Report 69 Business Practices Committee

Participants to these schemes need to recruit a number of other participants in order to recoup their payments and make a profit. The amount paid by a new participant goes into the pockets of the promoters and the other participants. Depending on the amount paid, new participants had to recruit a number of other participants to recoup their outlays. Assume that a member of such a scheme have to canvass five new participants to recoup his/her capital outlay. These five new participants need to recruit at least 25 new participants to recoup their payments and these 25 participants have to recruit another 125 participants. The schemes thus require exponential growth in the number of participants to enable the previous participants to recoup their "investments".

Assume "E" just became a participant to a particular "controlled" chain letter scheme. "E" would then have in his/her possession five so-called "Certificates". "E's" name would appear as number five on each of the "Certificates". These "Certificates" invariably have the following appearance.

The name of the promoter of the scheme often appears last on the list, although it could also appear as number 1. The names "A", "B", "C" and "D" on the list would already have had become participants to the scheme at an earlier stage and their names would be printed on the "certificate". Note that next to each name on the list are details such as "bank", "branch code", "account type" and "account number". Assume "E" now canvassed "V", "W", "X", "Y" and "Z". In order to simplify the explanation of the scheme, only the procedure following the canvassing of "V" by "E" would be discussed.

"V" now has to deposit the required amount (Rx) into the bank accounts of each of the six names on the list. The total outlay by "V" would thus be R6x, Rx being earmarked for the promoters and Rx each for the accounts of "A", "B", "C", "D" and "E". "V" then has to send the original deposits slips together with his application form to the promoters. On the application "V" filled in his name, address, telephone number, his bank, the branch and the branch code of the bank, the type of account and his account number. On receipt of the application form and the six deposit slips, the promoter issues 5 "certificates" to "V". The name of "V" would appear next to number 5 on the list on each of these "certificates". The name of "E" would move to the number 4 spot, "D" to number 3, "C" to number 2 and "B" to number 1. "A" would then drop from the list. "V" then would have to find other potential participants and the cycle would repeat itself. The name of "V" would eventually appear as number 1 on all the lists of his/her own "pyramid".

The total potential amount "V" could receive would be Rx times 55. Should Rx be R50 the total amount would be R50 times 55 = R156 250, provided that the participants canvassed by "V" each also canvassed five others and the chain was not broken by anyone. "V" could receive more than R156 250 if he/she participated more than once.

The explanation shows that in this example a new participant needs to recruit a number of other participants to recoup his/her payment of Rx to make a profit. These five new participants need to recruit at least 25 other participants to recoup their payments. These 25 participants need to recruit at least 125 new participants to recoup their payments. To recoup their payments the 125 "out-of-pocket" participants need to recruit at least 625 new participants. There will always be a large percentage of "out-of pocket" participants. Given the assumptions in the example, the percentage of participants that would not recover their payments would never be smaller than 80 per cent. This would apply to the total number of participants, irrespective of the stage at which they joined the scheme.

The extent of the possible earnings of new participants is clearly limited by the extent of the market. And the market is limited. The population growth rate does not match the exponential rate required to make the scheme viable for all participants over a relatively short period. Most, if not all, of the people that part with their monies to join such schemes do so with the expectation to make a handsome profit in the short term. Prospective participants are invariably informed that "opulent times" are around the corner.

These schemes can never reach a stage where everybody has recovered their payments. Those that have not canvassed any new participants will lose their "investments". The "promoters" and those ending up as number 1 on the list stand to earn substantial amounts. Those that have not canvassed the required additional participants will be unreasonably prejudiced. This will apply to all participants, irrespective of the stage at which they participated in the scheme. The monies made by participants in these types of schemes are mostly equal to the monies lost by those participants who find that it is nearly impossible to locate further interested participants.