participants are more likely to be let off with a warning. They are advised to remove their names from mailing lists and to not accept money from other people. Where appropriate they are told to refund any money they have collected. Pyramid scheme organisers and participants are secretive. The organisers know they are breaking the law and participants are often told by organisers not to talk to authorities. I urge consumers to break this code of silence. That is the reason I moved this motion.

I urge people who are involved in or who know about pyramid schemes to contact the Department of Fair Trading. I am concerned particularly to protect people in areas of the State which have suffered from depressed international markets and long-term drought. These people may be tempted to look for a quick fix to their problems. I am concerned also about money being lost by New South Wales consumers, including small business, to these scams. I have told my department to be vigilant about pyramid schemes that take advantage of new technology, such as the Internet. This relatively new form of instant worldwide communication poses big problems for fair trading enforcement bodies. This Government will be watching closely to head off new developments that may hurt consumers.

Obviously the pyramid scheme problem is worldwide. Millions of consumers overseas have lost money to these cons. The Department of Fair Trading’s most frequently used warning is: If it looks too good to be true, it probably is. The best way to think of pyramid schemes is that they are like a house of cards. Even if a pyramid scheme involves selling a product or service, they have nothing backing them. They simply consist of the money that is passed from person to person. When the supply of new money dries up, the flimsy pyramid comes crashing down - just like a house of cards. Pyramid schemes are illegal in New South Wales and across Australia because they are fraudulent. They work on the premise that there is an endless supply of new recruits, when clearly there cannot be. If the house of cards collapses, friendships can end and relations within a family can be poisoned. It is just not worth it. I urge the people of New South Wales not to take part in pyramid games. If they are aware of them they should contact the Department of Fair Trading.

Motion agreed to.