An elaborate pyramid scheme masquerading as a gift giving system, complete with fake birthday parties, was busted in London, Ont. on Monday, according to police.

Officers from the London Police Financial Crime Unit executed a search warrant at a residence in the Lambeth area where a 'birthday party' was being held.

Police say two people were arrested and charged with conducting or managing a pyramid scheme.

"Organizers of this scheme attempt to convince prospects that the scheme is not a pyramid but an 'ever-evolving cloud' and that it is legal because the Canada Revenue Agency (CRA) allows for gifting in this country," said Const. Travis Buckle.

According to the CRA website, "a gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child."

Police say the scheme has been running in the London area for at least a year.

How the scheme works

According to police, the scheme starts with a request for a $5,000 'gift,' which is given to a person at a gathering, posing as a birthday celebration. Police say eight people contribute a $5,000 'birthday present' to someone at the top of the pyramid, which organizers call the "cloud.'

The person who received the $5,000 then gets the option to 'gift' back into the scheme at the base level. The two people who were below the recipient become the next beneficiaries, who get their own 'birthday' party. The scheme continues on and the people at the top eventually receive $40,000 when new members are recruited.

Police allege that when someone gives $5,000, they become an 'investor' in the 'cloud' and becomes responsible for recruiting others, who are most often friends or family.

Red flags for those approached

Police said the people who were involved in the scheme were told to use cash and employ a nickname to protect the anonymity of those involved.

"These tactics appear to be designed to impede law enforcement," said Buckle. "Most people involved in this scheme will never see a return of their money."

The London Police Service is asking anyone who may have been approached to contribute to this scheme, or anyone who has invested or anyone who has profited from the scheme to call the Financial Crime Unit at 519 661 5515, extension 5257.

The public can also call Crime Stoppers at 1-800-222-TIPS (8477), or submit information online anonymously to www.londoncrimestoppers.com.