Pyramid and Ponzi schemes and the repercussions of the differing regulatory approaches

Abstract

Abstract Apart from a few shorter papers inspired by the nomination of a new crime prohibiting the organization of ‘pyramid games’ by the Hungarian Criminal Code in 1996, the topic of ‘pyramid and Ponzi schemes’ remained of little interest to Hungarian legal scholars. Internationally, the topic has garnered increased attention due to the grave socio-economic effects of ever newer scheme-collapses, from the high-profile American Madoff (2009) to the myriad less-known cases from emerging systems like the fiasco of the Albanian pyramid schemes in the mid-1990s, pyramid schemes camouflaged as multi-level marketing (MLM) ventures, or their online versions more recently. Comparative works that would juxtapose the pertaining laws and experiences of the United States with those of Hungary are lacking. To fill the void, this article contrasts a select number of differing regulatory approaches. At one end of the spectrum is the United States (US), which, instead of passing sector-specific laws, mobilized and adapted the enforcement tools of all utilizable branches of law to combat the schemes. While in the US this has been uniquely primed by securities laws, in Hungary the task remains limited to what criminal law and the criminal justice system could offer, coupled with the dominantly ad hoc reactions of the Hungarian Securities and Exchange Commission (SEC). Development of tests to distinguish legitimate Multi-Level Marketing (MLM) companies from pyramid schemes disguised as such represents the only segment where significant rapprochement occurred between the US, the European Union (EU) and therefore also Hungary. For contrast and illustration of the other end of the spectrum, the systems that were forced to react to risks corollary to the schemes by enacting sector-specific laws, the most recent regulatory reactions of India, Myanmar, and Sri Lanka had to be resorted to. As the latter two imposed complete bans on all MLMs, it is only the Indian 2019 comprehensive act that attempts to combat the schemes and akin forms of financial fraud relying on a new comprehensive regulatory model. The Philippines is an interesting mixture made of local and transplants that readily proves that the solutions of the most developed US system could successfully be transplanted into a significantly different socio-economic environment.