If you lived in Addis Ababa in 2005/2006, a friend may have approached you to sell you a great idea: work in your own time and make loads of money. It started with what was called Gold Quest, run by QNet. The business model was what is known as a pyramid scheme, a business that is downright illegal in many countries. I was working at 4 Kilo at that time. People were divided into two: ones who were in and ones who were out. Some of the latter ones were sick of friends from the other group nagging them. The “Questers” took the business model as a religion. There had after-work/school meetings, “educational” presentations and “inspirational” talks (at the Sheraton Hotel too – who can beat that?). There were pictures of a skyscraper building – supposedly Gold Quest headquarters and a professional-looking website. More and more Ethiopians kept buying over-priced items which they had no use for. One of these items alone cost thousands of birr.
Time went by. Those who didn’t join had already made up their minds and so the questers ran out of potential recruits. The hype gradually cooled off. A few other similar scams came out as well, some of which were selling themselves as “home grown”, by selling seemingly useful items. Back then I had the impression that it was all dying out. However I was furious when last week my very own sister suggested I buy products from Forever Living, yet another pyramid scheme scam. She tells me she spent 10,000 birr to join. She had also finished selling the products she bought and is making good progress recruiting new members. I have yet to talk to her out of it.
Why is it bad?
These scams can be damaging not only at the individual level, but to the entire economy of Ethiopia as well. I will not go into detail about this myself as there is plenty of information on the web about this. I list some below.
My mentor Jacob Eliosoff has had plenty of Ethiopians speak to him about pyramid schemes. He wrote an excellent article on it.
The Australian government has good educational information on pyramid schemes. Quoting (emphasis is mine),
Pyramid schemes are illegal and very risky ‘get-rich-quick’ schemes that can cost a lot of people a lot of money.
Promoters at the top of the pyramid make their money by having people join the scheme. Then they pocket the fees and other payments made by those who join under them.
In a typical pyramid scheme, a member pays to join. The only way for the member to ever recover any money is to convince other people to join up and to part with their money as well.
In contrast, people in legitimate multi-level marketing earn money by selling genuine products to consumers, not from the recruiting process. Be aware though, some pyramid scheme promoters disguise their true purpose by introducing products that are overpriced, of poor quality, difficult to sell or of little value. Making money out of recruitment is still their main aim.
People often hear about pyramid schemes from friends, family or neighbours. Normally, pyramid schemes recruit members at seminars, home meetings, over the phone or even by mail. Now email, usually as spam, is increasingly used to recruit members as well.
For the scheme to work so that everyone can make a profit there would have to be an endless supply of new members. In reality, the number of people willing to join the scheme (and therefore, the amount of money coming into the scheme) dries up very quickly. When the pyramid collapses (and they all do) relationships, friendships and even marriages can be destroyed over money lost in the scam.
In Australia, it is against the law not only to promote a pyramid scheme, but even to participate in one.
Now, not all bad things are illegal. Luckily, pyramid schemes are illegal in many countries and I wish the Ethiopian government paid more attention to it. A section in the FBI website describes how pyramid schemes are franchise fraud (emphasis is mine),
…pyramid schemes—also referred to as franchise fraud or chain referral schemes—are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out.
I have not yet found solid information on how much money Ethiopians spent on these scams, not to mention all the time they wasted putting their work aside and talking about rubbish all day. This article seems to reports 4 million dollars lost.
Pyramid schemes which operate/operated in Ethiopia
QNet/Quest Net/Gold Quest http://www.qnet.net/
Forever Living https://www.foreverliving.com/
I am concerned about these scams. If you know other scams or if you have something else to add, please comment or email me firstname.lastname@example.org. Please convince yourself first, and educate people you know.
Update October 2014
I discovered pyramid schemes are illegal in Ethiopian law since August 2010. In 30/6 Unfair and Misleading Acts,
applying or attempting to apply a pyramid scheme of sale by describing that a consumer will get a reward in cash or in kind by purchasing a good or service or by making a financial contribution and which describes that the consumer will get additional reward in cash or in kind where other consumers through his salesmanship purchase the good or service or make financial contribution or enter into the sales scheme, based on the number of consumers;
አንድ ሸማች አንድን የንግድ ዕቃ ወይም አገልግሎት በመግዛቱ ወይም የገንዘብ መዋጮ በማድረጉ ተጨማሪ የገንዘብ ወይም የአይነት ጥቅም እንደሚያገኝ በመግለጽ በሸማቹ አሻሻጭነት ከእሱ ቀጥሎ ሌሎች ሸማቾች የንግድ ዕቃውን ወይም አገልግሎቱን የሚገዙ ወይም የገንዘብ መዋጮ የሚያደርጉ ከሆነ ወይም በሽያጭ ስልቱ ውስጥ የሚገቡ ከሆነ በሸማቾቹ ቁጥር ልክ ተጨማሪ የገንዘብ ወይም የአይነት ጥቅም እንደሚያገኝ የሚገልጽ የፒራሚድ የሽያጭ ስልት ተግባራዊ ማድረግ ወይም ተግባራዊ ለማድረግ መሞከር፤