Court: Such Act Constitutes the Crime of Organizing and Leading Pyramid Schemes

Recently, the Jinshan District People's Court of Shanghai (hereinafter referred to as the "Shanghai Jinshan Court") concluded a case of organizing and leading pyramid schemes. The defendant, Yue Moulan, developed more than 60 members through the APP "Huate Squirrel" entrusted to be developed, and more than 2.5 million yuan was involved in the pyramid scam.

[Case Review] 

During meal time, Ms. Chen found her friend, Xiao Wang, was snatching squirrels on her mobile phone. She was curious and Xiao Wang told her that, "I am snatching squirrels. This APP is pretty popular now. You can keep pets and meanwhile make some money. Do you want a try?"

At the instigation of Xiao Wang, Ms. Chen downloaded the APP "Huate Squirrel" and registered as a member with her ID card. According to the publicity page, block squirrel is developed jointly by Huate Group and Squirrel Coin, the world's second largest virtual currency. The blockchain technology will bring investors fantastic returns. Gradually, Ms. Chen found out the rules of the game: you have to develop more members to buy your squirrels, so that you can earn money. Hence, she developed her niece, colleagues and friends as members, demonstrating to them the game rules from time to time.

With the passage of time, Ms. Chen has developed 16 members and can get team earnings according to the rules. However, customer service staff told Ms. Chen that she can't withdraw the money for the time being, or it's difficult for the platform to survive. 

One day, Ms. Chen suddenly found that "Huate Squirrel" couldn't be started any more. Her principal and interest were held up on the platform. Her friends experienced the same issue. They reported to the public security organs immediately.

After investigation, the public security organ got a criminal suspect, Yue Moulan. On October 17, 2019, Yue Moulan surrendered herself and truthfully confessed her crime.

After the trial, the Shanghai Jinshan Court found that for the purpose of seeking profits, the defendant, Yue Moulan, entrusted others to develop the APP "Huate Squirrel" and set up a studio in Jinshan District to develop APP members through face-to-face instruction or creating WeChat groups, etc. After downloading the APP "Huate Squirrel", members can buy "pine cones" and snatch "squirrels". Each "squirrel" has a different price and yield, and can bring fixed income after transferred to others when it gets mature. Members can also get advertising revenue by developing two tiers of members and get team earning if the number of members developed exceeds 15. By this means, from May to October 2019, Yue Moulan developed 8 tiers of members totaling more than 60 people, involving a pyramid amount of more than 2.5 million yuan, from which she obtained an illegal profit of about 300,000 yuan.

[Case Study]

After the trial, the Shanghai Jinshan Court held that, Yue Moulan and her associates, in the name of investment, asked participants to pay fees for "squirrels" to obtain the qualification for participation and, classifying them into different levels according to a certain order, directly took the number of members developed as the basis for kickbacks to induce them to develop more members, thereby defrauding money, which disrupted economic and social order. In total, they organized 8 tiers of pyramid personnel totaling more than 60 people, and collected more than 2.5 million yuan directly or indirectly. The circumstance was serious and their act constituted the crime of organizing and leading pyramid schemes. In view of Yue Moulan's voluntary surrender and truthful confession of her crime, a mitigated punishment may be given. 

The court handed down a first-instance judgment: the defendant, Yue Moulan, was sentenced to four years and four months' imprisonment and a fine of 100,000 yuan for the crime of organizing and leading pyramid schemes.

Behavior characteristics of the crime of organizing and leading pyramid schemes are as follows: organizing or leading the pyramid selling activities to cheat the participants of property, in which, in the name of marketing commodities, providing services or any other business operation, the participants are required to obtain the qualification for participation by paying fees, purchasing commodities or services or any other means, the participants are classified into different levels according to a certain order, the calculation of remunerations or kickbacks to participants is directly or indirectly dependent on the number of persons recruited, and the participants are induced to continue or coerced into continuing recruiting others to participate.

Criminal means in this case is a typical way of new network pyramid scheme. The defendant induced participants via high kickbacks on APP and took commissions from continuing recruiting others to participate. They formed a "pyramid" structure, and only by continuing recruiting others to participate can the former participants get the profits, so as to keep the pyramid going on. Once no new members join in, the whole pyramid will collapse immediately, and others, except the developer and organizer, will make no profits and worse, lose everything.     

[Relevant Laws]

Criminal Law of the People's Republic of China

Article 224a Whoever organizes or leads the pyramid selling activities to cheat the participants of property and disturb the economic and social order, in which, in the name of marketing commodities, providing services or any other business operation, the participants are required to obtain the qualification for participation by paying fees, purchasing commodities or services or any other means, the participants are classified into different levels according to a certain order, the calculation of remunerations or kickbacks to participants is directly or indirectly dependent on the number of persons recruited, and the participants are induced to continue or coerced into continuing recruiting others to participate, shall be sentenced to fixed-term imprisonment not more than five years or criminal detention, and be fined; or if the circumstances are serious, shall be sentenced to fixed-term imprisonment not less than five years, and be fined.

Paragraph 1 of Article 25 A joint crime refers to an intentional crime committed by two or more persons jointly.

Paragraph 1 of Article 67 Voluntary surrender refers to the act of voluntarily delivering oneself up to justice and truthfully confessing one's crime after one has committed the crime. Any criminal who voluntarily surrenders may be given a lighter or mitigated punishment. The ones whose crimes are relatively minor may be exempted from punishment.

Article 64 All money and property illegally obtained by a criminal shall be recovered, or compensation shall be ordered; the lawful property of the victim shall be returned without delay; and contrabands and possessions of the criminal that are used in the commission of the crime shall be confiscated. All the confiscated money and property and fines shall be turned over to the State treasury, and no one may misappropriate or privately dispose of them.

(Author: Lu Yebo, Shanghai Jinshan Court)