The term "Money Circulation Scheme" is an unsustainable operation that depends on future investments/purchases made by participants to pay off the commitments rather than generating and/or using the profits if at all earned by the company.
These schemes rely on new investments to come in under the garb of product purchases or plain vanilla investments or financial products not approved by the respective regulators by exploiting loopholes in the existing law.
They commit to offer fixed or high returns on purchase/investments, thus luring gullible, desperate people with a prospect of easy money.
Thus, all these operations promise to pay more than the attainable amount and are hinging on the principle of "Robbing Peter to Pay Paul," i.e., They take money from one person to give to another.
Two types of money circulation schemes
- With products (real value or token): In these types of Schemes, the promoters commit to paying a fixed amount (mostly in percentage) at set intervals, which may vary depending on the amount of the purchase; generally, the bigger the purchase, the higher the commitment of the returns.
- Without products: In these types of Schemes, there is no product given/offered. Instead, the promoters commit to paying a fixed sum (usually expressed in percentage) at set intervals, which may vary depending on the investment; generally, the more significant the investment, the higher the returns commitment.
Prominent cases from India
1. KURIACHAN CHACKO & ORS. v. STATE OF KERALA, JT 2008 (7) SC 614
The appellants are partners of M/s LIS, Ernakulam, a partnership firm engaged in the sale of lotteries and magazines after collecting advance money. They floated a scheme known as the "LIS Deepasthambham Scheme". The Scheme appeared to be very attractive to several people, and they started investing money; the membership collection during a short period reached almost Rs. 500 crores. The Supreme Court held that:
"The promoters of the Scheme very well knew that it is certain that the Scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that `Paul can be robbed to pay Peter', but ultimately, when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money."
Para 32: "In the instant case, both the essentials of Section 2(c) are present. The Scheme provides for (i) making of quick or easy money, and (ii) it is dependent upon an event or contingency relative or applicable to the enrolment of members into the Scheme."
https://indiankanoon.org/doc/450905/
2. STATE OF WEST BENGAL v. SWAPAN KUMAR, AIR 1982 SC 949
Sanchita Investment, a registered partnership firm, started its business in finance and investment with a share capital of Rs 7000/- An FIR was registered against the firm alleging that the firm had been offering 48 per cent interest which was later reduced to 36 per cent. The firm's partners moved Calcutta High court for quashing the FIR, and after the FIR was quashed, the State of West Bengal filed an appeal by Special Leave in the Supreme Court. The apex court interpreted section 2(c) of the act and made an in-depth analysis.
https://www.legitquest.com/case/state-of-west-bengal-ors-v-swapan-kumar-guha-ors/2C18
3. M/S APPLE FMCG MARKETING PVT. LTD. V. UNION OF INDIA
In the present case, the petitioner (M/s Apple FMCG Marketing Private Limited was registered under the Companies Act, 1956); it marketed various products through network marketing. Accordingly, the company prayed for a writ of declaration that selling products through the Network Marketing System is legal and not in contravention of the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 or any other law.
https://indiankanoon.org/doc/642280/
4. Ram Sumiran Pal vs State
M/S SPEAK ASIA ONLINE PVT. LTD. was established in Singapore in the name and style of M/S. HAREN TECHNOLOGIES PVT. LTD in 2006. In the year 2010, the company was renamed M/S SPEAK ASIA ONLINE PVT. LTD., which was incorporated with the ACRA (Accounting and Registration Authorities) of Singapore. The company was in the business of conducting surveys through its web portal www.speakasiaonline.com.The company recruited new panellists (who were to carry out the survey) using marketing tools of various modes like print and electronic media, seminars, etc. Manoj Sharma, CEO of, India and Tarak Bajpai, COO, India, was responsible for the company's marketing campaign.
Speak Asia had floated two different types of subscription plans. The first plan was of "Standard" panellist plan. In this plan, members had to enrol themselves as "Standard" panellists by paying a one-time fee of approximately INR 5500. The panellist got a subscription of 26 weekly issues of its Online Surveys Today E-bulletin in lieu of this fee. After the training period, panellists were entitled to complete two surveys each week for six months. In return, the panellist was to get INR 450 for each week for the tenure of six months. This sounded good to members because it seemed that by carrying out the survey, the initial investment of 'one-time fee' (of Rs 5500) could more than double within six months50 (Rs 11,700 = 26 weeks x Rs 450/week).
The Enforcement Directorate received the green signal from the PMLA (Prevention of Money Laundering Act), Mumbai court in the year 2019 to seize properties worth INR 89.56 Crore of Speak Asia Online Pvt Ltd. Mumbai police had registered this case in 2011, and based on that case, Enforcement Directorate had initiated an investigation against Speak Asia Online Pvt. Ltd, Singapore and its directors and others as per the money laundering act (PMLA).
https://indiankanoon.org/doc/127867542
5. V-Can Network (P) Ltd vs The Home Secretary
V-Can Network was a private limited company registered under the Companies Act on 2-11-2001 and under Central Sales Act and the Tamil Nadu General Sales-tax Act. The company was engaged in manufacturing Home Appliances of consumer durables, etc., and adopted the Multi-Level Marketing or Network Marketing System to promote the company. The three significant products introduced by the company were, "Ozone Water Purifier", "Magnetic Bed", and "Companion" which would cost Rs. 5,990/-. Under the MLM scheme of the company, the customers purchased the goods at their own will without any compulsion and were free to become either a distributor of the company or remain as the customer.
The three major products were manufactured scientifically for day-to-day use without violating any legal requirements. The distribution of these products nearly involved 5,0,000 people as the distributors, and about two lakh people were directly involved and earned their bread and butter under this system as well as the company never defaulted in paying kind of taxes to the Government. Though there were no complaints against the company, the Police arrested the three distributors of these goods, all their offices were sealed, and even their bank accounts were frozen.
Further, the five distributors of V-can Network Private Limited filed a petition against the arresting officer that the Police was unnecessarily interfering in their business and that their business would not fall within the ambit of the prize, chit as described in Section 2 (c) and 2 (e) of the Central Act 43 of 1978. They also opined that their business does not fall within the definition of Section 2 (1) of the money circulation or prize chit within the meaning of Section 2 (e) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
However, the Government Advocate demonstrated that it was very evident in the brochure of V-Can Network Private Limited that it was based on the Money Circulation Scheme, which is banned under Section 3 of The Central Act 43 of 1978 and whoever contravenes Section 3 shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to Rs.5,000/- or with both. Therefore, the petitioner was also charged under Sections 420 and 506 (i) IP C. apart from other provisions.
https://indiankanoon.org/doc/378163/
6. Achamma Chacko vs Government of Kerala
A partnership firm with the name and style "M/s. LIS, Ernakulam" is said to be conducting the business of making available Government lottery tickets to the public under the Multi-Level Marketing principle in partnership. As shown, the partnership has registered three lakhs' members in the Scheme evolved by it. The partnership deed further provides that the firm's primary business shall be arranged online and paper lottery tickets for the public. The firm is seen registered with the Registrar of Firms, Trivandrum, on 26.11.2002, and the duration of the firm is stated to be five years.
The firm LIS (Regd) is conducting Prize Chits and Money Circulation Scheme throughout Kerala in LIS Deepasthambam Project. The business of these persons claimed to be genuine, even though styled by the investigating agency as under the bogus name LIS (Regd), is making advertisements in all leading dailies and through visual media offering fabulous returns for deposits from the public. The nature of business is that an individual must deposit Rs.625/- per unit or multiplies thereof. For each unit, a member is given a lottery ticket worth Rs.350/- purchased over 35 weeks at Rs.10/- per week and subscribes Rs.275/- to a magazine called 'Trikalam' alleged to be published by LIS Printers and Publishers.
However, the Court observed from the circumstances that the petitioners' business was practicable, and the closing of the business would amount to a loss to the petitioners.
https://indiankanoon.org/doc/446882/
Prominent cases from Foreign Jurisdiction
1. IN BENSON V. JP MORGAN CHASE BANK
NA, Investors, sued JPMorgan Chase Bank as a successor of bankrupt Washington Mutual, Inc. because it aided and abetted the promoters of a Ponzi scheme. The US District Court for the Northern District of California allowed proceedings against JPMorgan on the theory of aiding and abetting because evidence showed that the bank employees knew that:
- the deposited checks were for the purchase of Certificates of Deposit from the promoters of the Scheme even though they were not authorised or registered to sell securities.
- all investor deposits were comingled in the same accounts; and
- investor funds were not being used to purchase securities but were being wired to offshore accounts of the promoters.
Based on the above principles, a bank is not liable for aiding and abetting if it merely serves as a passive mechanism for illegal transactions. Thus, for example, the bank is not responsible for acting as an automated clearing house since it cannot have known of the wrongdoing. However, the bank is substantially involved in the transactions— often through personal bankers trying to accommodate wealthy clients—the bank's risk of liability increases.
https://caselaw.findlaw.com/us-9th-circuit/1596325.html
2. SMITH V. FIRST UNION NATIONAL BANK
Involved the use of banks to perpetrate a Ponzi scheme. Bartoli, the owner of Cyprus Funds, a mutual fund company, claimed to have investments in American and Latin American securities. Bartoli opened accounts with several banks in the United States to accept investments, make remittances and payments, and launder the money through wire transfers. These banks did not file any suspicious activity reports or close the accounts used in the Scheme. As a result, investors continued investing in the fund until the SEC finally intervened, placing Cyprus Funds and related companies under receivership. Investors claimed that a Miami bank branch aided and abetted the Cyprus Funds' Ponzi scheme in the proceedings.
The Court accepted circumstantial evidence of the bank's aiding and abetting, such as (1) evidence of multiple wire transfers performed without apparent legitimate business reasons.
- wires to bank haven countries typically involved in money laundering.
- unusual correspondence, loans, and a business trip assisting Bartoli.
- statement by the bank's representative acknowledging a degree of malfeasance; and
- failure to file the suspicious activity reports required by law. According to the Court, the bank committed financial fraud under the principle of aiding and abetting, failing to observe the "know your customer" rule - it failed to file suspicious activity reports; hence, the bank was presumed to have the knowledge of the unlawful conduct.
https://caselaw.findlaw.com/us-4th-circuit/1153657.html
3. US v. STANFORD
Stanford Investment Bank Limited (SIBL), an offshore bank domiciled in St. John's, Antigua, West Indies, sold more than $7.2 billion worth of Certificates of Deposits to more than 50,000 unsuspecting clients in over 100 countries. Unfortunately, Robert Stanford, Chairman of the Stanford International Bank Limited (SIBL), surrounded himself with a closely-knit group of trusted family, friends, and confidants, which allowed him to perpetuate and maintain the Ponzi scheme.
Through a series of organisational controls, Stanford and a core group of corporate officers:
- prepared CARI. Nolasco et al. false financial statements to reflect increases in investment returns.
- structured investments into three tiers, allowing Stanford to misappropriate more than $1.6 billion of assets classified under Tier III (through the purchase of grossly overvalued estates and unsecured personal loans); and
- bribed a foreign government regulatory agency through payment of approximately $163,000.
https://supreme.justia.com/cases/federal/us/161/412/
