Once, they were called social clubs that supposedly improved the lives of minorities or churchgoers. Now they have morphed into Internet-advertised ploys to make easy money in tough economic times.
What hasn’t changed: Cash-gifting clubs are pyramid schemes that benefit a select few on the top of the ladder but scam others enlisted to join their ranks.
The concept is simple. New members, traditionally recruited from members of a church, civic group or other organization, are invited to provide cash gifts, often thousands of dollars. These new members are promised that their contribution will be pooled with others, and as more new members join, their initial investment will be repaid in spades—for example, with an 800 percent return.
“But it never works out that way,” says Robert FitzPatrick, who operates the website Pyramid Scheme Alert and wrote the bookFalse Profits, inspired in part by this scam. “It is mathematically impossible to continue to recruit enough new members. Only about 8 percent of people—those orchestrating this scam and maybe a few others—will ever make money. The other members lose everything.”
These schemes arose in the 1980s with names such as La Familia, which recruited Hispanics, and Corporate Ladder, aimed at middle-class African Americans. Now, there’s a resurgence because of the economic downturn and the ease of posting videos on YouTube, Yahoo and Google.
“It’s crazy how widespread these videos have become,” says Alison Southwick of the Better Business Bureau, which recently issued an alert about cash-gifting schemes that called their operators “little Bernie Madoffs.” In April, an independent audit found nearly 23,000 individual cash-gifting videos on YouTube alone that had generated some 60 million views.
These videos often show promoters opening UPS or FedEx envelopes stuffed with cash, with the promise that you could take part in this bounty by joining their circle with your own investment. They usually claim the operation is legal, alluding to IRS rules regarding gifting. (The IRS does allow cash or property gifts to be nontaxable, but to qualify, these gifts must be given with absolutely no expectation of receiving anything in return.)
Beyond the online world, cash-gifting scams continue in many localities. “In some cases, these schemes are touted as fundraisers by members of a church or civic group,” notes Southwick. “In others, they are pitched as just a way for you to make money.”
Adds FitzPatrick: “No matter the pitch, cash gifting is nothing more than robbing Peter to pay Paul. But now, it has become more widespread because people enlisted as investors are desperate; they don’t have opportunities to make money in conventional ways. And the authorities have been lax in prosecuting the ringleaders.”
If you’ve been approached to join a cash-gifting circle, these red flags suggest you’ve been targeted for a scam:
- You are asked to make an “investment” that will be returned with a profit as others are recruited.
- You are asked to recruit your friends and family members into the group.
- Those you recruit are also required to make an investment that will be used to pay you and others higher on the pyramid.
Sid Kirchheimer is the author of Scam-Proof Your Life(AARP Books/Sterling).