On the false profits blog an article was published by Robert Fitzpatrick, founder of Pyramid Scheme Alert and co-author of the book False Profits. The main theme of the article is on why people fall for pyramid and Ponzi schemes.
The Evolution of Fraud
01/17/2010 07:21 PM
As business has grown more complex, fraud has evolved and adapted accordingly. Multi-level marketing (MLM), the most common form of pyramid/ponzi fraud, is the product of years of evolutionary adaptation in the scam and swindle field, matching the adaptation of the legitimate marketplace. Public awareness and law enforcement always lag behind new forms of fraud. The success of MLM’s and other financial Ponzi’s at duping millions of people, rich and poor, educated as well as illiterate, shows that public understanding has not caught up to this new mutation.
A study of consumer fraud’s evolution shows three stages that parallel the three levels of development in American business. America evolved from leading the world in manufacturing (now China) to becoming the financial capital of the world (now moving to Asia/Europe/Middle East), to our present status as the world leader of consumer-purchases driven by marketing.
The Three Stages of Consumer Fraud:
(1) Product-based fraud in which consumers are tricked into buying defective or even non-existent products or to pay far more for a product than is worth
(2) Financial fraud in credit, banking, insurance, mortgages, stocks and bonds.
(3) Marketing fraud, in which consumers are induced to personally identify with the fraudulent company and to help it defraud others by becoming part of the marketing program themselves with their own purchases and personal promotions.
All three are in operation today but public awareness is now quite strong in the first stage — product frauds. Regulation is also well established. “Lemon” laws, return policies, product safety rules, and trusted consumer alert publications are available now that help to protect people from the old plague of bad products and price gouging.
The second stage — financial fraud — is still rampant, but public awareness is growing. We now know about crushing credit card terms, unjust banking fees, predatory pay-day loans, and the disaster caused by “sub-prime” mortgages. In 2010, America may even get its first consumer protection law aimed at “financial” products. The new law and the growing anger at predatory lending and banking practices show that public awareness and consumer protection are starting to catch up in this area.
The third stage — marketing fraud — is the highest and newest state of fraud, the one which the public is most vulnerable to, has least awareness of, and has the least legal or governmental protection from. This is area in which Ponzis and Pyramids and multi-level marketing operate. There is not even a dedicated law against pyramid schemes in America. Many other countries also do not have anti-pyramid laws. Canada, for example, has some regulations on multi-level marketing (MLM), and it has anti-fraud laws, but it appears helpless to make the connection between the two. So “endless chain” buy/sell scams that wipe out the savings of 90-99% of participants are safe to plunder Canadians and Americans and are spreading worldwide as “free enterprise.”
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As requested by Robert here some further elaborations.
Marketing fraud as it appears to transpire from the article is an extreme version of what we know as false advertising, whereby claims are made about a product, service or business opportunity that are actually know to be invalid, false and deceptive. In that sense the “marketing fraud” is a species of false advertisement be it a more insidious one.
The modus operandi that transpires from the article is most certainly one that is recognizable. At the same time however it seems to me that the methods used for what is classified as marketing fraud are just what marketing nowadays is all about.
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