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Mr Li left the firm and convinced his sister to do so as well. But most of his colleagues believed the company, not him. They stayed with it right up until it was closed down for breaking laws on fraud. Determined that others should not suffer as he had, Mr Li told his family that he was going to become an itinerant labourer. Instead, his travels took him in search of other victims of pyramid schemes. Most of those he found believed, like his former colleagues, that the companies which had taken their savings had their best interests at heart. Beginning with a couple of phones and volunteers, he founded and built up an NGO, the China Anti-Pyramid Promotional Association, into the main private institution taking on this warped product of China’s growth.
Many countries suffer from Ponzi schemes, which typically sell financial products offering extravagant rewards. They pay old investors out of new deposits, which means their liabilities exceed their assets; when recruitment falters, the schemes collapse. China is no exception. In 2016 it closed down Ezubao, a multi-billion-dollar scam that had drawn in more than 900,000 investors. By number of victims, it was the world’s largest such fraud.
Chinese pyramid schemes commonly practice “multi-level marketing” (MLM), a system whereby a salesperson earns money not just by selling a company’s goods but also from commissions on sales made by others, whom the first salesperson has recruited. People often earn more by recruiting others than from their own sales. Since 1998 China has banned the use of such methods, although it does allow some, mostly foreign, MLM companies to do business in China as “direct sellers”. This involves recruiting people to sell products at work or at home.
Family connections
The distinguishing feature of the Chinese scams is the way they combine pyramid-type operations with cult-like brainwashing. Typically, says Mr Li, a friend or family member will persuade a new recruit to go to an unfamiliar, often isolated place for a week of “introductions and training”. Cao Yuejie, for example, was enticed into joining such a scheme by her husband while on honeymoon. In many cases the recruiter (who is often duped) will spend the first three days trying to persuade the victim that the firm is a benevolent institution (not like those awful Ponzis!) and that working for it would be for the good of the family. For the next four days, the company’s representatives will appeal to the recruit’s ambition and greed, as well as his loyalty to his family.
