News from Pyramid Scheme Alert.org

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Anyone who has followed the multi-level marketing industry's 30-year trajectory from a scorned, shady and often prosecuted corner of the marketplace to a powerful Washington lobby, a force on Wall Street, and a nearly universal scavenger on Main Street has seen a sad spectacle often repeated: state and federal regulators routinely ignore consumer complaints about MLM deception and consumer losses, or, the regulators barely slap the wrists of MLMs and then allow to them to continue to prey upon the citizenry.

How do MLMs escape jail time or being shut down as consumer frauds? Political influence-buying (money), high-paid and aggressive legal defense and deceptive PR are major factors that enable MLMs to slip through the bars.
These backroom forces are clearly at work, but there must also be an additional factor. This is a public rationalization that allows the schemes to plead innocence with a straight face and to give cover to politicians and regulators who are forced to let the pyramids drain millions from citizens already struggling in the Great Recession.

This public rationalization is the claim of a legal "loophole". MLMs argue that if the MLM money, lost by thousands at the bottom of the MLM pyramid and transferred to the few recruiters at the top, is derived mostly from "product purchases", the scheme is miraculously cleansed of the stain of fraud. If the money is laundered mostly through products, it does not matter if virtually everyone made no profit, if success depends on recruiting, or if the scheme falsely advertises "infinite" income growth potential.

And, the product can be almost anything from "super" drinks that are just ordinary fruit juice, "miracle" meals that are tasteless and merely low calorie, vitamins that are no different from those in stores except they cost five times as much, wealth seminars that only cause more debt, e-books that have nothing useful in them, or discount coupons that offer nothing that can't be found elsewhere for free. In the loophole argument, these frequently bogus goods or services can also be priced at exorbitant, uncompetitive levels, making retail "direct selling" impossible. Even naked upfront fees can sometimes also be called "products" because they claim to offer the "buyer" special rights, benefits, or membership/agency status.

In the loophole narrative, the money transfers are re-labeled "sales and purchases" and "commissions and bonuses." Wink, wink, nod, nod.

Now, with this rationalization, the essential elements of the pyramid - which are in plain sight for all to see - can be ignored or a pretense can be maintained that they are something different from what they obviously are. These include:
-- the false promise that the income opportunity is "unlimited" or "infinite" based on "endless" expansion;
-- the fact the MLM "direct salespeople" don't sell products to retail customers but mostly recruit other salespeople and that sustainable profit requires recruiting forever;
-- the effective requirement of a "purchase" and recruiting in order to benefit in the commission plan);
-- and the transfer of most "commission" payments to the top 1% of recruiters).

Also ignored under the cover of the "product" and "direct selling" loophole:
-- the blatant pyramid structure, sometimes with 10 or more levels;
-- the top-loaded pyramid pay plan with more "commission" per sale transferred to the upper levels than to the person at the bottom who does the work;
-- the documented 99% loss rates among the consumers who invest;
-- the contrived and deceptive income "testimonials" to lure people in;
-- the recruitment rallies aimed at getting consumers to invest without due diligence and relying on false income claims;
-- the usually exorbitant prices of MLM "products" (sometimes 300-800% over competitive products in stores, with as much as half of the exorbitant price going to recruiters' "commissions").

A Rose by Any Other Name
A closer look reveals this legal loophole (the cover story of products and direct selling) to be as much a fiction as the MLM income promises. Paraphrasing Shakespeare, a pyramid scheme would cause just as much harm if it called "direct selling"; a pyramid recruitment payoff stinks just as much when it is re-labeled a "commission"; and a promise of "unlimited" income from "endless" expansion is a just as much a lie when there is a product involved.

A pyramid scheme is not defined by buying products or not-buying products. It is defined by a flawed, unsustainable structure in which investor/salespeople income depends on continuous recruitment of new investor/salespeople (robbing Peter to pay Paul) and on a deceptive sales pitch about "unlimited" income and profits (fraudulent claims).

Pyramids, by design, are both deceptive and harmful. Product-based pyramids cause the same or greater level of harm and make the very same deceptive income claims as those without products, the so-called naked pyramid scheme. Pyramid schemes - with or without products - are frauds. If state anti-pyramid laws are not adequate or too limited, all states have anti-fraud laws that would cover deceptive business opportunity solicitations. Yes, despite the fraud laws already on the books. The MLM "product" loophole continues to be cited as the reason for lack of prosecution.

It should be remembered that even the "naked" pyramids also have their own "loophole" argument. These schemes, generally called "cash gifting," (some of them were known by the names, Airplane Game, Original Dinner Party, etc.) claim that they too do not charge "fees" to join and do not pay "rewards" for recruiting, which most state anti-pyramid laws specify as requirements to be defined as a pyramid. Therefore, the "gifting schemes" are also not pyramid schemes either, their leaders claim. They simply facilitate gifts! They are just private clubs where people give and receive. The largest gifting program was called "Women Helping Women." As many as a million women joined in the USA and Canada. The scheme claimed everyone could receive an 800% profit on their original "gift" (in fact 90+% had to lose) and the opportunity was always "unlimited." Each person who joined made a gift of money and later, as others also made their gifts, the earlier people received gifts from as many as eight others. Wink, wink, nod, nod.

As a side note, experts have determined that the cash gifting schemes, which have no products, actually cause less economic harm than the MLMs do, which use products as their fig leaf. More participants in the cash gifting schemes actually can make money (nearly 10% versus less than 1% in the product-based MLM schemes and the average losses per person are less. Yet, many of these schemes are aggressively prosecuted, while the MLMs were allowed to continue plundering.)

Apply the Test
There is a simple test a consumer can apply who is evaluating a MLM scheme that sells a "product": If your MLM income depends upon your recruiting more MLM participants (salespeople, distributors, coaches, associates, IBOs, or whatever they are called), then you are in an "endless chain." Said another way, if you can't make a sustainable profit from selling your "product" to retail customers, one at a time, day in and day out, without signing up more "salespeople" under you, then you are not in a direct selling business; you are in a pyramid recruitment scheme. It's as simple as that.

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