[Big read] How China’s pyramid schemes used ‘state secrets’ to lure victims

(Edited and refined by Bai Kelei, with the assistance of AI translation.)

Pyramid schemes shot back to the spotlight in early September after Singapore’s Ministry of Foreign Affairs and police issued a joint statement: 52 Singapore citizens had been arrested and detained in Guangxi, China, over suspected involvement in pyramid schemes and other illegal activities. This is believed to be the largest single arrest case involving Singaporeans abroad.

Although details of the case have not been made public, there has been widespread speculation that it may be linked to schemes such as the “1040 Sunshine Project”, which was once prevalent in Guangxi. In cities where pyramid schemes once ran rampant, large indoctrination gatherings of out-of-town visitors are now rare. When scams are packaged as jobs, side hustles, start-up ventures, investment opportunities or even romantic relationships instead of pyramid schemes, psychological defences are more easily breached.

A shop owner near Changqing Park in Beihai, Guangxi, recounted to me, “Sometimes there would be groups of seven or eight, or even dozens of people. It was especially common after 2.30 pm, when batches of them would go to parks for ‘meetings’ and ‘lectures’. Locals could tell at a glance that they were involved in pyramid schemes.”

Beihai, Nanning and Fangchenggang — cities in the Guangxi Beibu Gulf Economic Zone — were once major hotspots for pyramid schemes that gathered participants from other parts of the country. Beihai was designated a key city for a nationwide crackdown in 2018 and removed from the list in 2019. Nanning and Fangchenggang were added in 2018 and 2019 respectively, and removed in 2021.

The same shop owner said, “There is no pyramid selling now. I have barely seen any in the past seven or eight years.” In the past, the influx of scheme participants drove up rents, with a two-bedroom unit renting for as much as 2,800 RMB (US$418) a month. He added, “Now, no one will rent one even for 600 RMB.”

Change in modus operandi

When I visited the three cities, I did not see any open gatherings or groups moving about together. In two Nanning residential estates where Singaporeans were reportedly once taken to view flats, there were no apparent pyramid schemes participants or the familiar Singaporean accent. Near Jinhu Square, where such groups had often gathered, only signs promoting a tough crackdown on pyramid selling remained. Over at residential estate entrances in Fangchenggang and Beihai, there were more signs declaring them “pyramid-selling-free communities”.

Pyramid scheme organisations once used the guise of Beihai day tours to take people sightseeing while indoctrinating them. The local travel agencies I enquired at said that they no longer offered day tours. At Xinhua Bookstore, I was unable to get a copy of Regulations on the Prohibition of Pyramid Selling (《禁止传销条例》). While searching the shelves, a staff member said, “There used to be many, but not anymore. Is your child involved in pyramid schemes? It is a scam!”

Naturally, just because pyramid selling is not seen out in the open anymore does not mean that it longer exists.

A taxi driver in Beihai recounted to me an incident he witnessed late last year. A retired teacher from Changchun, Jilin, was brought to Beihai by a former student and paid an entry fee of 69,800 RMB. After learning of it, her son rushed over and forcibly took her away. The pair argued throughout the drive to the airport. Even as she was leaving Beihai, the mother remained convinced that she had joined a project secretly backed by the state.

Rather than disappearing, pyramid schemes have shifted from public gatherings to subtle, integrated forms.

After China imposed a blanket ban on pyramid-selling in 1998, such organisations continually changed their modus operandi. In the early years, they often operated under the guise of selling physical products. As public vigilance increased, some shifted towards project sales, giving rise to concepts such as “capital operations” and the “1040 Sunshine Project”. The “1040” model often requires an entry fee of 69,800 RMB and baits participants with returns of 10.4 million RMB once they achieve a certain level.

Scams wrapped in state rhetoric

Guangxi is an important region for China’s opening-up and cooperation with ASEAN, and Nanning is the permanent host city of the China-ASEAN Expo. Pyramid-selling organisations draw on these genuine national and urban development narratives, mixing in keywords such as “Beibu Gulf”, “ASEAN”, “the next Shenzhen”, “Belt and Road Initiative” and “national projects” to piece together get-rich stories filled with half-truths.

Pyramid schemes have also evolved. In the past, “northern-style” schemes controlled participants through centralised living arrangements and restrictions on their freedom. The later “southern-style” model relied more on psychological control, allowing participants to appear to lead normal lives. In recent years, some such organisations have started associating with cryptocurrencies, digital assets and online investments.

Typical cases highlighted by China’s Supreme People’s Court and the State Administration for Market Regulation show that online pyramid schemes are shifting from physical products to virtual concepts, from recruitment through personal connections to broader online audiences, and is increasingly combining online and offline operations.

From park benches to mobile screens

In a major case involving an online platform known as “PlusToken”, organisers used blockchain technology to raise funds, requiring participants to pay virtual currency worth more than US$500 to sign up. The scheme eventually expanded to 3,293 levels and 2.6 million accounts, and involved the transfer of more than nine million units of virtual currency. The core team even moved its customer service and currency-disbursement units overseas.

In a major pyramid scheme cracked by Shanghai police in June this year, a company collected joining fees in the name of helping micro, small and medium-sized enterprises undergo digital transformation. It recruited more than 320,000 members and involved more than one billion RMB in proceeds. Related cases show that geographical boundaries are becoming increasingly blurred for pyramid-selling organisations, with some using online recruitment under the guise of making friends, matchmaking or job-seeking.

Huang Jinliang, a lawyer at Yingke Law Firm’s Shenzhen office, told Lianhe Zaobao that some pyramid schemes are deeply intertwined with illegal fundraising, through fabricated projects and promises of returns. Overseas teams make investigation and asset recovery difficult, while the apps they use are easily rebranded and relaunched.

However, online methods have not entirely replaced offline ones. Huang noted that some organisations have adopted an “online lead generation plus offline trust-building” model: they first approach targets through social media platforms and online meetings, then build trust through seminars, talks and sightseeing trips, before returning online for registration and management. Participants no longer need to live and eat together for extended periods, making irregularities harder for outsiders to detect.

In other words, pyramid schemes have simply moved from parks onto mobile phones.

Huang explained, “The core is unchanged. Pyramid selling is highly incentivised.” Regardless of appearance, pyramid schemes rely on recruiting people, establishing tiers and distributing benefits to drive further recruitment.

Once someone joins, they have an incentive to recruit the next person. Aside from the person possibly being brainwashed, if the funds coming in slows, an investment scheme that depends on maintaining payouts becomes unsustainable, likely resulting in a break in the funding chain.

Huang also said that overseas online investment schemes are showing signs of spreading into rural China. Some rural residents see relatives and friends around them making money and are easily persuaded to invest as well. Some even put in all their savings or mortgage their homes. “This is becoming increasingly common,” he said.

Exploiting jobseekers’ trust

Wang Shici, an independent activist who has campaigned against pyramid schemes for many years, observed that young people, especially university students, have featured prominently among the cases he has encountered in cities including Chengdu, Nanjing, Wuhan and Nanchang in recent years.

Driven by employment pressures and hopes of quick money, discontented youth or new graduates are easily enticed by promises of rapid success. What lowers their guard most often is familiarity. “Let’s say five classmates are already in, the sixth who comes along will feel right at home,” Wang explained. As one person recruits another, an organisation that was originally unfamiliar comes to resemble a circle of friends.

What young people encounter is often not called “pyramid schemes”. It may be presented as a job, a side hustle, an investment or even a relationship. Wang revealed that some organisations use romantic relationships as bait, with “men recruiting women and vice versa”, before asking for money on the pretext of engagement, bride price payments or sudden illness. To make it seem more real, other members may even play roles such as parents or in-laws.

Once potential members enter a residence, an intensive psychological offensive begins. Recruiters will arrange for different people to maintain communication with targets according to their backgrounds. Wang shared, “It is not one person, but a whole group brainwashing you. If one person cannot answer your question properly today, someone else will the next day. A lie repeated a thousand times becomes the truth.”

When I asked Wang whether he had encountered foreigners caught up in pyramid schemes, he said indoctrination requires a common language, and many rank-and-file participants do not speak foreign languages. He said, “They cannot communicate with foreigners, let alone brainwash them.” He has not encountered foreign nationals during rescue efforts, though he has dealt with people from Taiwan implicated in such cases.

Why do illegal pyramid-selling activities persist despite their notoriety and repeated bans? Wang cited several factors such as organisations operating in legal grey areas, difficulties in gathering evidence, and participants who have been thoroughly brainwashed.

Abusing legal grey areas and loop-holes

For instance, some such organisations deliberately keep their numbers below a certain threshold to avoid criminal liability. He explained, “They cap it at 29 people because liability begins at 30 according to the rules.”

Under China’s current judicial rules, organisers and leaders of pyramid schemes may be held criminally liable if they involve 30 or more participants and have three or more levels, but this does not mean that schemes with fewer than 30 participants cannot constitute a crime. The number of people and levels must be taken into account together with the specific conduct and organisational relationships of organisers and leaders.

What is more challenging is establishing the chain of evidence. Wang said pyramid-selling organisations often leave no complete records of payments or of who recruited whom. Early northern-style schemes collected cash directly. In later operations, those running the schemes often moved funds through other people’s accounts or under false names, or had others withdraw the cash immediately after receiving it. So, the bank account holder, the person controlling the account and the one making the cash withdrawal may not be the same individual.

Wang also disclosed that some masterminds even appoint terminally ill people as the legal representatives of companies. Once the legal representative dies, “there is no one left to testify”. Most discouraging of all, some low-level participants are so deeply indoctrinated that they refuse to identify their recruiters and say nothing when questioned by investigators. After being sent home by the police, they may even return to the den. Wang added, “They are tired of being poor and only want to make money. They think they have dreams and firmly believe this is their way to get rich, which leads to more pyramid schemes.”

The lack of direct verbal testimony does not mean a case cannot be solved. Investigators can still determine participant numbers and tiers by drawing on evidence including payment records, audio-visual material, relationship charts, bank statements and electronic data.

Shao Jun, a lawyer at a Singapore law firm, said that China tackles pyramid schemes through both administrative regulations and criminal penalties, and criminal sanctions do not target every participant. “It is a measured approach. The key is the nature of the money involved and what the person did exactly,” he said.

Shao added that legal liability differs depending on the roles people played in an organisation, the acts they committed and their mental culpability. Those involved in key stages such as initiating, planning, manipulating, managing, promoting or training may bear different legal responsibility from those who were simply deceived into joining and did not take part in organising or managing the scheme.

Regarding the 52 Singaporeans arrested or detained by Guangxi authorities, Shao said that without case details and evidence, it was not yet possible to determine what consequences they might face. The roles they had played in the organisation must be established first.

Interestingly, the term “government economic steering” (宏观调控) that is often used by Chinese state media has been hijacked by pyramid-selling organisations to dispel doubts about the legality of a project.

When I visited Beibu Gulf Square in Beihai earlier this month and asked a middle-aged man about pyramid schemes in the area, he responded, “Do you think pyramid selling is scary?” He then said the state was cracking down on pyramid schemes due to “economic steering”. When I pressed him on what he meant, he adopted an air of mystery and claimed I was “too rigid in my thinking”.

Lured by romance and riches

After hearing how 22-year-old Xiao Min (pseudonym) nearly fell into a pyramid scheme in August, I realised “government economic steering” was an all-purpose excuse.

After graduating from university, Xiao Min worked as a butler at a luxury apartment complex in Guangzhou. Wanting a side hustle, he met a woman on Douyin who lured him to Wuhan on the pretext of entrepreneurship opportunities. Food, accommodation and even sightseeing outings in Wuhan were arranged for him, before he met with purportedly successful people.

On the fourth day, the group told Xiao Min about their distribution system, which had five levels and three stages of advancement and asked him to pay 69,800 RMB or an initial downpayment of 3,800 RMB to join, after which he could profit by recruiting subordinates. Xiao Min, who had some financial knowledge, questioned whether this was a pyramid scheme. The group repeatedly used terms like “government economic steering”, “15th Five-Year Plan” and “state policies” to assure him.

Xiao Min recalled, “The person kept telling me about their distribution system. When I asked whether it was pyramid selling, he answered with just one term: government economic steering.” 

The man also claimed that the system was introduced from Singapore in 1998 and had long been included in Chinese government directives, but could not be made public. Xiao Min added, “He said if the system is made public, everyone will rush to do it and no one will do the country’s other work.”

Such claims are not supported by the facts. What Xiao Min encountered is actually a typical recruitment tactic used in location-based pyramid schemes, often packaged in the organisation’s rhetoric as “capital operations” or the “1040 Project”. From its structure, the 69,800 RMB entry fee to claims that it was “introduced in 1998” and a “state secret”, this script has been around for years. The only difference is, in line with online trends, it is now being promoted as “making friends on Douyin” and “starting a side hustle”.

Xiao Min knew full well that the claims were suspicious, but also realised that the sustained psychological pressure was gradually weakening his resistance. On the seventh day, he escaped and called the police while those living with him were taking an afternoon nap. When he later asked the woman why she had deceived him, she called it a “well-intentioned lie”.

Independent activist Wang said “government economic intervention” is a common refrain used by pyramid-selling organisations to explain police crackdowns and media exposure. Their fabricated narrative is that police arrests “frighten the timid”, causing them to leave while the bold remain to prosper.

Wang continued, “They will say that if everyone engaged in pyramid schemes, no one would drive trains or work as chefs, and society would descend into chaos. So the state has to frighten the timid and let the bold get started first. This so-called ‘government economic steering’ is totally different from the economic concept.”

To avoid falling prey to similar scams, Wang advised that if anyone takes you to an unfamiliar place for any reason, take time to make observations instead of quickly moving into accommodation arranged by them. “If they do not go to work or run a business, and simply take you out to eat and have fun every day, leave as quickly as you can,” he shared.

This article was first published in Lianhe Zaobao as “传销换马甲赌你看不见 设套玩话术盯上你的钱”.

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