MMM markets itself as a social financial network whereby members support each other financially to help each other get out of debt with financial institutions. Its website suggests that members can earn returns of up to 30% per month, and many members have reported great success so far.

MMM RSA Community issued a press release to announce that they were bringing a High Court application to refute allegations that MMM is a pyramid scheme. The release states: “In MMM all the members are informed that they are donating spare money but not investing money. Further and most importantly, there are no promises and/or guarantees that they will receive any financial help at the moment they sign up.”

What it does not state is that members who join are expecting to receive “donations” in return for their initial donation within 30 days, and they are expecting up to 130% of what they have donated.

MMM member Bongani (surname withheld at his request), who invested a year ago, stated in a tweet that he had made all his capital back and is now earning “interest”.

In a subsequent email to me as a follow up, he said he received 80 deposits into his bank account, one as recently as last week. He explained that as a new participant, you deposit cash via an ATM into a person’s bank account. This person remains anonymous to you and is selected by the MMM online system.

Once you have made your donation, you receive Mavros, a virtual currency that is reflected on the online system. If you deposit R1 000, within 30 days your online statement reflects 1 300 Mavros which is equal to R1 300. From here you can request up to 1 300 Mavros in donations/support from other members. The rand equivalent will be deposited into your account by someone assigned to you via the online system.

You can earn additional Mavros through activities such as testimonials and signing up new members and receiving a small percentage of their contribution, although Bongani insists you do not have to sign up new members ‒ you do so only if you want to increase your profits.

Yet the risks are enormous and very apparent. Firstly, as there is no central account where the money is held and individuals are effectively anonymous, the online system is crucial in maintaining the money flow between individuals. Secondly the survival of the structure, as MMM acknowledges, relies entirely on new inflows – these inflows need to grow exponentially in order to maintain the level of returns.

Who controls the online system?

A great deal of faith has been placed in the online system which sits on a server in Russia and is effectively managed by the architect of MMM – Sergey Mavrodi, a Russian national who was arrested for fraud and tax evasion after the Russian equivalent of MMM collapsed in 1994, losing an estimated $1bn. In an interview with the Financial Times, Mavrodi confirmed that in 2003 he was charged with fraud for which he received 4½ years’ imprisonment.

According to media publication Wired.com Interpol Moscow dispatches believed that Sergey Mavrodi was the mastermind behind StockGeneration, a massive internet pyramid scheme that collapsed in 2003.

In 2011 Mavrodi went on to create MMM-2011, another pyramid scheme in Russia. In an interview with the Moscow Times in January 2012, Mavrodi said he had 15 million investors. In June 2012 Mavrodi shut down the operations and in 2015 launched MMM Global branches in India, China and South Africa as well as Bitcoin-based investment scheme the Republic of Bitcoin.

With the apparent failure of his latest operation, Republic of Bitcoin, the following was published on its Facebook page: “We regret to inform you that we have to close down the Republic of Bitcoin. It was an experiment and unfortunately it failed” and asked members for their understanding.

Liabilities of Republic of Bitcoin members to be added to RSA

The announcement claimed that the Mavros owed to investors in Republic of Bitcoin will be transferred to the branches of MMM from where the participants come from, including South Africa, and 10% of the input in the system will go to repaying these members.

If this indeed happens, it means that these new members join the number of existing members asking for donations (redeeming their Mavros) and therefore even more new members are required to feed the system, putting pressure on the pyramid structure. It is certainly naive of members to suggest that the South African branch is isolated from Mavrodi’s other operations.

In an interview on KayaFM on Thursday, head of charity co-ordination at MMM Edward Phiri acknowledged that the MMM system relies on new inflows to sustain its return. The MMM Facebook page update reminds members that “in order to increase the amount of capital without resorting to loans, you just need to increase the rate of its turnover. You must learn to sell. It’s better than paying interests (sic)”.

Bongani says he has never viewed this as a long-term investment and that “the risks are dependent on your faith in whatever it is you are investing or the person investing for you.”

Why MMM is a pyramid scheme

Investors in pyramid schemes derive their income or returns primarily from the recruitment of new members. In other words the returns are not based on investments or the selling of any product but on money paid by new people joining. Basically, new investors are the return.

MMM RSA Community has filed an application with the High Court to declare that it is not a pyramid scheme as defined by the Consumer Protection Act. The Act states that a pyramid (multiplication scheme) “exists when a person offers, promises or guarantees to any consumer, investor or participant an effective annual interest rate… that is at least 20 per cent above the REPO rate.”  A banner across the MMM website rsa-mmm.co says “How to participate and earn 30% per month”. Considering that the monthly repo rate would be 0.6% then this is offering 29% more interest just in one month.

The Act also states that “An arrangement, agreement, practice or scheme is a pyramid scheme if participants in the scheme receive compensation derived primarily from their respective recruitment of other persons as participants, rather than from the sale of any goods or services”. This is probably the point that MMM will argue in court as they claim that members are not required to recruit new members. The question to ask then is where do the new donations come from if not new members? You do also receive additional returns for bringing in new members.

The Act also says a pyramid scheme is where “existing participants canvass and recruit new participants; or each successive newly recruited participant upon joining is required to pay certain consideration, which is distributed to one, some or all of the previously existing participants, irrespective of whether the new participant receives any goods or services in exchange for that consideration.” A joining MMM member has to transfer money into an existing MMM member’s account in order to join.

All pyramid schemes ultimately collapse once they reach a certain saturation point. This saturation point can be reached more quickly if people become concerned about the viability of the scheme and it becomes more difficult to recruit new members.

People at the top of a pyramid structure ‒ early adopters ‒ do make a lot of money, but they have not made the money out of thin air; they have made it from new investors. It is those new investors who carry all the risk of possibly losing all their capital that has already been paid to those higher up the pyramid. That is the big risk of pyramid investments – where in its lifespan are you investing? To date none of Mavrodi’s schemes has survived for more than a year, around the current lifespan of the South African operation.