A pyramid scheme is any business model which has as its premise, recruiting members via promising financial and/or non-financial benefits in exchange for the members recruiting additional participants. The idea is repeated throughout every tier of the structure, resulting in the chief constituents (those at the pyramid’s apex) receiving a fractional share of the benefits provided to each member.
Benefits trickle to the top, and recruiting participants for the newest members (those at the pyramid’s base) becomes increasingly difficult, if not impossible. Consequently, such schemes are unsustainable and illegal in every Australian Jurisdiction. Below, we set out the prohibition against Pyramid Schemes as well as penalties and defences for engaging in one.
Prohibition Against Participation in a Pyramid Schemes
Under Schedule 2, Division 3 of the Competition and Consumer Act 2010 (Cth) (the Act), a person must not participate, induce or attempt to induce another person to take part in a pyramid scheme. The term ‘scheme’ does not contain a legislative definition. Nonetheless, the case of ACCC v Worldplay Services Pty Ltd [2004] FCA 1138 (Worldplay) held that the term ‘scheme’ is to be given its everyday meaning and so is akin to a plan of action or programme.
Similarly, the Act broadly defines participation to include any activity that establishes, promotes or partakes in such a scheme in any capacity (section 44(1)).
A Legislative Definition of Pyramid Scheme
Section 45(1) of the Act stipulates that a scheme will be deemed to be a pyramid scheme if, and only if, it has both of the following characteristics:
- To take part in the scheme, some or all new participants must provide another participant(s) either a financial or non-financial benefit; and
- The participation payments must be entirely or substantially induced by the prospect held out to new participants that they will be entitled to financial or non-financial benefits contingent on their introduction of new participants to the scheme.
Regarding inducement, the case of Worldplay further held that a person will be induced into entering a scheme, if the relevant conduct in question leads, persuades or influences a person to do so. For an inducement to be substantial, it must be regarded as the predominant factor, which has contributed to the individual partaking in the scheme.
Similarly, in ACCC v Jutsen (No 4) [2012] FCA 503, the Court held that where the single most important inducement to prospective members is possibly making large amounts of money via encouraging and/or recruiting others who would pay a membership, this was likely a pyramid scheme.
Non-Disqualifying Factors
Section 45(3) of the Act specifically holds, amongst other things, that a scheme may be a pyramid scheme:
- No matter how the recruitment process is structured or managed;
- Even if the payment of financial or non-financial benefits is discretionary;
- Despite the fact that making a participation payment is not the only requirement that a potential member must discharge before obtaining entry into the scheme;
- Even if it does not grant new members any legally enforceable rights;
- Despite a lack of written documentation evidencing the particulars of the scheme; and
- Even if the scheme involves the marketing of a legitimate business offering, namely goods and/or services.
It is important to note that with the last of the above-listed criteria, the Court is to have regard to particular matters in determining whether a scheme that markets goods and/or services is, in fact, a pyramid scheme or a legitimate business offering. In such circumstances, the relationship between the participation payments and the value of the goods or services, if any, will be critical.
Penalties
Participation in a pyramid scheme or the inducement of others into the same carries with it a hefty fine. Corporate bodies may need to recompense to a tune of $1,100,000.00. Non-corporate bodies (individuals) face fines of up to $220,000.00 (section 164 of the Act).
Defences
Under Schedule 2 Division 3 of the Act (ss 207 and 208), it is a defence if you can establish that any contravention was caused by a reasonable mistake of fact due to another’s actions beyond your control, and provided that you can also establish you took reasonable precautions to avoid contravention.
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If you have concerns that your business model and/or offering could potentially result in a breach of the pyramid scheme prohibitions under the Act, let our business lawyers know on 1300 544 755.