Sold: a pyramid of greed and folly

For the sharks and schemers who inhabit the world of pyramid-selling, Albania was the softest touch of all.

The 40 years of darkness under the Stalinist leader Enver Hoxha gave the Albanian people little opportunity for learning the subtleties and potential pitfalls of personal finance.

The election of the country's first non-Communist leader less than five years ago has failed to produce the anticipated influx of wealth for the citizens of Europe's poorest nation, and average wages remain at a miserable pounds 45 a month.

With the lifting of the Stalinist curtain, Albanians have been exposed to televised sights of material wealth, but given no explanation as to how it is attained. So when the pyramid-seller arrived, with promises of untold riches, he was telling a desperate people what they wanted to hear: the secret formula for earning easy money. It was a message that has also been enthusiastically received in Britain and most other parts of the world. For, if the pitch is good, pyramid-selling can be a persuasive proposition.

Subscribers are asked to pay an entry fee - pounds 3,000 is typical in the UK - and are promised unrivalled rates of return, with the money being paid from the subscriptions of new people recruited to the venture. The rules are fairly straightforward: each new member is typically required to recruit a further six people. But for the first member to get a good return from the scheme they will need the three levels of the pyramid beneath them to be filled. This requires the recruitment of 216 people (6 x 6 x 6).

While this may not be beyond an enthusiastic pyramid salesman, the mathematics are more daunting for those who are subsequently recruited to the scheme. For the six people on the second rung to fill the necessary three levels beneath them, each must find a further 216 people - a total of 1,296. When those 1,296 come to recruit, they will require 279,936 people. For these to get their reward, 60 million participants are required.

The problem with pyramid-selling is that the number of potential recruits is limited, meaning that those on the bottom levels have no chance of making money. Inevitably, the scheme collapses under its own weight long before the 60 million are recruited, and while those at the top of the pyramid will no doubt have made considerable gains, the vast majority of subscribers lose their money. When a scheme collapses, those who set it up, who may well have made large profits, are tempted simply to start all over again.

The activities of pyramid-salesmen in Britain have alarmed the Department of Trade and Industry, which has closed some of the larger schemes on the grounds that they are against the public interest. Alchemy UK, one of the most controversial, was wound up after taking pounds 3m of investors' money. Participants were promised a return of pounds 31,775 each after making 24 monthly payments of pounds 75.

Another company, FPW, offered the Midas plan - computer-generated - and claimed to turn pounds 140 into pounds 600 as many times as investors liked. Some 20,000 people bought into the dream, eventually losing a total of pounds 6m.

Last year, Lord Woolf, Master of the Rolls, described pyramid-selling schemes as "pernicious and evil".

He said that such operations break the law when "they involve those who set up, promote, purvey and administer the scheme, in criminal offences".

Lord Woolf was speaking in the Court of Appeal as he outlawed Titan Business Club, a 10,000-strong scheme which stirred its members to ever greater recruitment activity at Revivalist-style rallies.

Earlier this month, a Private Member's Bill banning money circulation pyramid schemes finally became law. Previous legislation, passed in the Seventies, had proved ineffective against operations which had no product to sell. Instead, regulators used provisions in the Companies Act to ask the High Court to shut down pyramids, a slow process which has been used to close 18 operations in the past three years.

The Government believes that the new legislation will finally end the practice in this country. John Taylor, the consumer affairs minister, said that many pyramid operations were "no more than swindles". For their part, pyramid sellers claim they are misunderstood. One of Titan Business Club's directors complained that the company had been the victim of "extreme prejudice" by the authorities.

The degree of suspicion is not dissimilar to that once levelled at time- share holiday schemes.

Like many time-share operations, pyramid sales companies often draw potential new members to hear their carefully prepared promotional patter in a highly charged atmosphere with ranks of other would-be members. And like time- share, direct selling - as pyramid-selling is also known - has its respectable side, with reputable companies serving satisfied customers. Most of these involve sales of products such as jewellery or cosmetics, and are not limited to the simple transfer of money. Richard Berry, of the Direct Selling Association, which represents legitimate multi-level marketing companies, has publicly welcomed the clamp-down on "get-rich-quick" schemes by the British authorities.

Pyramid-selling is not new. In the Twenties, Charles Ponzi gave America the name "Ponzi Scheme" after persuading gullible Americans to part with millions of dollars. And if a scam was tried and tested in America and Britain, then it was sure to succeed in the former Communist countries, where investors were even more vulnerable to being swindled.

In Russia, 25,000 angry investors recently converged on the offices of one pyramid-seller, and in Romania the Caritas scheme collapsed having attracted an estimated $1bn (pounds 630m) from up to 4 million Romanians. In each case, greed was the motivating factor, just as it will be for those who buy into future pyramid-selling schemes. People will always want to believe in the dream of fast and easy money.

Those with the most unshakeable belief in the dream are often those in the most desperate circumstances, and this weekend in Albania, many investors still refused to believe that they had been duped. They rioted and burned, their anger ostensibly aimed at a government whom they accuse of malpractice over the affair; but in reality they have no one to blame but themselves.