Sri Lanka reins in pyramid scams

President Kumaratunga said the schemes could lead to debt default

Sri Lanka's president has endorsed a crackdown on pyramid schemes, promising legislation to ban them outright.

The move by President Chandrika Kumaratunga follows warnings from the central bank and the markets watchdog.

One foreign-run operation has already resulted in an outflow of $50m, Ms Kumaratunga said.

Pyramid schemes promise to pay members for attracting new "investors", but few people except their promoters make much money from them.

They are also known as "Ponzi schemes", a name which immortalises a highly successful 1920s US pioneer of the technique.

Such schemes exist in most countries. However, in poorer countries, with limited experience of investing, the temptation offered by promises of "guaranteed returns" sometimes topping 100% is often too much to resist.

In Albania in the 1990s, one such scheme almost bankrupted the country.

Network effect

In Sri Lanka, the dominant variety has been dubbed by Ms Kumaratunga "network marketing" - a term also in use by many legitimate businesses.

In this instance, a product - coins, medallions, watches or something similar - is offered to customers, albeit with a steep price tag.

Buying the product entitles customers to sell to others - and to introduce new members to the scheme, for each of which they receive a commission.

They are also lured by commissions on every person their own recruits bring in, creating a "pyramid" of members.

Those who get in early can sometimes make sizable sums.

Collapse?

But the promoters continue to keep the bulk of the money.

The "commissions", Ms Kumaratunga pointed out, are dependent on the flow of cash from new recruits to the promoters.

"Normally, any referral/pyramid scheme would collapse when it reaches a point where further recruitment is not feasible," she said.

With many investors borrowing to finance their involvement, she went on, the result could be widespread debt default.

In addition, the Central Bank warned of damage to Sri Lanka 's economy - not least because of the outflow of money without any corresponding return in real goods or services.

It also warned that bank officers and public officials promoting such schemes would face disciplinary action.