Beware of the multi-level marketing predators

Shobha Dayal (name changed to protect identity), 47, was working as a treasury manager with a bank. A friend sold her the ‘Gold Quest’, a multi-level or chain marketing scheme which deals in selling gold coins.

The scheme demanded her to invest Rs30,000 and organise three more members to whom she could further sell the same scheme to recover her investment and earn extra commission.

Apparently, she found the business model so attractive that she left her job and decided to totally devote her time for it. Within eight months she started regretting her decision as her friends and relatives to whom she had sold the scheme couldn’t take the chain ahead. Her commissions stopped coming in.

Financial frauds have become very common in the society, especially after the introduction of such ponzi and chain marketing schemes. We can only sympathise with those who have fallen prey to such multi-level marketing (MLM) schemes. People should be aware of and extremely cautious about such rackets, which are mushrooming these days.

These schemes, structured like pyramids, are unstable business models that promise high returns for enrolling people into the chain. Under MLMs, members pay a joining fee which is passed on to those above them.

Members sell products in return for a commission and keep on recruiting new members to keep the share of their commission flowing.

Whereas, ponzi schemes use funds from new investors. The existing investors pay interest to other investors from these funds and keep on adding members to it. Personal saving scheme, investment programmes and direct selling are some of such schemes.

Ponzi and pyramid schemes are banned in India. But schemes like Amway, Gold Quest, Oriflame, Tupperware and Herbalife operate as MLMs, that are not yet banned. Such schemes usually target people who belong to the higher strata of the society.

“Among them, policemen and their wives are the softest targets because when you include someone in a chain marketing scheme and if you face any loss, the person will think twice before complaining to the police,” says a victim.

Only very few scandals of such kind are known to the public. Women are easy targets for such schemes because the sales pitch ‘work from home’ is quiet attractive for them. Since it is direct referral marketing, most of the sales take place through family, friends and other acquaintances. Unemployed youth is another target market.

Illogical math
Since these schemes work on a network marketing model, the business runs according to the new enrollment at various stages. The further stages of enrolling new members move in a geometric progression. By the time it reaches, say 40th level, it should have covered over the world population, which is impossible.

Uncertain returns
Members at the bottom level earn money for the upper layer. In all pyramid schemes, members at the upper level only are likely to gain through the commissions of the new entrants.

Gradually, the whole business gets saturated, but by the time the fraud is exposed people at the top level will have benefited. Filing a complaint against your friend or relative (who sold you the scheme) becomes impossible. People at the bottom level are vulnerable ones and lose out the most.

These schemes are banned under the Prize Chit and Money Circulation Schemes (Banning Act) 1978. But absence of strong law enforcement and lack of awareness are the reasons behind the growth of financial scams in the country.

The Direct Selling Association in India has been trying to draw a distinction between pyramid schemes and MLMs. They are lobbying with the government to get out of the banning Act. The main problem is that it is a central Act administered by the state police.

What can be done?
There is no easy way to make money. It is better to keep away from people who promise you novel ways of making money and secrets to make you instant millionaires. When you see advertisements regarding investment options, it’s better to ask the right questions like whether the institution is licenced, the pattern of investments and the rate of returns. Legal system must be good enough to ensure that people get their lost amount back even if the company is closing down.

Check list
1. Don’t invest in any of the pyramid, ponzi schemes or MLMs.
2. Sometimes these firms resemble reputed institutions on logos, names, etc. Beware of all such institutions.
3. Avoid all messages and mail which offer you high returns, which are illogical.
4. Gather all the information before you park the money.