The concept of pyramid schemes as investment scams schemes varies all around the world. Some countries perceive these schemes as top spots of financial institutions where individuals can earn, for example, the United States. However, other countries such as Germany, China, and Albania view the schemes as fraud schemes. Particular concerns pertain to the rapidly evolving financial systems met by the high level of illiteracy among the population within the realm of an investment possibility. These financial systems lack efficient laws and regulations that govern how pyramid schemes are operated. Countries are adapting to the fact that that losses or bankruptcy resulting from these schemes after they collapse are not redeemable and cannot be recovered. That does not mean that these countries have not heard of disgorgement of illegally obtained profits, but the process may be just tiresome and is likely to bear no fruits. This section aims to compare China and Albania countries’ comparative law by discussing selected pyramid schemes from the two different countries.
Pyramid schemes in Albania
Albania is among the developing countries in Europe. The country encountered a pyramid scheme crisis between 1996 and 1997. For many years, the country had remained inaccessible due to its low and poor economic state. The Albanian pyramid scheme lured at least two-third of the country’s population to get to the systems by promising sure and substantial profit returns. The Albanian pyramid schemes began in 1991 when the country had been wholly stricken by poverty and desperation. Initially, like all other pyramid schemes, the country’s gross domestic product rose to at least ten percent.
Lack of a well-established financial system was among the major causes of Albania’s pyramid schemes. The financial system was inefficient and unreliable. Due to the poor economic state, the private banks grew at a languid pace. The poor system led to the upsurge of an informal financial system. The Albanian jurisdiction abided by the informal market transition, which was thriving as compared to the existing formal market.
Informal markets constituted colloquial lending firms that later became pyramid schemes. The majority of these firms were formed between 1991 and 1992. Until 1995, the firms offered loans to members at 4 percent to 5 percent interest rates monthly. The companies were involved in great investment strategies and some even financed illegal activities such as drugs and arms trafficking. While it was hard to distinguish between the informal firms and the pyramid schemes, both companies were operating without licenses and were beneficial opportunities for small businesses in the country.
Due to the Albanian government’s inadequate enforcement measures, these companies did not undergo any auditing to verify their transparency. However, in 1996, the Albanian banking system passed a law that states that companies were nor eligible to accept any deposits from the citizens. The central bank made a notice to the informal companies informing them to take business licenses to legalize their companies. However, government members were already participating in these pyramid schemes and hence were reluctant to follow the directives given by the central bank. The companies supported the politicians in the 1996 election campaigns, which clearly showed that the government was directly benefiting from these schemes. The schemes supported the election through paying for advertisement posters and organized political parties. This reliable support from these pyramid scheme companies to the government led to the negligence of the banks of Albania, whose governor was left alone in persuading for the investigation and the termination of these pyramid schemes.
In 1996, more pyramid schemes began to rise, bringing in more depositors, which urged the companies to raise their interest rates. At the time, the largest companies offered a 4 to 5 percent rate, and by the first half of the year, the companies raised their interest rates from 6 to 10 percent. Other new schemes sprang up within the year and had their interest rates at 12 to 19 percent. All of these companies have no authentic investments apart from being just deposit companies. With the increase in the percentage rates, more depositors were attracted to the pyramid schemes. By September, the companies were already offering interest rates that were over 30 percent per month. By the end of the year in November, pyramid schemes such as Xhafferi and Sude offered extended the interest rates to above 40 percent per month. By this time, the companies’ liabilities had hit approximately $1.2 billion. This massive number did not stop the mania that enthralled the country at this moment.
More depositors continued to pour in to deposit their funds. The pyramid scheme’s queues became longer with all classes from the poor to the rich. Some People believed that the programs had full government support, while others thought that the pyramid schemes gained their funds from illegal activities. With this belief in mind, they were sure that the illicit activities and the government would ensure security for their returns. People sold their livestock and land to devote their money in the schemes.
The world bank warned the public of the possible risks associated with these pyramid schemes, which all fell on deaf ears. The world bank had consistently given strict warnings from 1994 until 1996 when it gave a stringent warning. Together with the IMF, the bank accused the Albanians of contesting against the country’s most fortunate companies. All this came to a fall when the Sude pyramid scheme company failed to make its payments, and the downfall began. After four months, the other pyramids also defaulted to make the promised payments leading to a collapse of the whole system. The pyramid scheme collapse brought down the ruling country’s ruling party, leaving the country lawlessness and death of at least 2000 people due to violence after the collapse of the pyramid schemes.
pyramid schemes in China
China has not reported too many cases so far. However, several fraud cases have been published by international media as of 2007. This paper focuses on two pyramid schemes: the ant sales scheme and the Ezubao and their exposure to the economic market. In 2014, a p2p lending company known as Ezubao was created to offer financial help to businesses and individuals. Initially, investors were more than willing to invest their money in the scheme in the expectation that the money would be refunded with some interest rates from the money repaid by the borrowers. More so, this scheme promised to deposit at least seven times the interest earned directly into their banks and at least 15 percent annual returns.
The pyramid scheme advertised its advertisement through China’s central television, which built more trust from potential investors. The project was marketed and promoted through sales agencies from all over the country, and thousands of individuals and businesses joined with high expectancy. Approximately 900000 investors invested in this scheme, and the company had liabilities of about $7.6 billion. The majority of the scheme’s investors were the poor group from the rural areas. Apart from its advertisement on national TV, its contribution to the 12th association between southeast Asia and china nations expo gained more trust for the pyramid scheme. More so, the project announced a militia establishment at a large event that only expected the senior officials. This announcement meant that the scheme was trustworthy and supported by the government.
The collapse of the scheme happened in December 2015. The peer to peer lending company stopped trading anymore with the investors leading to an investigation by the police. The company’s assets were all frozen for the investigation to be conducted. The Xinhua News Agency declared that about 98 percent of the company’s investment was all fake. The agency further found out that the scheme was targeted to enrich the founders of the companies. By the beginning of 2016, at least 21 organizers of these pyramids’ schemes had been arrested. Six million documents of these companies were unearthed from the ground by the use of excavators. This scheme threatens the country’s financial system. Like other pyramid schemes, Ezubao company fabricated fake products for investment and used funds from the new investors to pay back the old investors. The scandal turned out to be one of the biggest fraudulent Ponzi schemes in the history of china.
The ant sales scheme was also another pyramid scheme that reached western media headlines. The ant sale scheme was a Chinese pyramid scheme that was built on an anthill foundation in 1999. The program was created around purportedly dead ants that were traditionally claimed to heal many diseases such as bossing one immunity and increased male stamina. During the scheme’s inauguration, investors were made to pay 10000 yuan for two boxes full of ants. The investors were expected to feed these ants until they died. With the death of the ants, the firm would peak as it was expected that it would use the dead ants to make medicines. In return for their investment, the investors were promised 13,250 Yuan.
The scheme attracted many investors as the founders went beyond employing famous stars to market their products on the TVs. The project also announced that it had advanced to a modern high-tech form that combined advanced technologies with traditional cultures to preserve people’s health. Further, Wang, using his political clout, made several contributions to the charity groups. Therefore, the scheme gained trust from potential investors when it received awards for the production of beneficial products. Approximately 80.000 companies were already selling these products. Investors, especially from low backgrounds, saw this as an opportunity to redeem their economic state. According to the scheme originators,’ the company enjoyed a 15 billion yarn profit annually from 1 million people who bred the ants per year.
The scheme, which was a big success for the country, hit a blow in 2004. The food and drug administration body in the US banned importing these products, claiming that they were substandard. That same year in 2004, the company failed to make its payments to its investors for the first time. This brought a lot of street chaos. People blamed the government for allowing these fraudulent projects to be operated for years and demanded their money. About 36000 citizens lost approximately $400 million to these schemes.
However, after investigation, later on, the prosperity of the pyramid scheme could not be ascribed exclusively to the naiveness of the investors who took to breeding ants. The founder, Wang, was found to be running other successful companies that were parallel to these schemes. His charitable and public-spirited nature conceived the investors into believing that the investment was real. More so, sources stated that he had never been sited with other politicians in the media, which made him more reliable and trusted. The whole scheme seemed so real and legitimate, a skill which other pyramid schemes play to lure investors.
Comparison between China and Albania
Impairment of the financial sector.
The pyramid schemes impact the financial sector negatively in both China and Albania. First, the pyramid schemes consumed the savings made by the investors. These investments would have been more successful if they had been made in other legit financial institutions such as banks and would significantly raise the country’s Gross domestic product. Moreover, the establishment of these schemes discredited other financial institutions. In Albania, for example, the governor of Albania’s bank tried to warn people about the consequences of investing in the Albania pyramid scheme. However, the high-interest rates offered by the pyramid scheme presented is a more profitable company as compared to other financial institutions.
Economic impairment
Undoubtedly, pyramids and Ponzi schemes have one character in common in these two countries. They are illegal and not considered as legitimate investments by their governments. This is due to the previous downfalls that the two countries have experienced from past pyramid schemes. Large financial losses have been incurred and tremendously impaired the economies. Both China and Albania economies experienced the impacts of pyramid schemes in the marketplace, and the victims involved lost thousands of money to the schemes.
Losing millions impacted on the economy as people lost confidence to engage in other legitimate investments.
Fraudulent chameleons
From the description of the leaders’ nature from the Albania pyramid scheme and the ant sale scheme in China, one could hardly think of better words to describe them but trained expert fraudsters that are empowered. For example, the ant sale scheme was operated by a well-known Wang, who had full support from the government. On the other hand, the Albanian pyramid scheme had full support from the government since some of the government members were already investing in this scheme. This explains why the Albania government was reluctant to heed to the warning sent by the world bank.
Crime investment
Without a doubt, the two jurisdictions treat pyramid schemes as crimes and scams. Since the collapse of the three grand pyramid schemes in the two countries, governments label other similar schemes formed as fraud companies. Both governments have raised the public’s awareness of the critical effects brought about by these schemes. These governments no longer support such projects. Instead, individual investors are held liable, and they are no longer protected through any financial regulations. The government perceives them as gamblers. However, this has posed a challenge to the investors since reputable schemes come up dressed as legitimate companies that are licensed, raising no suspicions from the investors. Most of the time, these reputable schemes are not easy to detect until they fail. In case of a loss and following the government distancing from these schemes, individuals who suffer such losses bear all the consequences.
Forceful Government changes
Pyramid schemes cannot be run forever. Even if the whole world were to join, those at the bottom of the system would experience losses. These losses led to Albania’s rebellion of 1997. From the two countries, government policies have had to change after the collapse of the pyramid schemes. Initially, both governments supported the programs as they also benefited from them. However, governments have recognized those schemes as frauds and put up policies that illegalize these schemes.
Civil unrest and violence
In 2004, riots broke out in the streets after the collapse of the anthill scheme. In Albania, at least 2000 cases of deaths were reported following the violence caused by the failure of the Albanian pyramid scheme. People were disappointed by these schemes that promised high returns prompting several violent incidents as people rioted and demanded the return of their money. Thousands of investors had invested in these pyramid schemes. They blamed the government for lack of law enforcement measures that would have regulated the excessive growth of the pyramid schemes. In Albania, the riots led to the arrest of the pyramid organizers. The two governments were forced to enforce measures that stopped the running of these pyramids.
Assets recovery
Recovery of investors’ money is one of the most critical steps to take after a pyramid collapse. The two governments put up measures to which some of the investors’ money would be refunded if not all. By the time of the collapse, the operators of these schemes have squandered all of the investments made by the citizens for gifts and lavish lifestyles. The Xinhua News Agency reported that the Ezubao operators used this money for gifts. More so, investigators traced all the assets and unearthed some documents from the soil.
Development of financial systems
With the collapse of the pyramid schemes, governments developed the role that is played by financial and non-financial institutions in an attempt to combat these pyramids schemes. The banks were more open about their business flows to encourage investors to participates in investing in the banks. More public awareness was also spread among the participants and the public.