Fraud is a phenomenon that exists worldwide. It can be categorised into areas such as money laundering, human trafficking, arms trafficking, and drug trafficking. Every country experiences these issues to varying degrees. There is no country where fraud does not occur. There are continuous reports of individuals falling victim to various scams, leading to a loss of money and, in many instances, resulting in life-threatening situations.
In Sri Lanka, individuals who have been punished and penalised for running pyramid schemes have been identified, causing thousands to become distressed as they lose their hard-earned money to these fraudulent investment opportunities. The schemes typically lure people in with promises of high returns, often visible only in the short term.
Immediate Financial Struggles
No matter how much awareness is raised about fraud, there seems to be no decline in the deposits made into such financial institutions. Scammers constantly lure people due to the lack of satisfactory interest rates in the country’s recognised banks. Additionally, when people face limited financial resources, they become desperate for quick funds. Despite the risks involved, they turn to fraudsters with the expectation of swift wealth accumulation, a common aspiration shared by many, not just in Sri Lanka but globally. The most straightforward pathway to this desire is through pyramid schemes.
Initially, one person recruits five to ten others by collecting money directly from them, forming the pyramid’s base. Those initial investors bring in another ten people each, exponentially multiplying the number of participants. The commission received by the original members relies on continuously recruiting new members. Although the Central Bank of Sri Lanka keeps an eye on these schemes, they often resurface shortly after being shut down.
Responsibility of the Central Bank
The Central Bank of Sri Lanka is primarily responsible for halting pyramid schemes. However, the Colombo Chief Magistrate recently criticised the Central Bank for failing to carry out this responsibility, urging the institution to formulate an immediate plan to rescue the public from these scams.
As the magistrate pointed out, despite having the legal authority to dismantle illegal financial institutions, the Central Bank has not acted efficiently or actively enough in this regard. He noted that had the Central Bank carried out its duties properly, these illegal schemes would not have proliferated nationwide. Additionally, it has become evident that many pensioners cannot enjoy a secure retirement because of the impact these pyramid schemes have had on their finances.
Legal Directives from the Court
The legal authority and financial capability to protect the public from fraud lies with the Central Bank of Sri Lanka. Therefore, a communication strategy is necessary to inform people of illegal financial institutions. This should involve discussions with media organisations and the use of social media for awareness. The Chief Magistrate of Colombo has requested the Central Bank to prepare a project plan for such a communication strategy, which should be submitted to the court within two months.
The Financial Toll of Pyramid Schemes
Over the past few years, it has been estimated that more than 5 billion rupees belonging to the public have been swindled through pyramid schemes. This revelation came during investigations by the Criminal Investigation Department regarding 11 illegal financial institutions, where the magistrate summoned officials from the Central Bank for questioning. The Central Bank has taken action against 20 pyramid companies under Section 83 of the Banking Act No. 30 of 1988 (Amendments) regarding prohibited proposals in the past 11 years.
List of Prohibited Institutions
- Tiens Lanka Health Care (Pvt) Ltd
- Best Life International (Pvt) Ltd
- Mark-Wo International (Pvt) Ltd
- V M L International (Pvt) Ltd
- Fast3Cycle International (Pvt) Ltd
- Sports Chain App/Sports Chain Society Sri Lanka
- Onmax DT
- MTFE App, MTFE SL Group, MTFE Success Lanka, MTFE DSCC Group
- Fastwin (Pvt) Ltd
- Fruugo Online App/Fruugo Online (Pvt) Ltd
- Ride to Three Freedom (Pvt) Ltd
- Qnet
- Era Miracle (Pvt) Ltd and Genesis Business School
- Ledger Block
- Isimaga International (Pvt) Ltd
- Bee Coin App and Sunbird Foundation
- Windex Trading
- The Enrich Life (Pvt) Ltd
- Smart Win Entrepreneur (Private) Limited
- Net Fore International (Private) Limited / Netrrix
Weaknesses in Central Bank Operations
The magistrate stated that the Central Bank has implemented various programs to inform the public about illegal financial institutions. However, there is doubt about their effectiveness. The Chief Magistrate emphasised that the continuing prevalence of pyramid schemes indicates a failure in these initiatives.
Pyramid Schemes Evolving with Technology
Pyramid schemes tend to evolve, adapting to new legal frameworks. Recently, strategies have included recruiting investments through various agricultural projects, such as tea, mango, and other agricultural initiatives. Promoters claim attendees can earn threefold returns in a few years.
Additionally, they use direct marketing strategies to expand their schemes further by persuading potential investors through various sales techniques. In these direct marketing methods, individuals are often encouraged to recruit new participants without needing upfront investment.
Use of Digital Currency
With the increasing use of digital currencies, pyramid schemes have adapted to incorporate these technologies, notably cryptocurrencies. These currencies, generated privately and operated without oversight from recognised regulatory authorities, facilitate transactions over the Internet.
Additionally, in Sri Lanka, cryptocurrencies are not recognised as legal tender, but fraudsters leverage this to entice investors with promises of substantial returns in a short period. Such schemes often promote high-profile eviction events to foster trust and convince individuals to invest.
Potential Penalties for Perpetrators
Another question arising within society revolves around the penalties that can be imposed on pyramid scheme operators. Should such individuals engage in fraudulent acts resulting in heavy losses, they could face a three-year prison sentence or a maximum fine of one million rupees or both penalties simultaneously.
Those responsible for causing financial harm to others could also receive penalties with a maximum prison sentence of five years, a fine of two million rupees or punitive measures equivalent to double the amount engaged in illegal fund mobilisation.
The expectation that individuals can quickly become rich leads many to associate with these financial companies without sufficient caution. Therefore, in today’s scenario, thinking critically before investing money is crucial. The risk is that funds accumulated over years through hard work can be lost in a moment, leading to prolonged suffering throughout their lives.
