There are hundreds of ways in which credit card fraud is committed. One such type of fraud is known as pyramid scheme. Also referred to as franchise fraud, multi level marketing scam or chain referral scheme, a pyramid scam is primarily an investment and marketing fraud.
A pyramid scam can also be described as a non-sustainable business model where money is exchanged primarily for getting other people enrolled into the scheme.
For example, an individual is offered a franchise to market a particular product. For this, the individual needs to pay a hefty amount to the parent organization in order to become a distributor. Investors are lured into the scheme with a representation that new participants can get back their investment and earn exponential benefits by inducing two or more prospects to make a similar investment. In a pyramid scheme, emphasis is more on selling franchises. Profit is earned, not by the sale of the product, but by the sale of new distributorships. With every franchise sale, the one responsible for luring the new customer gets a major share on the distributorship amount.
However, a pyramid scheme is more complex than described. More stress on selling franchises leads to a stage where the supply of potential investors gets exhausted and the pyramid collapses. While some of the participants drop out in the initial stages itself, people who have invested drop out after recovering their original investments. Sufferers are the new investors who are unable to recoup their investments due to collapse of the pyramid.
There are several ways in which pyramid schemes can occur. One such way is through prepaid credit card. A company issues a prepaid credit card to a customer. The customer is promised large rewards along with return of his investment if he can lure few more customers into taking the prepaid credit card from them.
Pyramid schemes have been billed as illegal in several countries including the United States, Great Britain, Canada, France, Malaysia, Norway, Australia and New Zealand.