CC BY
15DOI: 10.29141/2658-5081-2024-25-1-3 EDN: QNTLPD JEL classification: O17, G02
Marina V. Ryzhkova National Research Tomsk State University, National Research
Tomsk Polytechnic University, Tomsk, Russia
Elmira R. Kashapova National Research Tomsk State University, National Research
Tomsk Polytechnic University, Tomsk, Russia
Sludges against Ponzi schemes
Abstract. Pyramid schemes are adapting to the digitalisation era and mimicking various organisations. The organisers of these schemes quite often appeal to such human qualities as greed and the desire to get rich quickly. Thus, it is becoming increasingly relevant to develop new methods for countering pyramid schemes taking into account modern realities and behavioural characteristics of an individual decision-maker. The focus of the research is on selecting sludge tools to fight against digital pyramid schemes. Methodologically, the study relies on the concepts of behavioural economics, in particular, of the nudge theory (nudges vs sludges). The methods include brainstorming, focus groups. The evidence comes from primary qualitative research, in-depth interviews with both non-professional investors and experts in the field of financial market held in 2022. The analysis allowed defining the concept of sludge and present the types of sludge tools. The paper provides an original list of sludge tools as well as a set of practical tools to counter pyramid schemes, which, in particular, consists of legal restrictions, monitoring of Ponzi schemes' activities, financial enlightenment, a legal information system, self-coordination of investors, and an individual approach. The paper concludes that sludge tools differ in terms of the length of impact and the speed of obtaining a result. Short-term sludges generate a fast effect and prevent from investing in pyramid schemes without preliminary preparation of participants; they, for instance, include placing a poster with a warning against Ponzi schemes, ensuring a careful reading of the contract, mandatory familiarisation with the List of entities with detected signs of illegal activities in the financial market created by the Bank of Russia, taking a risk test for assessing the probability of a decreased price or lost asset, ensuring advice of a financial counsellor as an obligatory stage of investment. The findings contribute to the understanding of the need for proactive (preventive) measures' development aimed at countering fraudulent schemes.
Keywords: Ponzi schemes; digital pyramid schemes; countermeasures; sludges; nudges; financial behaviour.
Acknowledgements: The authors would like to especially thank Marat Safiulin, the Managing Director of the Federal Foundation for the Protection of Investors and Shareholders Rights (FedFond) and Aleksandr Otogochev, the economic adviser of the Suppression of Unfair Practices Office of the Non-Bank Lending Department of the Bank of Russia, for consulting during the research, as well as Zhanna Ermushko, Associate Professor of the National Research Tomsk Polytechnic University, for the reviewing and introducing valuable ideas during the writing of the article.
Funding: The research was supported by the Russian Science Foundation (project no. 22-28-00806, https://rscf.ru/project/22-28-00806/).
For citation: Ryzhkova M. V., Kashapova E. R. (2024). Sludges against Ponzi schemes. Journal of New Economy, vol. 25, no. 1, pp. 50-68. DOI: 10.29141/2658-5081-202425-1-3. EDN: QNTLPD.
Article info: received September 26, 2023; received in revised form December 1, 2023; accepted December 25, 2023
Introduction
Pyramid schemes can cause damage to vulnerable population strata and undermine confidence in the state's financial system [Gudkova, Silaeva, 2022; Minakov, 2023]. According to the NAFI Research Center1, only a quarter of Russian citizens correctly identify a pyramid scheme as an organisation that promises guaranteed high income. If such systems are widespread, this type of fraud results in a rising distrust in all other forms of investment and savings. The PromRating2 study shows that, according to 12 % of respondents, poverty / misery remain among the main reasons for participating in Ponzi schemes in Russia. At the same time, 14.1 % of respondents claim that the number-one reason is the desire to get rich quickly, and 10 % of participants "do not mind participating in such schemes if they make a profit to the detriment of other members".
In the experiment on choosing an investment plan (bank, pyramid scheme, stock market, and savings), respondents do not regard Ponzi schemes as a bad investment option, which indicates that it is fundamentally possible for potential investors to recognise the fraudulent practice [Mackenzie, 2005].
Thus, there is an urgent need to develop effective mechanisms for countering pyramid schemes. Despite the measures taken by the regulator to combat Ponzi schemes, the search and "verification of new approaches to countering this
1 NAFI Research Center. Pyramid schemes cause distrust in all forms of investment and savings. https://nafi. ru/analytics/finansovye-piramidy-porozhdayut-nedoverie-ko-vsem-formam-investitsiy-i-sberezheniy/. (In Russ.)
2 PromRating. Research findings: Every third Russian has friends and relatives who have invested in pyramid schemes. https://promrating.ru/issledovaniya/rossiya/issledovanie-kazhdyj-tretij-rossiyanin-imeet-znakomyh-i-rodstvennikov-vlozhivshihsya-v-finansovye-piramidy/. (In Russ.)
destructive phenomenon" remains questionable [Zubareva, 2017, p. 6]. Moreover, the opportunity to research into this issue is limited due to the lack of reliable data, therefore, an experiment can be run to study this phenomenon, which allows recreating a pyramid scheme under controlled conditions. A number of authors have used lab-in-the-field artefactual experiments to investigate how reminders to carefully consider the odds of winning or losing affect subjects' behaviour towards pyramid fraudulent schemes, finding that direct and simple intervention can reduce fraud rates. However, this treatment is effective only for subjects with a post-secondary education or high cognitive ability, which can help inform the targeting of consumer protection interventions as well as the potential content of those interventions [Bosley et al., 2019].
It is worth mentioning that in our study we omit the term "unqualified investor" utilised in the Russian law. We opt for "non-professional investor" instead.
Non-professional investor is one who does not possess proper knowledge, expertise, and skills in processing information and financial decision-making. It is noteworthy that this category tends not to invest heavily and any losses are significant for them, which makes it relevant to identify and protect such players in the financial market.
In literature, establishing barriers to decision-making is referred to as "sludge".
The purpose of the article is to select sludge tools to combat digital pyramid schemes. The objectives of the study are the following:
- to define the concept and search for sources of sludge tools' effectiveness;
- to identify the types of sludges and validate them;
- to summarise the existing tools for countering pyramid schemes and analyse their strengths and weaknesses.
Section one of the study reviews the literature and introduces the types of sludge; section two describes the types of sludge tools that were identified during the research and the results of validation of these tools using the expert assessment method; section three presents the existing tools to counter pyramid scheme fraud.
Conceptual field and research methodology. Sludges and their types
Within the framework of behavioural economics, the nudge theory [Thaler, Sunstein, 2008; Beshears, Kosowsky, 2020] is viewed as a way to help people make better choices independently. However, the same nudge techniques can also be used for negative purposes. Firms may lure customers to maximise profits rather than improve their welfare (as in the case of financier Bernard Madoff, who defrauded thousands of investors) [Thaler, 2018; Neuss, Zielke, 2022].
In recent studies, the concept of sludge is analysed alongside nudge [Rohde, Verbeke, 2017; Shahab, Lades, 2021; Sunstein, 2022; Newall, 2023; Mills, 2023].
The term "sludge" means thick mud and wet soil, and, therefore, it is often used in literature in a negative context. Sludge is similar to anti-nudging, which creates difficulties in decision-making, such as unnecessary paperwork to obtain a service [Sunstein, Gosset, 2020].
However, negative connotations should not outplace the content. The terms "nudge" and "sludge" are used according to changes in the relative barriers in the choice environment, rather than as a reflection of whether an intervention is good or bad based on a subjective definition. To eliminate this contradiction in the understanding of the terms, Mills [2023, pp. 13-14] uses the concepts of "Pareto nudges"1 and "rentseeking nudges". A Pareto nudge implies that all parties involved in a transaction benefit from the decision being made, while a rent-seeking nudge assumes that only the choice architect benefits from the outcome of the nudge.
Hence, "sludge is any aspect of choice architecture that increases the hedonic, social or obscurant frictions associated with a specific outcome relative to other outcomes and in doing so alters people's behaviour in a predictable way without forbidding any options or significantly changing economic frictions" [Mills, 2023, p. 10].
Hedonic costs (barriers) are interpreted as costs reducing individual pleasure / comfort that impede the achievement of outcomes of decisions made, depending on the age of the individual (for example, a graphic warning label on tobacco packages may cause some emotional discomfort). Social barriers arise from changes that interfere with the outcome of specific decisions due to adjustments in behaviour to fit in with others and avoid social stigma [Bernedo, Ferraro, Price, 2014; Mills, 2023]. Obscurant barriers are changes in psychological / cognitive burden "to encourage / discourage specific decision outcomes (i.e., using excessive and complicated language in a document)" [Mills, 2020, p. 7].
Sludge influences behaviour by changing the environment where decisions are made without changing financial incentives. Charging, in essence, is a direct economic impact on the subject, while sludges imply behavioural (indirect), non-fiscal interventions [Mills, 2023].
The behavioural concepts of nudges and sludge are based on cognitive biases that influence behaviour and decision-making. In particular, sludge uses strategies based on cognitive biases that make it difficult to change behaviour patterns [Petticrew et al., 2020; Luo et al., 2022].
The concept of sludge is rather controversial [Newall, 2023]. Sunstein claims that "efforts to ensure that people do not act recklessly or impulsively should be characterised as (helpful) nudges, not as sludge" [Sunstein, 2022, p. 7].
1 The term is borrowed from the economic lexicon, but not used to describe Pareto optimality. Here, Pareto is viewed from the position of the choice architect and decision maker, but not of the third party, which, however, may or may not benefit directly or indirectly from the intervention.
On the other hand, Soman [2020] notes that "sludge impedes our ability to get things done by creating psychological fences. Mind you, not all fences are bad. Sometimes we want to deliberately slow people down from making rash decisions" [Soman, 2020, p. 3].
Some researchers have found that notices highlighting and providing information about financial penalties modestly raise the payment rate among delinquent taxpayers, with larger effects for notices providing greater detail [Cranor et al., 2020].
Mills [2023] offers the principle of nudge / sludge symmetry: if a nudge is reducing the frictions associated with a specified option, sludges are associated with all other options available to the decision maker. For instance, "a default option nudge that automatically enrols employees into a workplace pension scheme reduces the frictions associated with the scheme - a person may face fewer hedonic costs such as anxiety from not saving, fewer obscurant costs as the nudge means they don't have to evaluate all options themselves and fewer social costs as the nudge normalises saving. But for a person who does not want to be in the scheme, they now face increased frictions, from time wasted opting out, to the cognitive burden of having to understand how to opt out, to the social costs of going against the grain" [Mills, 2023, pp. 8-9].
Hertwig and Grune-Yanoff [2017] suggest that default rules aim to exploit people's psychological states rather than strengthen their understanding.
Sludge has a negative connotation, as it creates barriers to decision-making, which in some situations is excessive and unjustified. However, when considering pyramid schemes and other similar fraudulent systems, sludge mechanisms can pose obstacles for non-professional investors so that they do not fall for the tricks.
Thus, intervention can be viewed for good, if all the choice subjects benefit from the decision made, or for bad, if only the one who nudges towards a certain choice benefits, and the decision maker does not.
Mills [2023] proposes three examples of sludges for good:
1) cooling-off periods1 - additional time to make an informed decision so as not to act due to stakeholder pressure [Luo, 2023];
2) are you sure checks - an extra option in the form of a question, which allows one to avoid making rash decisions [Luo, Zhao, 2023];
3) disfluency - the act of making tasks more cognitively difficult; loss of fluency in thinking and decision-making. For example, using hard-to-read fonts forces readers to engage with the text more to comprehend it.
There are also classic types of sludges for bad that are widespread in practice2:
1) requiring significant efforts when dealing with paperwork to obtain a service or a good;
1 For example, in insurance, a cooling-off period is a period of time during which one can terminate the insurance contract with a refund of the full amount of the paid insurance premium or part thereof.
2 What is "Financial Sludge"? Investor Insights. https://www.onedayinjuly.com/what-is-financial-sludge.
2) utilising forms that are exceedingly long;
3) failing to provide an easy way to obtain, submit, and track the transfer paperwork;
4) requiring notarisation, medallion signature guarantees, or a "spousal waiver";
5) misleading clients about what they have been paying in fees (in particular, failing to mention revenue sharing / commissions going on behind the scenes (financial sludges));
6) tacking on various "lines of credit" to brokerage accounts - preventing the seamless transfer of assets without talking to your broker and filling out additional forms first (financial sludges);
7) forcing clients to make decisions as quickly as possible, e.g., by setting out countdown;
8) creating a misleading website design masking privacy settings, imposing erroneous beliefs, withholding essential information, thus pushing customers to make unauthorised payments (for example, free trials followed by recurring subscription fees if not cancelled in a timely manner);
9) spooking clients into thinking there will be taxable and other financial implications if they fail to make quick decisions about paying for the service (financial sludges);
10) imposing exit fees on projects / accounts (financial sludges).
Sludge is part of a larger class of nefarious product and service design methods known as dark patterns1 [Mills et al., 2023]. In the field of finance, dark patterns, among other things, include outright fraud (Ponzi schemes) [Newall, 2019]. As dark patterns are explored, tools need to be developed to recognise them. Investors should be aware of how financial and technological products work and thoroughly investigate the product market.
In our research, we distinguish between short-term and long-term sludges. Sludges of the second type have a direct effect on the decision being made. All the tools listed above influence only one act of selection locally. Long-term sludges require prolonged exposure and training for non-professional investors and result in fundamental changes in choice priorities. In particular, in the field of investment, such an effect can be produced by the successful implementation of programmes to improve financial literacy.
Materials and methods
To find ways to counteract pyramid schemes, a number of research activities were carried out in 2022, during which signals of their attractiveness (nudges) and signals of non-involvement in them (sludges) were identified.
1 Personal Finance. In finance there is sludge everywhere. https://www.morningstar.co.uk/uk/news/228098/in-finance-there-is-sludge-everywhere.aspx.
1. Identifying triggers of pyramid schemes in the process of their evolutionary change - February, 2022. While working on the publication [Ryzhkova, Kashapova, 2022], 13 unrated signals were identified based on evolution-driven environmental shifts that allow fraudsters to attract investors to pyramid schemes.
2. Brainstorming - April 29, 2022, 8 participants. In the course of the brainstorming, the distinctive features of digital pyramid schemes were identified, which formed its definition as a socioeconomic phenomenon, and were also used for the focus group guide. A digital pyramid scheme is a scheme that attracts funds from investors through advanced digital technologies promising them high interest rates from highly profitable activities, the sources of which cannot be verified. Having analysed the participants' statements, we collected a set of sludges (31 rated signals of a digital pyramid scheme were received), some of which were used to develop the design of a laboratory economic experiment and a set of sludges [Ryzhkova, Kashapova, 2023a; 2023b].
3. Focus group and in-depth interview with non-professional investors - from April 28, 2022 to July 8, 2022, 12 participants. Based on the results of the brainstorm-ing, we came up with a number of hypotheses to discuss with the focus group and during a semi-structured interview with non-professional investors. In particular, the following issues were debated:
- the extent to which respondents are engaged in direct investment schemes and how interested they are in the types of pyramid schemes;
- participants' motives;
- how well-weighed their decisions are while being dragged into high-risk investment schemes;
- the mode of using digital investment instruments;
- daily use of applications for making direct investment and trading other instruments through Internet applications;
- subjective attitude towards tools and methods of direct investment in high-risk assets;
- analysis of the structure of information signals used in decision-making, and of the key rules of investment strategies;
- investors' personal qualities hunted for by organisers of pyramid schemes;
- cognitive biases that influence the investment strategies of respondents contributing to their involvement in financial schemes, such as pyramid scheme fraud.
During the analysis of two scripts, 23 signals of involvement in pyramid schemes were identified, as well as two signals of preventing involvement in it.
4. Training of the research team members - July-August, 2022. The authors of the study took part in four free introductory webinars on investing for non-professionals. Using their script, the strategies for attracting non-professional investors to dubious
trainings were identified, which produced 18 rated signals of involvement in pyramid schemes. The results of a systematic analysis of digital influencers' behaviour were presented for debate at a conference [Vernikov et al., 2023].
Based on the identified factors of pyramid schemes involvement, a set of sludges (barriers to participation) was compiled, which was presented to experts for evaluation.
5. Interview with the financial market experts - August-September, 2022, 14 participants. Respondents were selected from among professionals engaged in protection against pyramid schemes and fraud (expert practitioners - 9 respondents). Additionally, the sample included individuals who, due to their academic activities, studied the financial behaviour of Russian citizens (academic experts - 5 respondents). Expert practitioners were selected based on their main activities and job position; academic experts were selected based on publications indexed in the Russian online database elibrary.ru. The survey was carried out using Jamboard software (Google) according to the following structure: methods of influence (nudges) and methods of counteraction (sludges) in a digital pyramid scheme. Thus, 15 rated signals of nudges of pyramid frauds and 13 countermeas-ures were received.
The signal database was processed separately to systematise nudges and sludges. Similar language used to describe the tools was generalised. As a result, 12 authentic (in the parlance of the experts and participants in research activities) descriptions of the tools to counter pyramid schemes were obtained (Table 1, column 2).
Research results
Table 1 presents the authentic and work language as well as possible variants of tools to combat pyramid schemes.
Table 1. Ways for countering pyramid schemes and example tools
No. Authentic language* Work language Example tools (short- and long-term sludges)**
1 Avoiding unrealistically high returns Being cautious if profitability is above the market Placing a warning poster in a prominent place
2 Restraining oneself when feeling a surge to sell or buy something, especially avoiding starting new credit lines, using funds over the budget limit and financial airbag Having an emergency fund not intended for investment activities Banning yourself from spending emergency funds. Getting personal finance training
Table 1 (continued)
No. Authentic language* Work language Example tools (short- and long-term sludges)**
3 Gain investment experience Gain investment experience Imposing qualification requirements for the investor (educational, age, etc.). Establishing limits on amounts to be invested. Performing forced portfolio diversification
4 Setting clear personal financial goals to realise the consequences of losing savings Implementing financial goal-setting Training in setting personal financial goals***
5 Being attentive, delving into what you are doing until the situation is completely clear. Do not understand - do not give money (do not invest) Devoting some time to grasp the situation Forcing oneself to read the contracts; to believe documents, not words. Learning to resist pressure from scammers
6 Immersing into the field of investment, i.e., readiness to spend time on learning, reading news, examining the market Collecting up-to-date data about the object you invest in Performing a mandatory daily monitoring of news about the project itself and relevant topics
7 Formulating a step-by-step plan Planning investment in stages Giving permission to invest only after drawing up a plan
8 Improving your financial erudition - financial awareness Taking conscious financial actions Making sludge is problematic -it is the goal of long-term personal development
9 Taking a mandatory break prior to making a decision. Never make a decision in the financial institution itself or during a phone call Taking a break before investing to think things over Introducing a cool-off period before investing
10 Having a clear understanding of who you give money to and on what grounds Delving into the solvency and the level of trust in the counterparty Initiating a search in the database of licenses of the Central Bank and the database of unscrupulous organisations. Checking registration data, tax and other details, searching in databases of court decisions about the counterparty
Table 1 (concluded)
No. Authentic language* Work language Example tools (short- and long-term sludges)**
11 Getting to know the concept of risk and what types of risk exist; making a realistic risk assessment. Lacking confidence in the effectiveness of investment instruments Estimating risks Learning the basics of risk assessment. Reminding yourself that there are risks
12 Seeking advice of a financial advisor, i.e., willingness to pay for the services of a certified professional Contacting certified professionals Active advertising of professional services. Inability to invest risky money directly, in the absence a financial advisor
Source: Own compilation based on the results of the qualitative analysis in several research activities.
*The style of statements from qualitative primary research was preserved whenever possible.
**Specific options for implementing sludges depend on the environment, in which the investment process takes place.
***Said and done. What is the difference between financial goals and a dream, and how to set them correctly to achieve them? https://finuslugi.ru/navigator/kredity/stat_skazal_sdelal_chem_finansovye_ celi_otlichayutsya_ot_mechty_i_kak_ih_pravilno_stavit_chtoby_dostigat#:~:text=82. (In Russ.)
Next, we will consider using the proposed tools in interaction with the consumer when requiring a quick effect (in particular, we will use them in the design of the economic experiment). Not all tools are suitable for short-term impact (tools in Table 1, excluding 1, 5.1, 6, 10-12): setting financial goals, gaining investment experience and increasing the level of financial literacy are rather effort- and time-consuming for the investor. To test the effectiveness of sludges in the experiment, the following tools can be used:
1) placing a poster warning about pyramid schemes at the location of the experiment (tool 1);
2) giving permission to invest only after a thorough reading of the contract (all pages of the contract are legible, reading time is at least several minutes) (tool 5.1);
3) giving permission to invest after reading news about the project (reading time is at least several minutes) (tool 6);
4) introducing into the experimental design an additional option of checking the organisation in List of entities with detected signs of illegal activities in the financial market by the Bank of Russia1 (tool 10);
1 The Central Bank of the Russian Federation. List of entities with detected signs of illegal activities in the financial market. https://cbr.ru/eng/inside/warning-list/#csv_eng.
5) adding a test to assess the risk of a price decline or loss of an asset (tool 11);
6) imposing a fee for the financial advisor's services and a message that the project is a pyramid scheme (including a subjective assessment of trust in the advisor, which is difficult to control in the experiment, and there is a possibility of error) (tool 12).
Despite their short-term effectiveness, sludges 2 and 3 require from the investor to have legal literacy, be attentive and able to interpret news, which is also impossible in the short term. Sludge 6 brings up a question of trust in financial advisors. Short-term instruments, therefore, include sludges 1, 4, and 5.
The proposed instruments were validated through an expert assessment by Marat Safiulin, the Managing Director of the Federal Foundation for the Protection of Investors and Shareholders Rights (FedFond), and Aleksandr Otogochev, the economic adviser of the Suppression of Unfair Practices Office of the Non-Bank Lending Department of the Bank of Russia.
The research outcome was used in the design of a laboratory economic experiment conducted on September 25, 2023 at the Far Eastern Federal University; the materials are currently being processed.
Tools for countering pyramid schemes
Pyramid schemes have a long history and are resistant to ongoing changes in economic systems [Ryzhkova, Kashapova, 2022].
Table 2 presents the tools to counter pyramid schemes collected during the analysis of practices to combat these fraudulent systems and of the options available in the scientific literature and economic practice of FedFond and the Bank of Russia.
Table 2. Tools in the fight against pyramid schemes
No. Tools Summary
1 Legal restrictions* Liability for organising pyramid schemes: Art. 172.2 of the Criminal Code of the RF "Organisation of activities to attract funds and (or) other property" (No. 78-FZ of March 30, 2016); Art. 159 of the Criminal Code of the RF "Fraud". Administrative liability is provided for advertising pyramid schemes: Art. 14.62 of the Code of Administrative Offenses of the RF "Activities to attract funds and (or) other property." Pre-trial blocking of fraudulent websites has been additionally introduced (No. 250-FZ of July 1, 2021)
2 Financial monitoring of pyramid schemes** The Central Bank of the RF operates in all regions of the Russian Federation in cooperation with authorised institutions: monitoring the Internet using a modern automated system, including monitoring of social networks and instant messengers; offline monitoring of such projects; receiving data from "reports from citizens, market participants, representatives of various government bodies and public organisations, and the media"***
Table 2 (concluded)
No. Tools Summary
3 Financial education The Federal Fund for the Protection of the Rights of Investors and Shareholders - The StopPiramida Project (https://stoppiramida. ru/). The Ministry of Finance of the RF and the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) - the project "Promoting financial literacy of the population and the development of financial education in the Russian Federation" (https://minfin.gov.ru/ru/fingram/). The Association for the Development of Financial Literacy (ARFG) -Development of the financial education volunteer movement. Supporting financial literacy initiatives (https://fincubator.ru/)
4 Information and legal system [Zubareva, 2017] "Quick search and identification of any company regarding the legitimacy or illegality of its activities" [Zubareva, 2017, p. 116]. The system involves colour indication used to warn the person making the choice that the company is suspicious
5 Self-coordination of investors Forums for investors and victims of pyramid schemes to prevent participation in such fraudulent systems in the future. Pickets of victims of pyramids schemes facilitating the disclosure of information about this kind of scam and protection of citizens
6 Individual approach [Vinokurova, Gordyachkova, 2019] In international practice, organisations in the field of financial supervision use the following methods: making awareness phone calls; disseminating information through mobile apps; cooperating with interested parties; using social networks; spreading information through podcasts
*Federal law of March 30, 2016 no. 78-FZ "On amendments to the Criminal Code of the Russian Federation and Art. 151 of the Criminal Procedure Code of the Russian Federation". ConsultantPlus. https:// www.consultant.ru/law/hotdocs/46042.html. (In Russ.)
**Types of illegal activities in the financial market. Counteracting unscrupulous practices. The Central Bank of Russia. https://www.cbr.ru/inside/k_illegals/. (In Russ.)
***How does the Bank of Russia identify illegal companies? Counteracting unscrupulous practices. The Central Bank of Russia. https://www.cbr.ru/inside/k_illegals/. (In Russ.)
Look at the tools from Table 2 in more detail.
1. There are administrative and criminal penalties for organising and advertising pyramid schemes. In Art. 172.2 of the Criminal Code of the Russian Federation "Organisation of activities to attract funds and (or) other property" (the concept of a pyramid scheme is not used directly) sets out the types of punishments for organising a pyramid scheme: fines, penal labour or imprisonment. Administrative fines are imposed for advertising pyramid schemes. The introduction of a law
prohibiting such schemes creates formal norms and rules to streamline relations in society and protect the rights of citizens by enforcing sanctions against violators. However, it is rather difficult to collect evidence under Article 172.2 of the Criminal Code of the RF: the main problem is to confirm the organiser's malicious intent, which requires a forensic assessment, data collection, and statements from victims to be available.
2. The Bank of Russia detects illegal actors in the financial market by monitoring social networks and the Internet using specialised programmes and by supervising such projects. The Department for Combating Unfair Practices in the Financial Market compiles a list of companies with signs of illegal activity. Information about them can be provided by citizens, legal market participants, government and public organisations, and representatives of the media. This work is carried out throughout all the constituent entities of the Russian Federation with representatives of various government agencies. The Bank of Russia transfers the information about companies with signs of pyramid schemes to law enforcement agencies, which perform further verification. Inspections of companies for signs of pyramid scheme fraud can also be initiated by organisations from Table 3.
Table 3. Federal services' functions to protect consumers of financial services
Organisation Key pyramid fraud prevention functions
The Ministry of Finance of the RF Improving the regulatory framework in terms of increasing the level of legal protection of investors and consumers of financial services and fulfilling the obligations of the RF regarding the savings of Russian citizens, suppressing the activities of companies showing signs of pyramid scheme fraud
The Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) State supervision of consumer rights protection and increasing the guaranteed level of consumer rights protection
The Federal Antimonopoly Service (FAS) Processing complaints from citizens regarding violation of their rights in connection with false advertising in the field of financial services
The Federal Financial Monitoring Service (Rosfinmonitoring) Performing anti-money laundering functions and helping to suppress the activities of pyramid schemes, the organisers of which transfer stolen money abroad
Source: Own compilation based on data from the official websites of the Ministry of Finance of the RF. https://minfin.gov.ru/ru/; Rospotrebnadzor. https://www.rospotrebnadzor.ru/; the FAS. https://fas. gov.ru/; Rosfinmonitoring. https://www.fedsfm.ru/.
The major weakness of the countermeasures is that Ponzi schemes adapt to the changing environment (technological, economic conditions). Monitoring allows one to identify pyramid schemes, but not prevent them.
3. Financial education aims to improve overall literacy levels. Various organisations provide a variety of financial literacy programs. FedFond implements the Stop-Piramida project, in which it reveals a number of real-life pyramid schemes identified so far. The Fund, among other things, pays compensation to victims of pyramid schemes on the premise that all necessary supporting documents are provided, as well as offers legal assistance and promotes financial literacy.
The Ministry of Finance and Rospotrebnadzor are implementing a joint project "Promoting financial literacy of the population and the development of financial education in the Russian Federation". Due to financial literacy programmes, it is possible not only reduce the risk of citizens participating in fraudulent schemes (such as Ponzis), but also increase it by boosting participants' self-confidence, thereby encouraging them to take part in fraudulent investing scams.
Financial literacy programs are available to different groups of the population and include: advertising in the media; distribution of brochures; awareness-raising events for the general public; launching information and educational resources (websites) to foster the financial culture among citizens; etc.
The Association for the Development of Financial Literacy (ARFG) defines the following goals: developing the financial education volunteer movement; supporting financial literacy initiatives; implementing and scaling of successful projects.
Within this framework, researchers propose using visual methods of informing the population in places full of crowds or where financial institutions are located (for example, video lesson displays) [Maltseva et al., 2021].
The flip side of financial education is an increase in self-confidence in making high-risk investment (the "guards" are removed), and the fact that financial literacy courses can be conducted by scammers and aim to attract participants to invest in pyramid schemes (investment bloggers).
4. Zubareva [2017, p. 116] proposes to introduce "an information and legal system to carry out rapid search and identification of any company regarding the legitimacy or illegality of its activities". The system suggests using colour indication to warn the individual who makes a choice about a suspicious company. Companies are checked according to the criteria for whether or not they exhibit signs of a pyramid scheme. Such a system is advisory in nature, since there are no unambiguous criteria for a company to be classified as a pyramid scheme, and there are risks of unfounded accusations of unfair activities. However, the information from the system can allow making smarter decisions.
5. The extent to which activities to counter Ponzi schemes are effective depends largely on the person himself who makes the decision whether to invest money in
dubious projects or not. One of the possible tools for combating pyramid scheme fraud is self-coordination of investors through forums. Currently, there are no forums in Russia to discuss the schemes of financial fraudsters. A number of specialised websites, such as InvestMani.net (https://investmani.net/forum/25-ostorozh-no-moshenniki) and a hype discussion resource Money Maker Group (http:// MMGP.ru) have been shut down (access to the information resource is limited on the basis of the Federal Law of July 27, 2006 No. 149-FZ "On information, information technologies and information protection"). Such actions may be due to the fact that not only victims but also organisers of pyramid schemes can visit such forums and find their target audience there, so the information cannot be interpreted unambiguously.
6. In their study, Vinokurova and Gordyachkova [2019] review practices implemented in various countries to counter pyramid schemes, in particular, regarding the method of providing information about possible fraudulent conduct. For instance, "in Germany, the Federal Financial Supervisory Authority informs the public by phone, the Securities Commission Malaysia uses a phone app, the Netherlands Authority for the Financial Markets (AFM) organises stakeholder cooperation, the US Financial Services Industry Regulatory Authority (FINRA) disseminates information via podcasts" [Ibid., pp. 3-4]. These approaches are also of advisory nature and aim to warn and encourage consumers to make more informed decisions.
Meanwhile, despite the growing number of methods for combating pyramid schemes, the organisers of such schemes also tend to improve their techniques, including the ones for recruiting new investors, through advanced technologies that allow them to bypass restrictions. It is necessary, therefore, to develop preventive behavioural measures to counter such fraudulent schemes.
Conclusion
The tools presented in the article to counter pyramid schemes cover various methods for dealing with both the schemes themselves and the decision maker in order to eliminate the possibility of participating in such fraudulent systems of making money. Pyramid schemes and advertising them are restricted by law, and in some countries, participation in them is also prohibited. Monitoring their activities makes it possible to identify cases of wrongdoings on the part of financial market participants and new types of schemes with signs of the fraudulent investing scam. There are lots of efforts devoted to increasing financial literacy.
During the study of the practical tools to counter pyramid schemes, we have noted the strengths and weaknesses of these tools in order to perform comprehensive analysis and develop new approaches. For example, the concept of "pyramid
scheme" is not defined by law, and the applied Art. 172.2 of the Criminal Code of the RF "Organisation of activities to attract funds and (or) other property" assumes less liability compared to Art. 159 of the Criminal Code of the RF "Fraud". In addition, there is no liability for participating in Ponzis, but only for advertising them. However, according to the results of public opinion polls, people are willing to participate in pyramid schemes for generating income for themselves even to the detriment of other participants; accordingly, they must also bear responsibility.
Sludges are designed to establish barriers in a person's choice environment to make more informed investment decisions. In the paper, we have attempted to delve into the substance of sludges and analyse their types. We have also compiled a list of sludge tools and assessed the possibility of applying them in an economic experiment to test their effectiveness in combating pyramid schemes.
It is worth noting that sludge tools differ in the duration of exposure and, thus, the result of this influence. To implement long-term sludges, special programmes are to be instituted, the effectiveness of which is quite difficult to evaluate. The short-term exposure to sludge tools allows producing a quick effect, which can be of use when developing mechanisms to counter pyramid schemes. Organisers of such fraudulent systems avoid introducing such sludges for the investors they recruit. For instance, they mislead them into thinking that their organisation is legal, declare that no risks of losing money are involved, thereby dragging them into the fraud scheme as quickly as possible while persuading them not to read contracts and other documents.
Currently, there is a delay in updating the existing list of companies exhibiting signs of pyramid schemes. It is necessary to reduce the time and eliminate the barriers to putting pyramid schemes on this list, and to apply behavioural nudges to facilitate the use of the list.
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Information about the authors
Marina V. Ryzhkova, Dr. Sc. (Econ.), Associate Prof., Head of Laboratory of Psychological and Financial Security of a Person in the Digital World. National Research Tomsk State University, Tomsk, Russia; Prof. of Business School. National Research Tomsk Polytechnic University, Tomsk, Russia. E-mail: marybox@inbox.ru
Elmira R. Kashapova, Jr. Researcher of Laboratory of Psychological and Financial Security of a Person in the Digital World. National Research Tomsk State University, Tomsk, Russia; Sr. Lecturer of Business School. National Research Tomsk Polytechnic University, Tomsk, Russia. E-mail: elmira@tpu.ru
© Ryzhkova M. V., Kashapova E. R., 2024
