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5 July, 2012  ▪  Bohdan Butkevych

Financial Pyramid Reincarnated

Many young Ukrainians are joining the MMM financial fraud run by an infamous Russian. The Ukrainian Week has found out why…

Sergey Mavrodi was the mastermind behind the massive MMM pyramid scheme in the 1990s. When he announced, in early January 2011, the launch of a new financial pyramid called “We Can Do a Lot (My Mozhem Mnogoe, or MMM in Russian), it sounded like a joke. But the reincarnated MMM attracted 30 million participants in the post-Soviet territory and continues to grow, according to its official site. There are already signs that it will soon yield to the laws of economics and begin to collapse. Your correspondent from The Ukrainian Week pretended to be fooled into the scheme and became an MMM investor in order to study it from the inside.

THE WAY OF MAVRODI

“Any pyramid always rests on fraud,” says financial analyst Andriy Bychynsky. “A pyramid is empty money that does not generate any social goods. The principle is very simple: the more people you can recruit to the scheme, the more you’ll earn. Initially, your contribution will go to other, older members. And then you will get a certain percentage of investments made by new members. The accumulated money is not invested but is simply moved from the lowest level to the highest.”

This is the principle MMM-2011 lives by. It lives on, even though it was believed that it would collapse quickly due to its inglorious founder. Mavrodi’s first pyramid collapsed in 1994, bankrupting at least 10,000 people, while 50 committed suicide over the financial disaster they experienced.

Mavrodi was on Interpol’s wanted list in the early 2000s when he founded another online pyramid – Stock Generation (SG), a virtual stock exchange for trading virtual stock in virtual companies. Several million people in the West (the USA, the UK and a number of European countries) were defrauded. Finally, he was arrested in Moscow in 2003. He was on trial for four years, sentenced to 4.5 years in prison and released a month after the verdict was delivered. For a while Mavrodi wrote books in which he claimed to have fallen victim to “the system” and said he was pulling himself together. In January 2011, he launched a reincarnation of MMM.

The essence of his latest organisation is very simple and even somewhat refined. All money invested is kept on the accounts of investors themselves. They are divided into rank-and-file members, desiatniki (literally, supervisors of ten members), sotniki (supervisors of a hundred), tysiachniki (supervisors of a thousand) and temniki. This does not mean that desiatniki have exactly 10 people under them – they may have 20 or 50. The ranks have to do more with degrees of responsibility: desiatniki are responsible only for their group and the money flowing in it, while sotniki and higher-ups have authority over various groups. But desiatniki are exactly the ones who recruit new members, receiving 10 per cent of each new contribution. They also carry out all direct financial transactions: payouts to pyramid members, acceptance of new contributions, etc. They are controlled by centurions who are in turn managed by temniki. The latter report to a regional director personally appointed by Mavrodi.

This time around, Mavrodi built a pyramid in such a way as to protect himself as best as possible against any criminal charges. In the 1990s, all the money contributed to his pyramid flowed to one account. Once it was blocked, the entire system collapsed. Now money is scattered across many thousands of private accounts in dozens of banks across the world. Moreover, all transactions in the system take the form of money transfers between private accounts.

However, there is one important nuance which law-enforcement agencies are beginning to pursue and which Mavrodi cannot ignore: he lacks a licence to carry out financial transactions. In particular, Ukraine’s National Commission for Regulating Financial Services Markets notes: “As of today, no information about MMM-2011 has been entered into the register of financial institutions. The organisation has not received the status of a financial organisation or a licence to provide financial services, so its operations are a priori fraud.” Furthermore, the Law “On Consumer Rights Protection” contains the definition of a (financial) pyramid scheme and bans such pyramids. Meanwhile, MMM has unfolded an aggressive advertisement campaign, which should be impossible to do without a licence.

Instead of quite real shares of stock, which were issued in the 1990s and became one of the cornerstones for the prosecution’s case, the reincarnated MMM uses an internal currency called mavry which is purely virtual money. Its value always changes, and a participant can sell his share at any time. His income is what he earns on the price difference.

The rate of the MMM currency is set for many months ahead as can be seen on the pyramid’s official site and on Mavrodi’s webpage. The interest rate of the mavro depends on the duration of one's membership in the system: the longer your contribution has been in, the more you receive – 20, 30 or even 40 per cent. Thus, the system permits the smart and agile member to quickly get his money back and more, while stripping the feeble and slow-thinking of their entire investments.

FIGHTING THE SYSTEM

For me as a correspondent of The Ukrainian Week, immersion into the MMM structure began with its website in Ukraine and a simple registration procedure – it was easy to use a fake name, because no passport data was required. Five minutes after registration I received a phone call from my supervisor, a Serhiy, with contact information. I called, said I wanted to become an investor and asked how I could make the initial contribution. Within 10 minutes I received a text message with bank account information for a desiatnik. Our editorial office decided to risk UAH 300. At the time, the return rate on investments in the pyramid was 40 per cent per month. According to MMM’s conditions, I was to receive UAH 300 after two weeks and a bonus for joining the system after a month, i.e., on June 16. I was promised to be paid UAH 375 on that day (my initial deposit plus 40 per cent) and a UAH 160 bonus for the initial payment – a total of UAH 535, which means UAH 235 of net profit in just one a month.

A week after my registration, I met with my foreman in a Kyiv café. I told him I wanted to work in the MMM structure like he did. “In fact, I am a coach in business technology,” I said without batting an eyelid. “I have a large human resource that I can get involved here. But to do it, I have to be convinced myself that it is indeed beneficial and absolutely safe for me.”

I expected my vis-à-vis to produce standard rhetoric aimed at average simpletons in the style of videos posted on MMM’s official webpages. “I used to work for UAH 2,000 a month,” my interlocutor said with great agitation. “I also paid tuition, so I had to work as a loader. Now I earn UAH 40-50,000 a month. I’ve finally grasped how our damned state is cheating us: you have to break your back doing work you hate and you’re being exploited like livestock!” I could not believe what I was hearing: a 20-minute torrent of harsh anti-capitalism propaganda mixed with curses against the financial system, the vampire state, the slavish existence of hired labour force, etc. It seemed that Serhiy might produce a well-worn communist party membership card from his pocket at any minute and invite me to join an underground Bolshevik revolutionary committee.

I asked him if I had a chance to rise to the level of a desiatnik. “No problem,” he said. “I can see that you are a smart guy, so you can become a supervisor over at least five people. Open your own account and go ahead. You’ll also have preferential conditions to buy mavros and the right to 5 per cent of the sum deposited on the account of your group.” We agreed that I would give him a list of my people two days later and he would register me in the system of desiatniki.

Then I suddenly changed the topic: Was he afraid that MMM could soon collapse? Not in the least, Serhiy insisted. As long as the state stays away from MMM’s affairs, everything will be great: the system has unlimited potential for growth. “Even a serious bank will collapse if there is a bank run,” he said. “A campaign has been launched against us in the media. They are slandering us and calling us fraudsters. But where’s the fraud? Mavrodi himself and every desiatnik immediately warn that you can lose everything and there are no guarantees. So why isn’t playing cards for money considered fraud? It all depends on luck in cards, too.” In fact, organising card-playing for money is a crime under current legislation, but I did not bring that up.

The day after I talked with Serhiy, Mavrodi announced the start of Operation Phoenix under which returns on deposits were to be drastically cut from 40 to 10 per cent per month. Moreover, he cancelled bonuses for newbies and declared that the parts of the pyramid that owed money to its participants were to be scrapped. He also said that the operation was a response to “endless provocations and hysteria in the press” and “active government counteraction” against MMM-2011. This immediately caused a chain reaction and panic among investors ensued. It has been reported than many branches of the pyramid completely discontinued payments on investments and many offices were closing. Mavrodi later unveiled another pyramid, MMM-2012, allegedly aimed at helping out the old one.

However, Serhiy assured me that I could withdraw my money at any moment and that rumours were nothing else but “a slanderous campaign against MMM”. His overall message was that the situation was normal, even though there was a bit of strain. He also informed me that I had become a desiatnik. I decided to keep my money in to see what would happen to the most daring financial scheme in Ukraine after the epic frauds of Elita Centre and King’s Capital. It would be interesting to know if, by the time this article is published, the police or prosecutor’s offices will have received any complaints from MMM’s investors.

THE YOUNG AND CYNICAL

The motivation of people who are joining MMM now is totally different from that which prevailed in the 1990s. Today, most of these people are below 30, while in 1994 most investors were middle-aged people, with 30-35 per cent of pensioners. So it turns out that the recent massive advertisement campaign has not tricked the older generation, the category that is most vulnerable to fraud. Meanwhile, active and pushy young people seeking a quick and easy buck have come to the pyramid on their own.

“The young always want to try their luck,” says Yevhen Holovakha, deputy director for research at the NANU Institute of Sociology. “They are more informed than two decades ago and understand that any pyramid indeed brings huge profits to begin with and then collapses. So they try to calculate things perfectly and pull out before it crumbles.”

But why did Mavrodi decide to launch a new pyramid right now? Of course, it may be assumed that he had been waiting for people to forget about his previous fraud scheme. But why, according to MMM itself, has Ukraine been the locomotive of this structure over the past six months?

“The arrival of the current team to power caused a certain rollback of the overall social atmosphere which is similar to the first post-Soviet years,” Holovakha explains. “The similarity is not in outward manifestations but in people’s attitudes. They see how different things are returning to the reality of the early 1990s on a daily basis, essentially to the system of Soviet bureaucracy amidst post-Soviet lawlessness. And this atmosphere naturally fosters the reincarnation of other elements of the past epoch, including MMM.”

According to scientific calculations, the lifetime of a pyramid is a year or eighteen months at the most. Thus, MMM-2011 is now in the turbulent zone anyway, and the chances that Mavrodi’s scheme will survive until autumn are slight. But what is next? “The key problem of MMM’s operation is not even that it cheats people out of their money,” social psychologist Andriy Strutynsky says. “The main thing is that pyramids like that foster cynicism in people, whether or not  they participate themselves. Remember that after the original MMM pyramid collapsed in the 1990s, opinion polls showed that confidence in the banking system and reforms in general had plummeted. The reason is that a quest for personal gain makes every pyramid member defraud new members. And he will do it even he when knows that they will lose everything. Later, after the collapse, this will show in other spheres and projects. This undermines trust in the financial system of the state as such. Since this system rests exclusively on people’s trust in it and in each other, any state must fight pyramids with any means it has at its disposal.”


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