The Rise and Fall of Pyramid Schemes in Albania

In 1996, pyramid schemes swept through Albania, drawing millions of dollars from investors and causing widespread economic chaos. The schemes, which promised unusually high returns to depositors, were largely unregulated and lacked a clear regulatory framework.

The Collapse of the Schemes

• In January 1997, the largest scheme, which controlled about half of all deposits in the sector, froze withdrawals and subsequently collapsed.
• Other schemes followed suit, leaving millions of dollars in losses for depositors.
• The economic crisis that ensued led to a state of emergency being declared by the government.

Government Response

The Albanian government responded to the crisis by establishing a commission to investigate the causes of the collapse of the pyramid schemes. The commission’s report concluded that the collapse was due to a combination of factors including inadequate supervision and lack of regulation. In addition, the report identified weaknesses in the banking system which allowed the schemes to operate.

Lessons for Other Countries

• Establishing a well-functioning formal financial system
• Setting up a regulatory framework that covers informal markets
• Tackling general governance problems

Dealing with Pyramid Schemes

When pyramid schemes emerge, governments should deal with them swiftly and firmly by:

1. Investigating the companies believed to be operating pyramid schemes
2. Freezing assets during investigations
3. Closing down schemes once they are confirmed as such
4. Seizing assets of closed schemes
5. Appointing administrators to handle assets
6. Making it clear that there will be no compensation for depositors

The International Monetary Fund (IMF) and the World Bank should also play a role in dealing with pyramid schemes by warning governments about them and providing assistance when necessary.