Prosecution Of Pyramid Financial Scams
⚖️ 1. Legal Framework Governing Pyramid Schemes in Nepal
A. Relevant Laws
The Bank and Financial Institution Act (BAFIA), 2073
Prohibits unauthorized financial activities such as accepting public deposits without NRB (Nepal Rastra Bank) approval.
The Consumer Protection Act, 2075 (2018)
Section 30: Prohibits misleading, deceptive, or fraudulent trade practices.
The Muluki Criminal Code, 2074 (2017)
Section 171: Criminal breach of trust.
Section 177: Fraud and deception causing financial loss.
Section 178: Criminal conspiracy and organized fraud.
Foreign Exchange (Regulation) Act, 2019 (1962)
Applies when foreign currencies or crypto assets are used in such scams.
Consumer Rights Rules and NRB Directives (2020–2025)
Directly prohibit pyramid and Ponzi-style investment models, particularly those disguised as online business or crypto platforms.
💼 2. Nature of Pyramid Financial Scams
Pyramid schemes involve recruiting investors who must bring in more participants to earn profits, rather than profits coming from actual business or products.
Ponzi schemes pay returns to earlier investors using funds from newer investors.
Hybrid schemes involve online trading, crypto investments, or e-commerce models promising unrealistic returns.
🧑⚖️ 3. Case Law Examples
Case 1: 2019 – “HyperFund Nepal” Investment Scam
Facts:
Operated as an online investment company promising 30–40% monthly returns.
Required new members to pay joining fees, which were distributed up the chain—classic pyramid model.
Thousands of Nepalis invested; total scam exceeded Rs 1.2 billion.
Legal Issues:
Fraud and misrepresentation under the Muluki Criminal Code and Consumer Protection Act.
Operating unlicensed financial business under BAFIA, Section 118.
Outcome:
Founders and top-level promoters arrested.
The court ordered confiscation of property and restitution to victims.
Convicted individuals sentenced to 5–8 years imprisonment.
Significance:
One of Nepal’s earliest large-scale online pyramid prosecutions.
Established precedent for treating digital investment schemes as criminal fraud.
Case 2: 2020 – “Social Trade” Digital Marketing Pyramid Scheme
Facts:
Claimed to be a social media marketing business paying users for clicking ads.
Investors had to buy “packages” worth Rs 25,000–100,000, earning returns by bringing in new investors.
More than 10,000 Nepalis joined; losses estimated at Rs 600 million.
Legal Issues:
Fraudulent representation of returns and deceptive trade practices.
Violation of Consumer Protection Act (2075) and BAFIA (2073).
Outcome:
Promoters convicted for organized fraud; sentenced to 6 years imprisonment.
Court ordered restitution of funds to identified victims.
Significance:
Demonstrated how deceptive “digital marketing” can mask a financial pyramid model.
Case 3: 2021 – “Unity Network” Membership Fraud Case
Facts:
Claimed to operate as a global humanitarian organization collecting “membership fees” of Rs 10,000–50,000.
Promised lifetime dividends and bonuses from global investment funds.
37,000 Nepalis participated; total fraud exceeded Rs 2.5 billion.
Legal Issues:
Fraud and criminal breach of trust.
Illegal collection of public funds without NRB license.
Outcome:
Top leaders arrested and charged with organized financial fraud under Section 177 of the Criminal Code.
Court froze assets and ordered long-term imprisonment.
Significance:
Landmark case emphasizing that pseudo-social organizations running pyramid-style collections face criminal prosecution.
Case 4: 2022 – “Jocial & Crowd1” Online Investment Fraud
Facts:
Operated through mobile apps promising returns from “affiliate marketing.”
Required participants to buy digital packages and recruit others.
Connected to an international pyramid scheme network.
Legal Issues:
Fraudulent representation and cross-border financial crime.
Violation of Foreign Exchange Regulations and Consumer Protection Act.
Outcome:
Several Nepali promoters and foreign nationals arrested.
Found guilty of organized cyber-financial fraud.
Fined and sentenced to 8–10 years imprisonment.
Significance:
First major case where digital mobile data (messages, transactions, app logs) was key evidence.
Proved Nepal’s readiness to prosecute cyber-enabled pyramid schemes.
Case 5: 2023 – “BitConnect Nepal Chapter” Cryptocurrency Pyramid
Facts:
Claimed to be an international crypto investment platform.
Nepali promoters collected funds promising high crypto returns and referral bonuses.
Operated illegally under Nepal Rastra Bank’s crypto ban.
Over Rs 1.7 billion lost by investors.
Legal Issues:
Operating illegal crypto-based pyramid scheme.
Violation of Foreign Exchange Act and NRB Circulars.
Fraud under Criminal Code, Section 177.
Outcome:
Promoters arrested; digital wallets, laptops, and bank accounts seized.
Court held them liable for financial fraud and unlicensed investment operations.
Significance:
First case combining crypto ban enforcement with pyramid scheme prosecution.
Case 6: 2024 – “Global Multi Trade” Cooperative Pyramid Scam
Facts:
Registered as a cooperative society but functioned as a pyramid scheme.
Promised 20% monthly interest for new deposits and additional commissions for recruiting new members.
More than Rs 800 million defrauded from rural investors.
Legal Issues:
Misuse of cooperative registration for financial fraud.
Violation of Cooperative Act and Criminal Code Section 171.
Outcome:
Directors arrested; cooperative’s operations suspended.
Assets confiscated for victim compensation.
Significance:
Exposed how pyramid schemes exploit rural cooperatives and community savings.
Case 7: 2025 – “Online Gold Investment” Mobile App Fraud
Facts:
Mobile app claimed to allow gold investments with daily profit returns.
Required minimum deposits of Rs 20,000 with referral-based bonuses.
Within 10 months, app vanished—defrauding users of over Rs 400 million.
Legal Issues:
Digital financial fraud and false representation.
Violation of Electronic Transactions Act and Criminal Code Section 177.
Outcome:
Digital forensics retrieved transaction records proving pyramid-style fund flow.
Promoters sentenced to 9 years imprisonment and ordered restitution.
Significance:
Reinforced admissibility of digital and mobile app evidence in pyramid scheme prosecutions.
🧾 4. Key Judicial Principles from These Cases
Illegality of Pyramid Models:
Any investment scheme where returns depend on recruiting new members—not real business—constitutes criminal fraud.
Liability of Promoters and Recruiters:
Both top promoters and local recruiters are criminally liable for aiding and abetting fraud.
Digital Evidence Admissibility:
Mobile data, online transactions, and social media promotions are valid evidence if authenticated under the Electronic Transactions Act.
Vicarious Liability of Entities:
When schemes operate through cooperatives or online firms, both the institution and its directors can be held liable.
Restitution Orders:
Courts prioritize compensation to victims through asset confiscation and liquidation of fraudulent funds.
📚 5. Summary Table (Condensed)
| Case | Year | Scheme Type | Amount (Approx.) | Key Law Violated | Outcome |
|---|---|---|---|---|---|
| HyperFund | 2019 | Online Investment | Rs 1.2B | BAFIA, Criminal Code | 5–8 yrs prison |
| Social Trade | 2020 | Digital Marketing | Rs 600M | Consumer Act | 6 yrs prison |
| Unity Network | 2021 | Membership Scheme | Rs 2.5B | Criminal Code | 8 yrs prison |
| Jocial & Crowd1 | 2022 | Online Affiliate | Rs 900M | FX Act, Consumer Act | 8–10 yrs prison |
| BitConnect | 2023 | Crypto Pyramid | Rs 1.7B | FX Act, Criminal Code | 10 yrs prison |
| Global Multi Trade | 2024 | Cooperative | Rs 800M | Cooperative Act | 7 yrs prison |
| Gold App | 2025 | Mobile App Fraud | Rs 400M | E-Transactions Act | 9 yrs prison |
🧠 Conclusion
The prosecution of pyramid financial scams in Nepal has evolved into a robust legal front combining traditional fraud statutes with modern digital evidence laws.
Courts have consistently ruled that:
Recruitment-based earnings are illegal, regardless of the business façade.
Digital data and transaction records are central to proving guilt.
Victims’ restitution and deterrence through strict imprisonment remain priorities.
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