Angel or Devil?

MLM and Pyramid Schemes; in the Eyes of the Law


In recent years, entrepreneurship and start-ups are rapidly becoming a trend. Everyone wants to be the “boss” of their own life and own businesses; with hopes of reaching that “pot of gold” at the end of the rainbow. Thus, it is easy for one to get tangled in a web of fraud, mischief, and unwanted repercussions.

Often, these “opportunities” come from “networking platforms” and “investment schemes”. It is therefore prudent to always be wary of your options and conduct the necessary checks; to ensure that your next “financial adventure” is secured. This article seeks to provide a brief understanding on two business models; “multi-level marketing” and “pyramid schemes”. This article will also briefly examine the legality of these business models, under the laws of Malaysia.

Multi-Level Marketing

Multi-level marketing is a business model that thrives on a system where independent salespeople (also known as “distributors”) sell consumer products to their network of friends and family members. It is akin to allowing individuals to form their own “start-ups” by selling consumer products and eventually having a “team” selling these same products to a wider network of friends and family members.

Companies such as Amway, Nu Skin, Mary Kay, and Herbalife have arguably utilised this business model to its full potential. Many individuals are now “distributors” of these companies and their brands are well-known throughout the globe.

This business model may also be known as “direct-selling”; a business method which is accepted, both ethically and legally.

Pyramid Schemes

Pyramid schemes employ a very similar system to that of multi-level marketing. However, instead of selling marketable products, such schemes focus on making quick profits from selling contacts and/or the right to recruit others; i.e. the more “participants” to your “network”, the more money you will make. Pyramid schemes are illegal in Malaysia and in most other countries around the world.

Section 27B of the Malaysian Direct Sales and Anti-Pyramid Scheme Act 1993 makes it illegal for any individual and/or corporation to conduct a pyramid scheme. The penalty of such an offence is; a fine not less than RM1 million and not more than RM10 million and, for a second or subsequent office, a fine not less than RM10 million and not more than RM50 million – if the offence is committed by a body corporate, partnership or society; and a fine not less than RM500,000-00 and not more than RM5 million or to an imprisonment term not exceeding five (5) years or both and, for a second or subsequent offence, a fine not less than RM1 million and not more than RM10 million or to an imprisonment term not exceeding ten (10) years or both.

How Does One Identify a Pyramid Scheme?

The Schedule to the Direct Sales and Anti-Pyramid Scheme Act 1993 provides 10 key points on identifying whether a business model is indeed a pyramid scheme:-

                                               
Point 1: The promotion of the scheme is based on receiving bonuses and/or benefits solely or primarily from the recruitment or introduction of participants into the scheme. There is no sale of goods, services, or intangible property by the participants.
                                               
Point 2: The payment of bonus to the participants and/or the benefits received by the participants are derived solely or primarily from the recruitment or introduction of participants into the scheme. There is no sale of goods, services, or intangible property by the participants or other persons.
                                               
Point 3: There is no contract or written agreement that lays out the material terms of the legal relationship between the participants and the scheme.
                                               
Point 4: A mandatory purchase of goods, services, or intangible property or a minimum payment or sale requirement is imposed on the participants as a condition to be eligible for participation in the scheme and/or to receive bonus and/or benefits from the scheme.
                                               
Point 5: Participants are required to purchase goods, services, or intangible property in unreasonable amounts and are thereafter, expected to sell and/or consume them in an unreasonable amount of time. In certain instances, participants are pressured into purchasing selected packages; to meet sales requirements which qualify the participant for position and/or bonuses in the scheme.
                                               
Point 6: There is no refund for the goods, services, or intangible property purchased by the participants.
                                               
Point 7: There is no buy-back policy provided by the scheme for currently marketable goods, services, or intangible products; notwithstanding reasonable request made by the participants.
                                               
Point 8: There exist a strict or unreasonable structural requirement within the scheme for the participants’ eligibility to receive bonuses and/or other benefits.
                                               
Point 9: Participants of the scheme cannot withdraw themselves.
                                               
Point 10: The participants are allowed or encouraged to buy more than one position or “right to participate” within the scheme.

Conclusion

It is indeed a very thin line to be drawn; in deciding whether one business opportunity is adopting a multi-level marketing method or whether it is merely a sham in the shape of a pyramid scheme. Whilst properly conducted multi-level marketing businesses offer the opportunity for a better life, a pyramid scheme will almost certainly offer you the opportunity to experience prison-life.

In our ever-changing and ever-challenging business world, it is important to seize the correct opportunities. Whenever in doubt, remember the 10 points highlighted above and do your necessary checks to ensure that your “financial adventure” is secured. If all else fails, consult your friendly neighbourhood lawyer; a “Milo-peng” at the “mamak” store could potentially save you thousands or even millions.