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CONSUMER ALERT
MIKE COX
ATTORNEY GENERAL
The Attorney General provides Consumer Alerts to inform the public of unfair,
misleading, or deceptive business practices, and to provide information and guidance on
other issues of concern.
CASH GIFTING SCHEMES
Local police departments and the Attorney General's Office have noticed a recent surge
in inquiries regarding cash gifting schemes. These schemes are presented in an endless
variety of ways – including schemes targeting NASCAR fans, or "socially conscious
women." No matter how these schemes are presented, the bottom line is the same for all – cash
gifting schemes are illegal in Michigan. This consumer alert will provide Michigan
consumers with information on how to spot illegal cash gifting scams, and what to do if
they believe one of these scams is operating in Michigan. PYRAMID SCHEMES ARE ILLEGAL IN MICHIGAN Section 28 of the Michigan Franchise Investment Law (MCL 445.1501 et seq.) makes
pyramids illegal in Michigan. The statute reads in part: [a] person may not offer or sell any form of participation in a pyramid or
chain promotion. A pyramid or chain promotion is any plan or scheme or
device by which (a) a participant gives a valuable consideration for the
opportunity to receive compensation or things of value in return for
inducing other persons to become participants in the program or (b) a
participant is to receive compensation when a person introduced by the
participant introduces one or more additional persons into participation in
the plan, each of whom receives the same or similar right, privilege,
license, chance, or opportunity.
Essentially, a pyramid is a scheme in which participants receive compensation for
recruiting other participants. Michigan Attorney General Consumer Alerts are available at www.michigan.gov/ag
Toll free 1-877-765-8388
Violations of Section 28 of the Michigan Franchise Investment Law are a felony,
punishable by a fine of up to $10,000 or seven years in prison. MULTI-LEVEL MARKETING PLANS VS. PYRAMID SCHEMES – WHAT IS
THE DIFFERENCE? Multi-level marketing plans typically involve a parent company that sells products to
consumers through independent sales people. Generally, independent sales people do not
receive a salary - rather, they are compensated based on the amount of product that they
sell. Multi-level marketing plans are generally legal in Michigan. The key difference between a legal multi-level marketing plan and an illegal pyramid
scheme is that a multi-level marketing plan bases compensation almost entirely on the
amount of product sold, whereas an illegal pyramid scheme is based on the amount of
people recruited. CASH GIFTING – JUST ANOTHER TYPE OF PYRAMID Cash gifting schemes are the quintessential example of a pyramid scheme. Instead of
selling products, cash gifting schemes forego the sale of products and just give people
cash, but the premise is the same – like other pyramids, cash gifting schemes are based on
the amount of people recruited. Generally, these gifting "circles," "clubs," or "groups" encourage participants to pay a
substantial entry fee (which can range anywhere from $500 to $5,000 or more). This
entry fee will guarantee the participants a place on a chart of members. The participants
will move on the chart every time they recruit more people into the "circle" or "club."
And once the participant moves enough on the chart, they are "guaranteed" a large
payout. Gifting schemes operate under a variety of names, as con artists that start these
schemes are endlessly creative in their quest to con a lot of people out of a lot of money.
But most gifting schemes follow the general pattern outlined in this alert. Pyramid schemes, including cash gifting schemes, can become popular very quickly,
because early participants often receive their payout as promised. Those participants that
receive their money then relay their success stories to prospective participants, and the
cycle continues. The problem is that eventually the pool of new participants runs out,
and the pyramid collapses, and very few participants actually receive any money. Once a
pyramid collapses, everyone, except the initial con artist that started the scam, will have
limited prospect of ever getting their money back. Michigan Attorney General Consumer Alerts are available at www.michigan.gov/ag
Toll free 1-877-765-8388
I'VE BEEN ASKED TO JOIN A GIFTING SCHEME – WHAT SHOULD I DO? In Michigan, prosecutions of cash gifting schemes are generally handled by local
prosecutors. Michigan consumers who have been asked to join a gifting scheme, or who
are aware of a pyramid or gifting scheme operating in their area, should contact their
local police department, county sheriff's office, or local prosecutor. If you are currently involved in a gifting scheme, you should consider contacting a
private attorney. For help in finding a private attorney, please visit the Michigan State
Bar's website, at http://www.michbar.org, for information on finding a Lawyer Referral
Service in your area. Along with violations of the Michigan Franchise Investment Law,
charges under other state statutes are also possible. Finally, if you are currently involved in a gifting scheme, or have participated in a gifting
scheme in the past, keep in mind that you are also required to report any earnings you
received to the Internal Revenue Service. Despite any promises made to you by those
operating cash gifting schemes, earnings received from a gifting pyramid are taxable.
Thus, in addition to consulting a private attorney, you should also consider speaking to a
professional tax advisor about your situation. Michigan Attorney General Consumer Alerts are available at www.michigan.gov/ag
Toll free 1-877-765-8388
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