Pyramid schemes explained: How ordinary people are trapped by false promises

The illusion of easy money

In every community, there are people who dream of a better income, a better lifestyle, and a better future. These dreams are natural. But because of these hopes, many individuals unknowingly fall into dangerous traps, especially those set by people who promise quick wealth through illegal pyramid schemes. These schemes have grown into sophisticated ones over time, hiding behind attractive advertisements, job offers, training programs, online apps, and even cryptocurrency claims. Yet at their core, they remain simple frauds designed to take money from ordinary people and leave them with nothing.

To understand why so many fall victim, it is important to see how these schemes operate, how they disguise themselves as legitimate opportunities, and how easily someone can be deceived without realising it.

A job interview that wasn’t a job

As seen throughout history, the concept of a pyramid scheme too can be easily understood by following a simple storyline. The story begins with a young woman who attended what she believed was a normal job interview. She explained that she was hoping for a modest salary because she is just starting her career. Instead of offering her a job, the interviewers laughed and told her she could earn more than a hundred thousand rupees a month without even going to an office. Being very curious, she asked what the work involved. That was when they revealed the catch, she needed to pay a large registration fee first. After paying, she was told she only needed to bring in two or three more people who could pay the same amount. Once she did that, they promised the monthly income would begin.

What she thought was a job interview was actually a recruitment attempt for a pyramid scheme. The situation may sound unbelievable, yet thousands of people have encountered exactly the same tactic. The promise of easy money and effortless income can be tempting, especially when the invitation comes from someone friendly, confident, or persuasive. But the truth behind these schemes is far more troubling.

How Pyramid schemes really operate

A pyramid scheme works by convincing people to pay money upfront and then persuading them to recruit others who will also pay. Early members receive money using the payments made by new members. Nothing real is sold. No actual service is provided. The entire structure is supported only by a continuous flow of new people joining at the bottom. By the time the flow of new recruits dries up, which is inevitable, the scheme collapses. Those who joined earlier may earn something, but the vast majority lose their savings. In many cases, the operators themselves vanish long before the collapse, leaving behind financial ruin, broken trust, and sometimes even legal consequences for the innocent participants.

Why Pyramid schemes are illegal

Sri Lankan law is very clear on this issue. Under Section 83C of the Banking Act, starting, promoting, joining, or even unknowingly participating in a pyramid scheme is illegal. A person found guilty can be fined up to ten million rupees or imprisoned for up to three years. If someone knowingly promotes such a scheme with the intention of deceiving others, the penalties are much more serious. These laws exist because pyramid schemes cause enormous harm, not just to individuals, but to society and the economy as a whole.

The many disguises 

of a Pyramid scheme

Even with strict laws, pyramid schemes continue to spread because fraudsters constantly create new ways to disguise their operations. One of the most common tricks is to present the scheme as a multi-level marketing business (MLM). MLM itself is not illegal if it involves selling real products at genuine market prices. However, pyramid schemes use MLM as a cover. They may display vitamins, gadgets, cosmetics, or electronic items, but these products are usually overpriced, low quality, or merely symbolic. The real focus of the scheme is not selling products but adding more members. That is the clear signal that something is wrong with what they promote.

Another trick is misusing company registration documents. Fraudsters proudly show certificates issued by the Registrar of Companies to convince people that the business is legal. But a registered company can still engage in illegal activities. Registration alone does not make the business model lawful. Many people trust these documents without understanding the difference between a registered business and a legal business activity.

Some operators use glamorous lifestyles to mislead people, such as photos with luxury cars, foreign tours, expensive hotel stays, and dramatic claims of rapid wealth. These are staged to create trust and excitement. In reality, many of these so called “success stories” are either exaggerated or completely fabricated. The promoters themselves are often paid by the scheme to attract new members.

With the rise of the internet, pyramid schemes have also been moved online. They appear as mobile applications and social media promotions, asking users to invest in foreign currencies or cryptocurrencies. Participants are often asked to click advertisements or complete simple tasks while the app displays fake earnings. These numbers are artificially generated to create the illusion of profit. In Sri Lanka, cryptocurrencies are not legally recognised as a form of currency, making such schemes even more dangerous. People not only lose their money, but also risk losing their personal information to unknown operators.

Another modern disguise is the “training program.” Some organisations conduct one day or weekend workshops, charging high registration fees and promising certificates and job opportunities afterward. In reality, these programs have no professional value. Their entire income depends on constantly enrolling new participants, making them nothing more than pyramid schemes wrapped in professional language.

The damage caused 

by Pyramid schemes

The consequences of falling into a pyramid scheme are severe. Financial loss is the most obvious result. People often borrow money, mortgage property, or use their savings to join, hoping to earn it back quickly. When the scheme collapses or when the operators run away, the debt remains. Relationships, too, suffer deeply. Many recruit family members and friends, believing they are offering a good opportunity. When those people lose their money, blame, anger, and mistrust follow. In some cases, victims face legal trouble for participating in or promoting an illegal scheme, even if they did not intend to cheat anyone.

Preventing the trap

Given these dangers, the best protection is awareness. Learning about legal financial practices and understanding how genuine investments work is essential. The Central Bank of Sri Lanka offers guidance through its website, hotlines, and awareness programs. By educating yourself, not only is your own money protected, but the spread of such schemes to others is also prevented. If you come across any suspicious activity, reporting it to the nearest police station or to the Central Bank’s Financial Consumer Relations Department can help stop the scheme before more people get trapped.

A final reminder

Pyramid schemes survive only when people fall for false promises. By staying alert, asking questions, and making informed decisions, you can protect yourself, your loved ones, and your community from these harmful traps. Quick riches may sound tempting, but real financial stability always comes from honest work, patience, and wise choices, not from illegal shortcuts disguised as opportunities.

(The author is the Senior Assistant Director, Financial Consumer Relations Department, Central Bank of Sri Lanka)