Recession Exposes MLM as Business Opportunity Fraud, Not Direct Selling
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 News stories, mostly planted by the Direct Selling Association, seek to dupe unemployed consumers that, despite the Recession - or because of it - they can make a lot of money in "direct selling."
Reality is the brutal opposite. In fact, MLM activity in the Recession - ramping up recruitment of salespeople even as the markets for their products shrinks - is proof that many MLMs are engaging in business opportunity fraud, selling a bogus "income opportunity." The recruitment reveals that many MLMs make their money, not from product sales to retail customers, but from the investments of the salespeople themselves. Recruiting salespeople, not selling products to retail customers, is how such MLMs make money. How would the new salespeople earn money if the markets for their MLM products are declining? By recruiting more salespeople, of course!
The dis-information campaign, launched by the Direct Selling Association, to convince people that selling high priced MLM products door to door is a "safe haven" during a Recession is yet another financial trap, on par with pay day loans, exploding mortgages and suddenly rising credit card interest rates.
For a full analysis of how the MLM's recruitment activity is a red flag for regulators, see the False Profits Blog, "When Market Declines, Hire More Sales People?"
Filed in: Economics/Financial, 06/14/2009.
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India Fights Back Against
US-style MLM Schemes
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While MLM's are mostly allowed to plunder consumers in the USA, some countries have fought back. In 2005, China banned the MLM "business model" as it operates in America. In 2006, the government of England attempted to completely close down Amway, America's largest and oldest MLM, "in the public interest." UK regulators discovered that 99% of all UK's Amway "distributors" had lost money in the scheme.
India, also has fought back. Police officials in the southern state of Andrah Pradesh raided Amway offices and brought criminal charges against the company. India also recently arrested leaders of the international scam, Gold Quest (sometimes also called QuestNet)
One citizen leader in India, attorney Shyam Sundar, publishes the blog, Corporate Frauds Watch, that focuses on MLM scams and educates the public about how the schemes deceive.
A scheme that is spreading rapidly in India, called TVI Express, has led many Indian citizens to register complaints with Pyramid Scheme Alert. The scheme charges $275 to join and then urges each investor to recruit at least two others. The recruits are placed on a classic "8-ball" board, with 1 at the top, two below, 4 below them, and 8 at the bottom. A person joins at the bottom and as other people later join, the recruit is moved up the chart.(14 new people must join for each new each person to be moved from bottom to top.) At the top, he/she receives his money back and moves to a new board, designed exacty like the first one. At the top of the new board, each person is paid $15,000 (from the money of those below). Each person can repeat the cycle "endlessly". They can even buy multiple positions. The initial $275 (USD) is said to cover "discounts" and "benefits" for travel and leisure.
However, the scheme's FAQ on its website, states "You don't need to sell any products... The first thing you need to do is sponsor two (2) people who join the TVI Express Opportunity. Secondly, you need to encourage and teach those two downlines (people you sponsored) to sponsor more people... There is no limit on cycles. You can earn as much as you want by cycling out multiple times... the matrix structure pays till infinity."
Little wonder that Indian citizens are asking, "How can this be legal?" and "Doesn't the math on the chart guarantee that the vast majority of people must be at the bottom where they cannot recoup their money? Isn't this the 'endless chain' trick?"
The scheme has a remarkable resemblance to Canada's "Business in Motion" scheme that was exposed on the CBC News show, Marketplace. BIM was shut down in England when it used the same structure but different name and product. TVI is also based in the UK, yet no regulators have taken action to date. It also claims to operate openly in the United States.
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The Decline and Failure of the FTC
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In the wake of the Bernard Madoff Ponzi scheme collapse and other Wall Street frauds, there have been shocking revelations about neglect, collusion and incompetence at the Securities & Exchange Commision (SEC), the federal government agency that oversees stocks, bonds and other consumer investment opportunities.
A similar pattern developed at United States Federal Trade Commission (FTC), the federal agency
charged with investigating and prosecuting "business opportunity
frauds" and pyramid schemes.
Back in the late 1990s, the FTC was actively working to protect consumers. In four years it prosecuted more multi-level marketing and "business opportunity" schemes than it had in the previous 17 years when "de-regulation" was in vogue. On its staff, the FTC had an internationally acclaimed expert in identifying and exposing pyramid schemes that are disguised as "direct selling" companies. With FTC leadership, nearly a dozen state Attorney General offices around the country held regular conference calls to share experience in prosecuting multi-level marketing scams. In 1998, the FTC's top ranking attorney delivered a highly publicized speech to world leaders at the International Monetary Fund about how to identify MLM scams, which were spreading worldwide and causing massive consumer losses. She identified "lack of retail sales" as a main red flag of the disguised fraud.
Then, in 2001, virtually all consumer protection in this area stopped at the FTC. The sudden change occurred immediately after a new chairman was appointed, who came to the job from a law firm whose client was the largest and most politically influential MLM - the Amway Corporation.
The FTC staff expert on pyramid schemes was abruptly given new duties, unrelated to business opportunity scams. Enforcement of previous orders against MLMs was neglected. Lack of retail sales, the hallmark of the MLM scam, was redefined in a widely circulated FTC letter as no longer the trigger for investigation. Some of the agency's top officials and even the chairman of the FTC went on to become lobbyists for MLMs. They then used their names and influence to argue against a proposed FTC rule that would give consumers more disclosures about an MLM when they are solicited.
From 2001 forward, the FTC maintained a policy of ignoring MLM scams, but then it even took a step further. In 2008, it decided to exempt MLMs altogether from new rules to protect consumers from "business opportunity" frauds.
What happened to cause this radical change? How did the FTC move from protecting consumers to protecting pyramids? Why did some FTC officials move from representing the public to lobbying for pyramid selling schemes?
The whole story has been researched and presented in a new report authored by Pyramid Scheme Alert president, Robert FitzPatrick, with help from many other consumer activists. The 21-page report details political influence-buying, conflicts of interest, and failure to protect the public. The story is eerily similar to the recent revelations of the SEC, which led to Wall Street frauds and the Bernard Madoff scam.
The report is entitled, "The Main Street Bubble: A Whistle Blower's Guide to Business Opportunity Fraud; How the FTC has Ignored and Now Protects It." It has been sent to appropriate members of Congress that oversee the FTC, among other officials. It will soon be available to the public. If you have an interest in seeing this report, email PSA. Include the words "FTC Report" in the subject line.
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| No More Silence: Take Action ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Over
the last eight years, Pyramid and Ponzi schemes have grown and spread.
The Internet is now choked with "cash gifting" scams and "matrix
selling" frauds. Pyramid selling scams have multiplied and now boast
that the Recession will bring them more desperate "recruits." The false
promise of income from an "endless chain" recruitment scheme is the
lure of these multi-level marketing scams. Many of the "job" and
"business opportunity" solicitations on the internet are nothing more
than pyramid schemes, flim-flam frauds.
Consumers now have a way
to fight back. A petition for stronger regulation is being gathered on
the Pyramid Scheme Alert Website.
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