Kerala government’s guidelines in favour of MLMs says expert

Moneylife Digital Team

While intention of the state government may be genuine, its new guidelines for direct selling companies will not curb the menace of MLMs but in fact would shield them

The guidelines being framed by the Kerala state government to distinguish a genuine direct selling company from fake one are grossly inadequate and misleading. According to an expert in reality, it (the guidelines) aims to protect the fake money multiplier companies and schemes. Kerala is trying to become the second state, after Manipur, to have separate guidelines for multi-level marketing (MLM) companies.

Robert FitzPatrcik, co-author of False Profits, the first book-length analysis of pyramid schemes and multi-level marketing, told Moneylife that, “The rules (being framed by Kerala government) noted are grossly inadequate and misleading and, I fear, will  result in the tragedy of  millions morepeople falling victim to pyramid frauds that are disguised to look like legitimate sales companies. By prohibiting requirements to recruit others or to buy products, and by requiring that all payment be based on a purchase, the rule has "validated" a pyramid scheme that is disguised as a sales company, but, beneath the disguise, is perpetrating a blatant fraud.

Mr FitzPatrick is also founder and president of ‘Pyramid Scheme Alert’ and is based in the US.

The Kerala government had set up a high-level committee headed by the chief secretary following the complaints of few direct selling firms, calling themselves genuine, which were affected by the drive of the investigating agencies to weed out ‘get-rich-quick’ companies. The guidelines were approved by the state cabinet on 12th September 2011. 

According these guidelines, any direct selling company would be considered ‘valid’ if it does not directly ask seller or a consumer to purchase any product or collect membership fees as a condition precedent for enrolment. The compensation should be based solely on the quantum of goods and services. These entities would also require giving full refund to consumers who have returned the unsatisfied goods within 30 days. 

Mr FitzPatrick says that either handing over cash or purchasing products, these schemes still remain fraudulent. “The fraud lies in the false and misleading income proposition, not in the official requirements regarding products and purchases. It matter little if a person is defrauded by handing over cash or by purchasing products. If the fraud that induced the payment or the purchase are the same, and the net effect is the same -- huge losses -- then the policies protected no one. Indeed they achieved the opposite by giving protection to the scams.”

Apart from legally registering and filling necessary tax returns mandated under law, according to the guideline, these direct selling entities should also have a valid license or a registered trademark identifying its promoter, goods and services. They should also maintain websites with complete details of the company, and other such as price, terms and condition of its products/ services.

However Mr FitzPatrick says that the new policies of this state would legitimize a gross unfair and deceptive marketing practice. “Allowing the endless chain promise to drive purchases corrupts and pollutes the market place. It lures millions to join the schemes in the desperate need, not of the products, but of income. Yet, these schemes, by their design, cannot offer income to any but a few. To all others, the schemes, by design, cause financial losses.

He adds, “For this income promise to be valid, the chain of salespeople would have to extend forever, which obviously it cannot. Those who join later will not be able to gain the income because they will not be able to enroll enough new members. So the harm of the pyramid scheme occurs, just as if the money were directly transferred rather than through product purchases.”

In India there are various direct selling firms such as Amway, Herbalife, Tupperware have huge market base and membership with turnover amounting to several crore.

The sales people, according to the directive, should carry their identity cardissued by the government while selling the product. It should also furnish full details of the order date, amount, and bill to the consumer. Interestingly, the direct seller should take prior permission or appointment of the person to whom the goods or services are intended to be sold.

It is important to note that, apart from Kerala, other states like Manipur, Rajasthan, Maharashtra and Andhra Pradesh are keeping tight vigil on ponzi schemes.

Moneylife had reported that Kerala, said to be the country’s most literate state, is flooded with numerous ‘get-rich-quick’ or ‘earn-huge-return’ schemes offered by money swindlers. While the state director general of police has admitted noticing frauds amounting to over Rs1,000 crore, the worrying factor is that even a few policemen have been found to be involved in these MLM schemes.

Mr FitzPatrick says that actual fraud in MLM is the deceptive promise. “The fraud of pyramid scheme is not in whether money changes hands directly or throughout the vehicle of a purchase. The fraud is in the deceptive promise which cannot be fulfilled. The rule would not prohibit the use of this "endless chain" lie. It would, in fact, validate it by merely requiring that it assume a disguise and enact meaningless "policies" that have no effect in practice.