The Amway Myth:
Analogy to the Days when Cigarettes Were Good for Us.
England wants to kick it out of the country; China banned its pay plan; its offices in India were raided; Top Gun insiders sue it as a massive pyramid scheme; a class action case brought by distributors claim it is an illegal fraud under American law; books and websites detail victim losses.
Yet, Amway maintains the myth of being a "direct sales" company (though it has no retail customers) and a "unique income opportunity" (though indisputable data show that 99% of all Amway distributors lose money.)How does it maintain the lie?A comparison with how the tobacco industry maintained its myth for decades that "cigarettes are harmless" helps to clarify.
See The Amway Myth
Thursday, 24 July 2008
England's case against Amway continues
Government of England Renews Case to Throw Amway Out of Country
July, 2008
After a judge's ruling that severely restricted Amway's operation in England, the English government has appealed the ruling and renewed its case to close Amway down and kick it out of the country.
The Department for Business Enterprise and Regulatory Reform in England charges that Amway is "inherently objectionable" and must be "wound down" (closed down in USA-English). The government claims that Amway violates England's Fair Trading Act 1973 among other laws.
The Fair Trading Act 1973 addresses:-
“Get rich quick schemes [operating] on the same basis as chain letters with each member recruiting further members. Members pay out large sums in the expectation of a high return…the forecasts are derived from…the principle of geometric progression leading to theoretical levels of recruitment reward which, in reality, are impossible to achieve…”
The government based its action partly on findings that show that more than 99% of all Amway distributors lost money; that Amway's top leaders were falsely promising success with the sales of its "tools" (books, tapes and seminars); and that Amway routinely misled recruits in England with false income claims. In fact, the tools only increased the losses of recruit.
After nearly six months of deliberation, a judge decided Amway could continue operations but under severe restrictions, including the complete banning of "tools" by Amway upliners, and massive price cuts. The two main Amway "tools" promoters in England are Britt Worldwide and Network 21. Both have not ceased operations in that country. The ruling to allow Amway to continue was made only after Amway had suspended its recruitment, stopped the tools business, lowered pricing and claimed it had "changed its model."
The government has now decided that the changes were inadequate and to appeal the decision. The judge has allowed the appeal. The government has renewed its case against Amway to close it down completely. The heart of the government's case against Amway mirrors exactly all the claims made against Amway in America, India and many other countries and confirms all the main reasons that China cited when it chose to ban Amway's multi-level pay scheme (and the same for all MLM schemes.)
1. Amway's product are not marketable. They are priced far higher than comparable goods. They are seldom sold to anyone other than the salespeople themselves.
2. More than 99% of all Amway salespeople lose money. More than half quit the scheme within a year, after suffering financial losses
3. The only way to make money in Amway is through "endless chain recruiting", a flawed and fraudulent system that guarantees only the top recruiters can be profitable and is illegal in England and most other places on the planet. (Some have termed this scheme a "closed market swindle.")
4. Extreme deception is used to lure people into the scam
Among the stunning revelations in the judge's ruling:
-- Among Amway's current "active" distributors in the UK, which exceeded 33,000, only about 90 of them earned enough bonus to cover the costs of actively building their business That's a 99.7% loss rate for consumers induced to invest.
-- After the commencement of the investigation Amway cut the cost of homecare products by 48% and personal care products by 29%.
-- For the period 2001-2006, 95% of all bonuses were earned by just 6% of IBO's, 75% of all bonuses were earned by 1.5% of IBO's
-- Over a five-year period, a near 100% turnover rate among the "distributors."
2001-2002: 5,690 were recruited in but 10,149 quit
2002-2003: 6,525 were recruited and 8,000 quit
2004-2005: 12,561 joined and 8,756 quit
-- Amway UK's operation is consistently unprofitable as a business but is sustained by cash from Amway in Korea!
-- Perhaps one of the strangest revelations is that though Amway UK never showed a profit, Amway has dropped prices as much as 48% and eliminated the registration and renewal fees!
The judge's ruling to allow Amway to continue is contingent on:
-- All "tools" business be controlled by Amway UK and it is now impermissible to profit from them.
-- Amway will publish distributor earnings information
-- Both the registration and renewal fees are abolished
-- Amway has restructured so that a new class of representative is created that only retails.
The government did not consider these "reforms" adequate or even basic. Essentially it said the changes don't make a major difference and Amway could not be trusted to implement them in any event.
The case to shut Amway down goes forward, but even under the current ruling of the judge and the changes Amway has made, it is questionable that Amway will survive in the UK. Its entire European operation is badly damaged. And there are even larger consequences.
For example, does the ruling now place Amway in a precarious legal position to put the same safeguards in place in other countries?
Are the findings of the court grounds for lawsuits brought by UK citizens who lost money due to the "closed market swindle."
Victim testimonials and analysis of Amway's USA data prove to be nearly identical in the US and other markets as were revealed in the UK case.
With the UK data as a model, projecting the losses to consumers on a worldwide basis reveals a global scam of mythic dimensions and deception on a scale that few people could grasp.
Related News:
-- A class action lawsuit was filed against Quixtar (Amway) by plaintiffs who are at the bottom of the Amway/Quixtar pyramid. These charges against Amway/Quixtar assert that there is no retail "direct selling" opportunity, only an endless chain recruitment program. The suit was brought by Boies, Schiller and Flexner.
-- Police officials in India raided offices of Amway in the largest state of Andhra Pradesh in the South of India. The police are charging that Amway is deceiving Indian citizens and causing large-scale financial losses by perpetrating a pyramid scheme.
-- China, the largest market in the world, has effectively shut Amway out of that country. The government of China allowed Amway to gain a licence but strictly prohibited Amway from using its pyramid recruitment pay plan. No Amway distributor can earn money from purchases of others in a downline. Without the false lure of the endless chain, Amway's sales will wither in China.
-- Amway founders and top guns have contributed millions to Republican congress members and to President Bush. This was rewarded in 2001 with President Bush's appointment of Timothy Muris, an attorney that worked for Amway, as chairman of the FTC. Muris has since left the FTC and several key Amway protectors in Congress (e.g. Rich Santorum in PA and Tom Delay in TX) were defeated. Dick Devos, the son of Amway founder Richard Devos, ran for governor of Michigan but was defeated.
July, 2008
After a judge's ruling that severely restricted Amway's operation in England, the English government has appealed the ruling and renewed its case to close Amway down and kick it out of the country.
The Department for Business Enterprise and Regulatory Reform in England charges that Amway is "inherently objectionable" and must be "wound down" (closed down in USA-English). The government claims that Amway violates England's Fair Trading Act 1973 among other laws.
The Fair Trading Act 1973 addresses:-
“Get rich quick schemes [operating] on the same basis as chain letters with each member recruiting further members. Members pay out large sums in the expectation of a high return…the forecasts are derived from…the principle of geometric progression leading to theoretical levels of recruitment reward which, in reality, are impossible to achieve…”
The government based its action partly on findings that show that more than 99% of all Amway distributors lost money; that Amway's top leaders were falsely promising success with the sales of its "tools" (books, tapes and seminars); and that Amway routinely misled recruits in England with false income claims. In fact, the tools only increased the losses of recruit.
After nearly six months of deliberation, a judge decided Amway could continue operations but under severe restrictions, including the complete banning of "tools" by Amway upliners, and massive price cuts. The two main Amway "tools" promoters in England are Britt Worldwide and Network 21. Both have not ceased operations in that country. The ruling to allow Amway to continue was made only after Amway had suspended its recruitment, stopped the tools business, lowered pricing and claimed it had "changed its model."
The government has now decided that the changes were inadequate and to appeal the decision. The judge has allowed the appeal. The government has renewed its case against Amway to close it down completely. The heart of the government's case against Amway mirrors exactly all the claims made against Amway in America, India and many other countries and confirms all the main reasons that China cited when it chose to ban Amway's multi-level pay scheme (and the same for all MLM schemes.)
1. Amway's product are not marketable. They are priced far higher than comparable goods. They are seldom sold to anyone other than the salespeople themselves.
2. More than 99% of all Amway salespeople lose money. More than half quit the scheme within a year, after suffering financial losses
3. The only way to make money in Amway is through "endless chain recruiting", a flawed and fraudulent system that guarantees only the top recruiters can be profitable and is illegal in England and most other places on the planet. (Some have termed this scheme a "closed market swindle.")
4. Extreme deception is used to lure people into the scam
Among the stunning revelations in the judge's ruling:
-- Among Amway's current "active" distributors in the UK, which exceeded 33,000, only about 90 of them earned enough bonus to cover the costs of actively building their business That's a 99.7% loss rate for consumers induced to invest.
-- After the commencement of the investigation Amway cut the cost of homecare products by 48% and personal care products by 29%.
-- For the period 2001-2006, 95% of all bonuses were earned by just 6% of IBO's, 75% of all bonuses were earned by 1.5% of IBO's
-- Over a five-year period, a near 100% turnover rate among the "distributors."
2001-2002: 5,690 were recruited in but 10,149 quit
2002-2003: 6,525 were recruited and 8,000 quit
2004-2005: 12,561 joined and 8,756 quit
-- Amway UK's operation is consistently unprofitable as a business but is sustained by cash from Amway in Korea!
-- Perhaps one of the strangest revelations is that though Amway UK never showed a profit, Amway has dropped prices as much as 48% and eliminated the registration and renewal fees!
The judge's ruling to allow Amway to continue is contingent on:
-- All "tools" business be controlled by Amway UK and it is now impermissible to profit from them.
-- Amway will publish distributor earnings information
-- Both the registration and renewal fees are abolished
-- Amway has restructured so that a new class of representative is created that only retails.
The government did not consider these "reforms" adequate or even basic. Essentially it said the changes don't make a major difference and Amway could not be trusted to implement them in any event.
The case to shut Amway down goes forward, but even under the current ruling of the judge and the changes Amway has made, it is questionable that Amway will survive in the UK. Its entire European operation is badly damaged. And there are even larger consequences.
For example, does the ruling now place Amway in a precarious legal position to put the same safeguards in place in other countries?
Are the findings of the court grounds for lawsuits brought by UK citizens who lost money due to the "closed market swindle."
Victim testimonials and analysis of Amway's USA data prove to be nearly identical in the US and other markets as were revealed in the UK case.
With the UK data as a model, projecting the losses to consumers on a worldwide basis reveals a global scam of mythic dimensions and deception on a scale that few people could grasp.
Related News:
-- A class action lawsuit was filed against Quixtar (Amway) by plaintiffs who are at the bottom of the Amway/Quixtar pyramid. These charges against Amway/Quixtar assert that there is no retail "direct selling" opportunity, only an endless chain recruitment program. The suit was brought by Boies, Schiller and Flexner.
-- Police officials in India raided offices of Amway in the largest state of Andhra Pradesh in the South of India. The police are charging that Amway is deceiving Indian citizens and causing large-scale financial losses by perpetrating a pyramid scheme.
-- China, the largest market in the world, has effectively shut Amway out of that country. The government of China allowed Amway to gain a licence but strictly prohibited Amway from using its pyramid recruitment pay plan. No Amway distributor can earn money from purchases of others in a downline. Without the false lure of the endless chain, Amway's sales will wither in China.
-- Amway founders and top guns have contributed millions to Republican congress members and to President Bush. This was rewarded in 2001 with President Bush's appointment of Timothy Muris, an attorney that worked for Amway, as chairman of the FTC. Muris has since left the FTC and several key Amway protectors in Congress (e.g. Rich Santorum in PA and Tom Delay in TX) were defeated. Dick Devos, the son of Amway founder Richard Devos, ran for governor of Michigan but was defeated.
Saturday, 19 July 2008
From cushioned life to hard reality
It has been a long journey for the now infamous Pushpam Appala Naidu, the beleaugured managing director of GoldQuest International Ltd from the air-conditioned cushioned life to the hard reality of spending time in various jails in the country.
The high-profile entrepreneur had been leading the luxurious life inducing several lakhs of people all over India if not all over the sub-continent and for the matter South-East Asia with her smooth sales talk selling great luxury life to all and sundry till the long arm of the law caught her. Now she is in Warangal Central Jail and before that she was in Chennai Central Prison. Spending nights in the dark prison cells without air-condition is not easy for people like her.
The much-travelled middle-aged lady 'inspires' and 'hypnotises' the audiences with her glib talk of getting rich quick and retire early in life. Of ocurse, almost all the executives deliver such talks while addressing a large number of audiences in huge auditoria offering sumptuous lunch. Usually she is followed with much fanfare creating hype among the audiences she is going to address. These fraudsters never leave a doubt in the minds of people about what they are doing is a banned activity in various countries under relevant laws.
Yes. It is a banned activity. The money circulation schemes are banned across the globe. That is why they came up with product-based money circulation schemes like Gold coins, memorabilia by GoldQuest International or self-styled herbal products by Herbalife or so-called luxurious cosmetics by Amway. They all do the same trick of cheating the gullible people with false promises of getting rick quick and early retirement in life and happy holidays in the tropical islands.
But these fraudsters must remember that the long arm of law would not leave anyone and nobody is above law. These fraudulent companies should close shop sooner the better for the good of the people and the country.
People should not fall prey to the false promises of these fraudsters and allow them to plunder our country.
Wednesday, 16 July 2008
Cases piling up against GoldQuest, Herbalife in queue
A number of criminal complaints have been filed against the scandalous GoldQuest International Ltd in spite of threatening by its parent companyQuestNet to file defamation cases against police officers who filed accepted criminal complaints against the company.
Three cases in Warangal District and two cases in Vijayawada, Krishna district were already filed and consumer activists are gearing up to file class action suits against the fraudulent company deamanding compensation from the company for cheating them in the name of sending them coins purportedly having numismatic value which in fact is not true. They also claim refund of their hard-earned money and compensation.
More cases are likely to be filed in Visakhapatnam and Guntur districts soon. It may be recalled that several thousands of people were cheated all over the country with the promise of getting quick rich. In fact, the organisers of the scheme and the vortex in the chain have only benefitted. They amassed enormous wealth. For instance, Eenadu, a vernacular newspaper reported that one of the top grossing members, Padma, has amassed Rs. 22 crore within a short span of three years. If it is not getting quick rich, what else is? It is a classic case of getting quick very rich and followed by Ravi Ramesh Babu of Vijayawada and Rajendra Kumar Solanki of Vijayawada. Bo the latter are anywhere between Rs. 50 lakh to Rs. 2 crore each earned while enrolling new members and getting commissions through enrolling.
One has to wait and watch to see the logical end of these cases and it may drag on for years to come. And this multinational fraudster has not dearth of funds to drag on the case for years. It is high time that the Central Government woke up and threw these fraudulent companies like Amway, Herbalife, GoldQuest and a plethora of similar companies out of the country to save the country and people.
Wednesday, 2 July 2008
GoldQuest racket rocks Andhra Pradesh
There has been uproar all over Andhra Pradesh over the GoldQuest racket in which a sizable number of top shots were involved making a biggest racket in recent times.
GoldQuest International Ltd is a registered company under Companies Act with its registered office at Chennai and it has entered India on the pretext of foreign direct investment. In fact, it started multilevel marketing and garnered several tens of millions of rupees in the name of selling memorabilia including gold and silver coins and others to the gullible people promising nothing short of moon. People were promised that they would get enormous money if they sell the same memorabilia in future as they would get numismatic and antique value. People were also lured into bringing in more members into the scheme to get huge commissions. What the company exactly did was the money circulation scheme which was banned way back in 1978 with a perfect enactment.
If a member is sponsored by an existing member, he is eligible for becoming a member and in turn he can sponsor further two more members. They in turn can sponsor two more members each and one can easily understand that it is a money circulation scheme. But strangely, neither the government officials, nor the Police Department took cognizance of the offence and the company continued the plundering for at least a decade. This resulted in heavy outflow of Indians’ hard-earned money which may be at least Rs. 10,000 crore at a rough estimate.
The money circulation scheme should stop at a logical end and this also reached a stagnation point where no new person is interested in taking membership. Naturally, the persons who joined late are the losers and they started pestering their upline members for refund of money. When they did not get their money back, they started filing cases in police stations.
So far, cases were filed against a number of doctors and other professionals who were attracted to the scheme for the easy and quick money. Naturally, they have taken advantage of their relationship with their clients and made them members in the scheme. Now they repent and say that they were not aware of that the scheme was illegal. They forgot that “ignorantia juris non excusat”. Ignorance of law is no excuse. They are running helter skelter to save their skin and recover their lost glory. They have turned out to be criminals.
Wait and Watch what will in store for them in future. Many of them have already appealed to the Andhra Pradesh High Court for anticipatory bails.
One thing we wish to mention. Your Corporate Frauds Watch has been instrumental in filing cases against these unscrupulous, money mongering people. Watch this space for more news soon.
GoldQuest International Ltd is a registered company under Companies Act with its registered office at Chennai and it has entered India on the pretext of foreign direct investment. In fact, it started multilevel marketing and garnered several tens of millions of rupees in the name of selling memorabilia including gold and silver coins and others to the gullible people promising nothing short of moon. People were promised that they would get enormous money if they sell the same memorabilia in future as they would get numismatic and antique value. People were also lured into bringing in more members into the scheme to get huge commissions. What the company exactly did was the money circulation scheme which was banned way back in 1978 with a perfect enactment.
If a member is sponsored by an existing member, he is eligible for becoming a member and in turn he can sponsor further two more members. They in turn can sponsor two more members each and one can easily understand that it is a money circulation scheme. But strangely, neither the government officials, nor the Police Department took cognizance of the offence and the company continued the plundering for at least a decade. This resulted in heavy outflow of Indians’ hard-earned money which may be at least Rs. 10,000 crore at a rough estimate.
The money circulation scheme should stop at a logical end and this also reached a stagnation point where no new person is interested in taking membership. Naturally, the persons who joined late are the losers and they started pestering their upline members for refund of money. When they did not get their money back, they started filing cases in police stations.
So far, cases were filed against a number of doctors and other professionals who were attracted to the scheme for the easy and quick money. Naturally, they have taken advantage of their relationship with their clients and made them members in the scheme. Now they repent and say that they were not aware of that the scheme was illegal. They forgot that “ignorantia juris non excusat”. Ignorance of law is no excuse. They are running helter skelter to save their skin and recover their lost glory. They have turned out to be criminals.
Wait and Watch what will in store for them in future. Many of them have already appealed to the Andhra Pradesh High Court for anticipatory bails.
One thing we wish to mention. Your Corporate Frauds Watch has been instrumental in filing cases against these unscrupulous, money mongering people. Watch this space for more news soon.
Saturday, 28 June 2008
Prize Chits & Money Circulation Schemes (Banning) Act 1978
The Prize Chits and Money Circulation Schemes[Banning] Act, 1978 [No. 43 of 1978] is an Act to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or incidental thereto.
Be it enacted by Parliament in the Twenty-ninth Year of the Republic of India as follows :-
1. Short title and extent:-
(1) This Act may be called the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
(2) It extends to the whole of India expect the State of Jammu and Kashmir.
2. Definitions:- In this Act, unless the context otherwise requires,-
(a) “conventional chit” means a transaction whether called chit, chit fund, Kuri or by any other name by or under which a person responsible for the conduct of the chit enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money(or certain quantity of grain instead)by way of periodical installments for a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the chit agreement, be entitled to a prize amount.
Explanation:- In this clause “prize amount” shall mean the amount, by whatever name called, arrived at by deducting from out of the total amount paid or payable at each installment by all the subscribers,
(i) the commission charged as service charges as a promoter or a foreman or an agent; and
(ii )any sum which a subscriber agrees to forego, from out of the total subscriptions of each installment, in consideration of the balance being paid to him;
(b) “money” includes a cheque, postal order, demand draft, telegraphic transfer or money order;
(c) “money circulation scheme” means any scheme, by whatever name called, for making of quick or easy money, or for the receipt of any money, or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;
(d) “prescribed” means prescribed by rules made under this Act;
(e) “prize chit” includes any transaction or arrangement by whatever name called under which a person collects whether as a promoter, foreman, agent or in any other capacity, monies in one lump sum or in installments by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service or service charges to or in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement by whatever or the income accruing from investment or other use of such monies for all or any of the following purposes, namely:-
(i) giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or in hand, whether or not the recipient of the prize or gift is under a liability to make any further payment in respect of such scheme or arrangement ;
(ii) refunding to the subscribers or such of them as have not won any prize or gift, the whole part of the subscriptions, contributions or other monies collected, with or without any bonus, premium interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit;
(f)“Reserve Bank” means the Reserve Bank of India constituted under the Reserve Bank of India Act, 1934 (2 of 1934).
3. Banning of prize chits and money circulation schemes or enrolment as members or participation therein: - No person shall promote or conduct any prize chit or money circulation scheme, or enroll as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme.
4. Penalty for contravening the provisions of Section 3:- Whoever contravenes the provisions of Section 3 shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, or with both ; (3) Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.
5. Penalty for other offences in connection with prize chits or money circulation schemes:- Whoever, with a view to the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of this Act or in connection with any chit or scheme promoted or conducted as aforesaid,-
( a ) prints or publishes any ticket, coupon or other document for use in the prize chit or money circulation scheme; or
( b ) sells or distributes or offers or advertises for sale or distribution, or has in his possession for the purpose of sale or distribution any ticket, coupon or other document for use in the prize chit or money circulation scheme ; or
( c ) prints, publishes or distributes, or has in his possession for the purpose of publication or distribution-
(i) any advertisement of the prize chit or money circulation scheme; or
(ii) any list, whether complete or not, of members in the prize chit or money circulation scheme ; or
(iii) any such matter descriptive of, or otherwise relating to the prize chit or money circulation scheme, as is calculated to act as an inducement to persons to participate in that prize chit or money circulation scheme or any other prize chit or money circulation scheme; or
(d) brings, or invites any person to send, for the purpose of sale of distribution, any ticket coupon or other document for use in a prize chit or money circulation scheme or any advertisement of such prize chit or money circulation scheme; or
(e) uses any premises, or causes or knowingly permits any premises to be used, for purposes connected with the promotion or conduct of the prize chit or money circulation scheme; or
(f) causes or procures or attempts to procure any person to do any of the above-mentioned acts, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to three thousand rupees, or with both:
Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.
6. Offences by companies: –(1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceed against and punished accordingly : Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.
(2) Not withstanding anything contained in sub-section (1),where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly .
Explanation: _ -For the purposes of this section –
(a) “Company” means any body corporate and includes a firm or other association of individuals; and
(b) “Director”, in relation to a firm, means a partner in the firm.
7. Power to enter, search and seize: - (1) It shall be lawful for any police officer not below the rank of an officer in charge of a police station,
(a) to enter, if necessary by force, whether by day or night with such assistance as he considers necessary, any premises which he has reason to suspect, are being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of this Act ;
(b) to search the said premises and the persons whom he may find therein;
(c) to take into custody and produce before any Judicial Magistrate all such persons as are concerned or against whom a complaint has been made or credible information has been received or a reasonable suspicion exists of their having been concerned with the use of the said premises for purpose connected with, or with the promotion or conduct of , any such prize chit or money circulation scheme as a foresaid;
(d) to seize all things found in the said premises which are intended to be used, or reasonably suspected to have been used in connection with any such prize chit or money circulation scheme as aforesaid.
(2) Any officer authorised by the State Government in this behalf may-
(a) at all reasonable times, enter into and search any premises which he has reason to suspect ,are being used for the purpose connected with , or conduct of, any prize chit or money circulation scheme in contravention of the provisions of this Act;
(b) examine any person having the control of ,or employed in connection with, any such prize chit or money circulation scheme;
(c) order the production of any documents, books or records in the possession or power of any person having the control of, or employed in connection with, any such prize chit or money circulation scheme; and inspect and seize any register, books of accounts, documents or any other literature found in the said Premises.
(3)All searches under this section shall be made in accordance with the provisions of the code of Criminal Procedure, 1973(2 of 1974).
8. Forfeiture of newspaper and publication and publication containing prize chit or money circulation scheme:-Where any newspaper or other publication contains any material connected with any prize chit or money circulation scheme promoted or conducted in contravention of the provisions of this Act or any advertisement in relation thereto, the State Government may, by notification in the Official Gazette, declare every copy of the newspaper and every copy of the publication containing such material or the advertisement to be forfeited to the State Government.
9. Power to try offences:- No court inferior to that of a Chief Metropolitan magistrate, or as the case may be,Chief Judicial Magistrate, shall try any offence punishable under this Act.
10. Offences under this Act to be cognizable:-All offences punishable under this Act shall be cognizable.
11. Act not to apply to certain prize chits or money circulation schemes.-Nothing contained in this Act shall apply to any prize chit or money circulation scheme promoted by-
(a) a State Government or any officer or authority on its behalf; or
(b) a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme whether it is in the nature of a conventional chit or otherwise; or
(c) a banking company as defined in clause ( c ) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), or a banking institution notified by the Central Government under Section 51 of that Act or the State Bank of India constituted under Section 3 of the State Bank of India Act, 1955 (23 of 1955), or a subsidiary bank constituted under section 3 of the Banking Companies(Acquisition and Transfer of Undertakings)Act, 1970 (5 of 1970),or a Regional Rural Bank established under Section 3 of the Regional Rural Banks Act, 1976 (21 of 1976) or a co-operative bank as defined in clause (ii) of Section 2 of the Reserve Bank of India Act, 1934 ( 2 of 1934);or
(d) any charitable or educational institution notified in this behalf by the State Government, in consultation with the Reserve Bank.
12. Transitional provisions: - (1) Notwithstanding anything contained in this Act, a person conducting a prize chit or money circulation scheme at the commencement of this Act may continue to conduct such chit or scheme for such period as may be necessary for the winding up of the business relating to such chit or scheme, so however that such period shall not in any case extend beyond a period of two years from such commencement: Provided that the said person shall furnish to the State Government or to such officer as may be authorised by it in this behalf and to such office of the Reserve bank as may be prescribed, in such form and within such period as may be prescribed, full information regarding the chit or scheme along with a winding up plan prepared in accordance with the provisions of any rules that may be made by the State Government in this behalf under this Act:
Provided further that if the State Government is satisfied, on an application made by the person conducting the prize chit or money circulation scheme, that the chit or scheme cannot be wound up within the period fixed in the winding up plan furnished to the State Government under the foregoing proviso, it may , in consultation with the Reserve Bank, permit such person to continue to conduct the business relating to the said chit or scheme for such further period as may be considered necessary having regard to the circumstances of the case and the interests of the members of the said chit or scheme.
(2)The State Government may, in consultation with the Reserve Bank, approve the winding up plan furnished under sub-section (1) with or with out modifications or reject the same and may grant- or refuse to grant permission to continue to conduct that chit or scheme:
Provided that no such winding up plan shall be modified or rejected without giving an opportunity of being heard to the person who conducts such prize chit or money circulation scheme.
(3)If any person fails to furnish full information regarding the said chit or scheme along with its winding up plan in the form and within the period prescribed, he shall forfeit his right to continue the business relating to the said chit or scheme on the expiry of such period.
(4) Notwithstanding anything to the contrary contained in any agreement or arrangement entered into between any person conducting any such chit or scheme and the subscriber, the person conducting the chit or scheme shall, within such period as may be prescribed, refund the monies or the subscriptions collected till the date of default referred to in sub-section (3)
(5) If any person fails to comply with the provisions of sub-section (4), he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to three thousand rupees, or with both:
Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.
13. Power to make rules:- (1) The State Government may, by notification the Official Gazette and in consultation with the Reserve Bank, make rules for the purpose of carrying out the provisions of this Act.
(2) In Particular and without prejudice to the generality of the foregoing power, such rules may provide for-
(a) the office of the Reserve Bank to whom full information regarding any prize chit or money circulation scheme may be furnished under the first proviso to sub-section (1)of Section 12, and the form in which and the period within which such information may be furnished;
(b) the particulars relating to the winding up plan of the business relating to prize chits or money circulation schemes.
14. Repeals and saving.-(1) The Andhra Pradesh Money circulation Scheme (Prohibition) Act, 1965 (Andhra Pradesh Act 30 of 1965), as in force in the State of Andhra Pradesh , and in the Union territory of Chandigarh and the Madhya Pradesh Dhan Parichalan Skeem (Pratishedh) Adhiniyam, 1975 (Madhya Pradesh Act of 19 of 1975) , are hereby repealed.
(2) Notwithstanding the repeal of any Act referred to in sub-section (1) , anything done or any action taken under the provisions of any such Act shall, in so far as such thing or action is not inconsistent with the provisions of this Act, be deemed to have been done or taken under the provisions of this Act as if the said provisions were in force when such thing was done or such action was taken and shall continue in force accordingly until superseded by anything done or any action taken under this Act.
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Be it enacted by Parliament in the Twenty-ninth Year of the Republic of India as follows :-
1. Short title and extent:-
(1) This Act may be called the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
(2) It extends to the whole of India expect the State of Jammu and Kashmir.
2. Definitions:- In this Act, unless the context otherwise requires,-
(a) “conventional chit” means a transaction whether called chit, chit fund, Kuri or by any other name by or under which a person responsible for the conduct of the chit enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money(or certain quantity of grain instead)by way of periodical installments for a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the chit agreement, be entitled to a prize amount.
Explanation:- In this clause “prize amount” shall mean the amount, by whatever name called, arrived at by deducting from out of the total amount paid or payable at each installment by all the subscribers,
(i) the commission charged as service charges as a promoter or a foreman or an agent; and
(ii )any sum which a subscriber agrees to forego, from out of the total subscriptions of each installment, in consideration of the balance being paid to him;
(b) “money” includes a cheque, postal order, demand draft, telegraphic transfer or money order;
(c) “money circulation scheme” means any scheme, by whatever name called, for making of quick or easy money, or for the receipt of any money, or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;
(d) “prescribed” means prescribed by rules made under this Act;
(e) “prize chit” includes any transaction or arrangement by whatever name called under which a person collects whether as a promoter, foreman, agent or in any other capacity, monies in one lump sum or in installments by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service or service charges to or in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement by whatever or the income accruing from investment or other use of such monies for all or any of the following purposes, namely:-
(i) giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or in hand, whether or not the recipient of the prize or gift is under a liability to make any further payment in respect of such scheme or arrangement ;
(ii) refunding to the subscribers or such of them as have not won any prize or gift, the whole part of the subscriptions, contributions or other monies collected, with or without any bonus, premium interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit;
(f)“Reserve Bank” means the Reserve Bank of India constituted under the Reserve Bank of India Act, 1934 (2 of 1934).
3. Banning of prize chits and money circulation schemes or enrolment as members or participation therein: - No person shall promote or conduct any prize chit or money circulation scheme, or enroll as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme.
4. Penalty for contravening the provisions of Section 3:- Whoever contravenes the provisions of Section 3 shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, or with both ; (3) Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.
5. Penalty for other offences in connection with prize chits or money circulation schemes:- Whoever, with a view to the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of this Act or in connection with any chit or scheme promoted or conducted as aforesaid,-
( a ) prints or publishes any ticket, coupon or other document for use in the prize chit or money circulation scheme; or
( b ) sells or distributes or offers or advertises for sale or distribution, or has in his possession for the purpose of sale or distribution any ticket, coupon or other document for use in the prize chit or money circulation scheme ; or
( c ) prints, publishes or distributes, or has in his possession for the purpose of publication or distribution-
(i) any advertisement of the prize chit or money circulation scheme; or
(ii) any list, whether complete or not, of members in the prize chit or money circulation scheme ; or
(iii) any such matter descriptive of, or otherwise relating to the prize chit or money circulation scheme, as is calculated to act as an inducement to persons to participate in that prize chit or money circulation scheme or any other prize chit or money circulation scheme; or
(d) brings, or invites any person to send, for the purpose of sale of distribution, any ticket coupon or other document for use in a prize chit or money circulation scheme or any advertisement of such prize chit or money circulation scheme; or
(e) uses any premises, or causes or knowingly permits any premises to be used, for purposes connected with the promotion or conduct of the prize chit or money circulation scheme; or
(f) causes or procures or attempts to procure any person to do any of the above-mentioned acts, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to three thousand rupees, or with both:
Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.
6. Offences by companies: –(1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceed against and punished accordingly : Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.
(2) Not withstanding anything contained in sub-section (1),where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly .
Explanation: _ -For the purposes of this section –
(a) “Company” means any body corporate and includes a firm or other association of individuals; and
(b) “Director”, in relation to a firm, means a partner in the firm.
7. Power to enter, search and seize: - (1) It shall be lawful for any police officer not below the rank of an officer in charge of a police station,
(a) to enter, if necessary by force, whether by day or night with such assistance as he considers necessary, any premises which he has reason to suspect, are being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of this Act ;
(b) to search the said premises and the persons whom he may find therein;
(c) to take into custody and produce before any Judicial Magistrate all such persons as are concerned or against whom a complaint has been made or credible information has been received or a reasonable suspicion exists of their having been concerned with the use of the said premises for purpose connected with, or with the promotion or conduct of , any such prize chit or money circulation scheme as a foresaid;
(d) to seize all things found in the said premises which are intended to be used, or reasonably suspected to have been used in connection with any such prize chit or money circulation scheme as aforesaid.
(2) Any officer authorised by the State Government in this behalf may-
(a) at all reasonable times, enter into and search any premises which he has reason to suspect ,are being used for the purpose connected with , or conduct of, any prize chit or money circulation scheme in contravention of the provisions of this Act;
(b) examine any person having the control of ,or employed in connection with, any such prize chit or money circulation scheme;
(c) order the production of any documents, books or records in the possession or power of any person having the control of, or employed in connection with, any such prize chit or money circulation scheme; and inspect and seize any register, books of accounts, documents or any other literature found in the said Premises.
(3)All searches under this section shall be made in accordance with the provisions of the code of Criminal Procedure, 1973(2 of 1974).
8. Forfeiture of newspaper and publication and publication containing prize chit or money circulation scheme:-Where any newspaper or other publication contains any material connected with any prize chit or money circulation scheme promoted or conducted in contravention of the provisions of this Act or any advertisement in relation thereto, the State Government may, by notification in the Official Gazette, declare every copy of the newspaper and every copy of the publication containing such material or the advertisement to be forfeited to the State Government.
9. Power to try offences:- No court inferior to that of a Chief Metropolitan magistrate, or as the case may be,Chief Judicial Magistrate, shall try any offence punishable under this Act.
10. Offences under this Act to be cognizable:-All offences punishable under this Act shall be cognizable.
11. Act not to apply to certain prize chits or money circulation schemes.-Nothing contained in this Act shall apply to any prize chit or money circulation scheme promoted by-
(a) a State Government or any officer or authority on its behalf; or
(b) a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme whether it is in the nature of a conventional chit or otherwise; or
(c) a banking company as defined in clause ( c ) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), or a banking institution notified by the Central Government under Section 51 of that Act or the State Bank of India constituted under Section 3 of the State Bank of India Act, 1955 (23 of 1955), or a subsidiary bank constituted under section 3 of the Banking Companies(Acquisition and Transfer of Undertakings)Act, 1970 (5 of 1970),or a Regional Rural Bank established under Section 3 of the Regional Rural Banks Act, 1976 (21 of 1976) or a co-operative bank as defined in clause (ii) of Section 2 of the Reserve Bank of India Act, 1934 ( 2 of 1934);or
(d) any charitable or educational institution notified in this behalf by the State Government, in consultation with the Reserve Bank.
12. Transitional provisions: - (1) Notwithstanding anything contained in this Act, a person conducting a prize chit or money circulation scheme at the commencement of this Act may continue to conduct such chit or scheme for such period as may be necessary for the winding up of the business relating to such chit or scheme, so however that such period shall not in any case extend beyond a period of two years from such commencement: Provided that the said person shall furnish to the State Government or to such officer as may be authorised by it in this behalf and to such office of the Reserve bank as may be prescribed, in such form and within such period as may be prescribed, full information regarding the chit or scheme along with a winding up plan prepared in accordance with the provisions of any rules that may be made by the State Government in this behalf under this Act:
Provided further that if the State Government is satisfied, on an application made by the person conducting the prize chit or money circulation scheme, that the chit or scheme cannot be wound up within the period fixed in the winding up plan furnished to the State Government under the foregoing proviso, it may , in consultation with the Reserve Bank, permit such person to continue to conduct the business relating to the said chit or scheme for such further period as may be considered necessary having regard to the circumstances of the case and the interests of the members of the said chit or scheme.
(2)The State Government may, in consultation with the Reserve Bank, approve the winding up plan furnished under sub-section (1) with or with out modifications or reject the same and may grant- or refuse to grant permission to continue to conduct that chit or scheme:
Provided that no such winding up plan shall be modified or rejected without giving an opportunity of being heard to the person who conducts such prize chit or money circulation scheme.
(3)If any person fails to furnish full information regarding the said chit or scheme along with its winding up plan in the form and within the period prescribed, he shall forfeit his right to continue the business relating to the said chit or scheme on the expiry of such period.
(4) Notwithstanding anything to the contrary contained in any agreement or arrangement entered into between any person conducting any such chit or scheme and the subscriber, the person conducting the chit or scheme shall, within such period as may be prescribed, refund the monies or the subscriptions collected till the date of default referred to in sub-section (3)
(5) If any person fails to comply with the provisions of sub-section (4), he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to three thousand rupees, or with both:
Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.
13. Power to make rules:- (1) The State Government may, by notification the Official Gazette and in consultation with the Reserve Bank, make rules for the purpose of carrying out the provisions of this Act.
(2) In Particular and without prejudice to the generality of the foregoing power, such rules may provide for-
(a) the office of the Reserve Bank to whom full information regarding any prize chit or money circulation scheme may be furnished under the first proviso to sub-section (1)of Section 12, and the form in which and the period within which such information may be furnished;
(b) the particulars relating to the winding up plan of the business relating to prize chits or money circulation schemes.
14. Repeals and saving.-(1) The Andhra Pradesh Money circulation Scheme (Prohibition) Act, 1965 (Andhra Pradesh Act 30 of 1965), as in force in the State of Andhra Pradesh , and in the Union territory of Chandigarh and the Madhya Pradesh Dhan Parichalan Skeem (Pratishedh) Adhiniyam, 1975 (Madhya Pradesh Act of 19 of 1975) , are hereby repealed.
(2) Notwithstanding the repeal of any Act referred to in sub-section (1) , anything done or any action taken under the provisions of any such Act shall, in so far as such thing or action is not inconsistent with the provisions of this Act, be deemed to have been done or taken under the provisions of this Act as if the said provisions were in force when such thing was done or such action was taken and shall continue in force accordingly until superseded by anything done or any action taken under this Act.
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Thursday, 3 April 2008
Ten Big Lies of Multi-Level marketing
The 10 Big Lies of Multi-Level Marketing
By Robert L. FitzPatrick
T
he multi-level marketing (MLM) field grows and its member companies multiply. Solicitations to join the movement seem to be everywhere. The impression accordingly grows that it is indeed the "wave of the future", a business model that is gaining momentum, growing in acceptance and legitimacy and, as its promoters claim, will eventually replace most other forms of marketing and sales. Many are led to believe the assertions that success can be found by anyone who faithfully believes in the system and steadfastly adheres to its methods and that, eventually, all of us will become MLM distributors.
My analysis of the MLM business is based upon fourteen years experience in corporate consulting specifically in the distribution field and more than 10 years of research and writing about the MLM model. This has included serving as expert witness in state and federal court cases, corresponding directly with more than 1,500 participants, writing a book, being interviewed for local and national radio, television, newspapers and magazines, and carefully studying numerous MLM marketing and pay plans.
This research has shown that the MLM business model, as it is practiced by most companies, is a marketplace hoax. In those cases, the business is primarily a scheme to continuously enroll distributors and little product is ever retailed to consumers who are not also enrolled as distributors.
In general, MLM industry claims of distributor income potential, its descriptions of the 'network' business model and its prophecies of a reigning destiny in product distribution have as much validity in business as UFO sightings do in the realm of science.
Financially, the odds for an individual to achieve financial success under those circumstances rival the odds of winning at the tables in Las Vegas.
The very legality of the MLM system rests tenuously upon a single 1979 ruling on one company. The guidelines for legality that are set forth in that ruling are routinely ignored by the industry. Lack of governing legislation or oversight by any designated authority also enables the industry to endure despite occasional prosecutions by state Attorneys General or the FTC.
MLM is not defined and regulated like, for instance, franchises are. MLMs can be established without federal or state approval. There is no federal law specifically against pyramid schemes. Many state anti-pyramid statutes are vague or weak. State or federal regulation usually involves first proving that the company is a pyramid scheme. This process can take years and by then, the damage to consumers is done. Indeed, even when MLM pyramids are shut down, often the promoters immediately set up new companies under new names and resume scamming the public.
MLM's economic score card is characterized by massive failure rates and financial losses for millions of consumers. Its structure in which positions on an endless sales chain are purchased by selling or buying goods is mathematically unsustainable and its system of allowing unlimited numbers of distributors in any market area is inherently unstable.
MLM's espoused core business - personal retailing - is contrary to trends in communication technology, cost-effective distribution, and consumer buying preferences. The retailing activity is, in reality, only a pretext for the actual core business - enrolling investors in pyramid organizations that promise exponential income growth.
As in all pyramid schemes, the incomes of those distributors at the top and the profits to the sponsoring corporations come from a continuous influx of new investors at the bottom. Viewed superficially in terms of company profits and the wealth of an elite group at the pinnacle of the MLM industry, the model can appear viable to the uninformed, just as all pyramid schemes do before they collapse or are exposed by authorities.
Deceptive marketing that ably plays upon treasured cultural beliefs, social and personal needs, and some economic trends account for MLM's growth, rather than its ability to meet any consumer needs. The deceptive marketing is nurtured by a general lack of professional evaluation or investigation by reputable business media. Consequently, a popular delusion is supported that MLM is a viable business investment or career choice for nearly everyone and the odds of financial success in the venture are comparable or better than other trades, professions, employment or business ventures.
MLM's true constituency is not the consuming public but rather hopeful investors. The market for these investors grows significantly in times of economic transition, globalization and employee displacement. Promises of quick and easy financial deliverance and the beguiling association of wealth with ultimate happiness also play well in this market setting. The marketing thrust of MLM is accordingly directed to prospective distributors, rather than product promotions to purchasers. Its true products are not long distance phone services, vitamin pills, health potions or skin lotions, but rather the investment propositions for distributorships, which are deceptively portrayed with images of high income, minimal time requirements, small capital investments and early success.
The word, lie, is provoking and it is used here for provocative purposes. At some level, everyone who participates in MLM in which little retailing is occurring is unconsciously lying to himself or herself. Many at the top of these organizations are consciously lying to everyone else. Deception is inherent in this type of MLM scheme and is pervasive in its marketing. Here are 10 of the biggest lies I have found to be present in almost every MLM I have encountered.
Lie #1: MLM is a business offering better opportunities for making large sums of money than all other conventional business and professional models.
Truth: For almost everyone who invests MLM turns out to be a losing financial proposition. This is not an opinion, but a historical fact. Consider some notable examples from among the largest MLMs.
In the largest of all MLMs, Amway, only 1/2 of one percent of all distributors make it to the basic level of "direct" distributor, and the average income of all Amway distributors is about $40 a month. That is gross income before taxes and expenses. When costs are factored, it is obvious that nearly all suffer a loss. Making it to "direct", however, is not a ticket to profitability, but to greater losses. When the Wisconsin Attorney General filed charges against Amway, tax returns from all distributors in the state revealed an average net loss of $918 for that state's "direct" distributors.
Extraordinary sales and marketing obstacles account for much of this failure, but even if the business were more feasible, sheer mathematics would severely limit the opportunity. The MLM type of business structure can support only a small number of financial winners. If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need one million more to duplicate the success. How many people can realistically be enrolled? Much of what appears as growth is in fact only the continuous churning of new enrollees. The money for the rare winners comes from the constant enrollment of armies of losers.
The vast majority of the losers in MLM drop out within a year. In a 1999 court case brought against Melaleuca, one of the country's largest MLMs, the company claimed it has the highest "retention" rate among distributors in the entire MLM industry. Melaleuca boasted a drop-out rate is 5.5% per month. This equates to about 60% per year, if the dropouts are replaced each month.
In its annual report to the SEC, Pre-Paid Legal, another large MLM, revealed that more than 1/2 of all its customers and distributors quit each year and are replaced by another group of hopeful investors.
This pattern of 50-70% of all distributors quitting within one year holds true also for NuSkin, the industry's second largest MLM. NuSkin also exemplifies the accompanying pattern in which a tiny percent of the distributors gain the majority of all company rebates. In 1998, NuSkin paid out 2/3rds of its entire rebates to just 200 upliners out of more than 63,000 "active" distributors. The money they received came directly from the unprofitably investments of the 99.7% of the others.
In 1995, Excel Communications, another "fast growing" MLM, reported to regulators an 86% turnover rate of distributors and 48% drop-out rate among all customers.
To obscure their dismal numbers, some MLMs classify their distributors as "active" and "inactive." The Active group includes only recent participants and those still buying products or receiving rebates. Payout and retention statistics are then disclosed only on the "active" group.
If ALL distributors who participate are included the losses and the average incomes are exposed as much worse. And, if all the distributors who enroll and quit over several years are included, the odds of success for a new distributor/investor are shown to be absurdly low. Yet, these companies typically advertise their business as "an opportunity of a life time" with "unlimited potential."
Lie #2: Network marketing is the most popular and effective new way to bring products to market. Consumers like to buy products on a one-to-one basis in the MLM model.
Truth: If you strip MLM of its hallmark activity of continuously reselling distributorships and examine its foundation, the one-to-one retailing of products to customers, you encounter an unproductive and impractical system of sales upon which the entire structure is supposed to rest. Personal retailing is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and awkwardly engage in business transactions with close friends and relatives. The unfeasibility of door-to-door retailing is why MLM is, in reality, a business that just keeps reselling the opportunity to sign up more distributors.
Lie #3: Eventually all products will be sold by MLM, a new form of marketing. Retail stores, shopping malls, catalogues and most forms of advertising will soon be rendered obsolete by MLM.
Truth: MLM is not new. It has been around since the late 1960's. Yet, today it still represents less than one percent of US retail sales. In year 2000, total US retail sales were $3.232 trillion, according to the Dept. of Commerce. MLM's total sales are about $10 billion. That is about 1/3rd of one percent and most of this sales volume is accounted for by the purchases of hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. Not only are MLM sales insignificant in the marketplace, but MLM fails as a sales model also on the other key factor maintaining customers. Most MLM customers quit buying the goods as soon as they quit seeking the "business opportunity." There is no brand loyalty.
These basic facts show that, as a marketing model, MLM is not replacing existing forms of marketing. It does not legitimately compete with other marketing approaches at all. Rather, MLM represents a new investment scheme that uses the language of marketing and sales of products. Its real products are distributorships which are sold with misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person who might join your 'downline,' the 'big fish' as they are called.
MLM's growth is a manifestation not of its value to the economy, customers or distributors but of the recently high levels of economic fear and insecurity and rising expectations of quick and easy wealth. It is growing in the same way day trading on the stock market, legalized gambling and lotteries are.
Lie #4: MLM is a new way of life that offers happiness and fulfillment. It is a means to attain all the good things in life.
Truth: The most prominent motivating appeal of the MLM industry as shown in industry literature and presented at recruitment meetings is the crassest form of materialism. Fortune 100 companies would blush at the excess of promises of wealth and luxury put forth by MLM solicitors. These promises are presented as the ticket to personal fulfillment. MLM's overreaching appeal to wealth and luxury conflicts with most people's true desire for meaningful and fulfilling work in something in which they have special talent or interest. In short, the culture of this business side tracks many people from their personal values and desires to express their unique talents and aspirations.
Lie #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative visualization to promote MLM enrollment, the use of words like 'communion' to describe a sales organization, and claims that MLM is a fulfillment of Christian principles or Scriptural prophecies are great distortions of these spiritual practices. Those who focus their hopes and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as taught by all the great religions and faiths of humankind. The misuse of these spiritual principles should be a signal that the investment opportunity is deceptive. When a product is wrapped in the flag or in religion, buyer beware! The 'community' and 'support' offered by MLM organizations to new recruits are based entirely upon their purchases. If the purchases and enrollment decline, so does the 'communion.'
Lie #6: Success in MLM is easy. Friends and relatives are the natural prospects. Those who love and support you will become your lifetime customers.
Truth: The commercialization of family and friendship relations or the use of 'warm leads' which is required in the MLM marketing program is a destructive element in the community and very unhealthy for individuals involved. Capitalizing upon family ties and loyalties of friendships in order to build a business can destroy ones social foundation. It places stress on relationships that may never return to their original bases of love, loyalty and support. Beyond its destructive social aspects, experience shows that few people enjoy or appreciate being solicited by friends and relatives to buy products.
Lie #7: You can do MLM in your spare time. As a business, it offers the greatest flexibility and personal freedom of time. A few hours a week can earn a significant supplemental income and may grow to a very large income making other work unnecessary
Truth: decades of experience involving millions of people have proven that making money in MLM requires extraordinary time commitment as well as considerable personal wiliness, persistence and deception. Beyond the sheer hard work and special aptitude required, the business model inherently consumes more areas of ones life and greater segments of time. In MLM, everyone is a prospect. Every waking moment is a potential time for marketing. There are no off-limit places, people or times for selling. Consequently, there is no free space or free time once a person enrolls in MLM system.
Under the guise of creating money independently and in your free time, the system gains control and dominance over people's entire lives and requires rigid conformity to the program. This accounts for why so many people who become deeply involved end up needing and relying upon MLM desperately. They alienate or abandon other sustaining relationships.
Lie #8. MLM is a positive, supportive new business that affirms the human spirit and personal freedom.
Truth: MLM marketing materials reveal that much of the message is fear-driven and based upon deception about income potential. Solicitations frequently include dire predictions about the impending collapse of other forms of distribution, the disintegration or insensitivity of corporate America, and the lack of opportunity in other professions or services. Conventional professions, trades and business are routinely demeaned and ridiculed for not offering 'unlimited income.' Employment is cast as wage enslavement for 'losers.' MLM is presented as the last best hope for many people. This approach, in addition to being deceptive, frequently has a discouraging effect on people who otherwise would pursue their own unique visions of success and happiness. A sound business opportunity does not have to base its worth on negative predictions and warnings.
Lie #9. MLM is the best option for owning your own business and attaining real economic independence.
Truth: MLM is not true self-employment. 'Owning' an MLM distributorship is an illusion. Some MLM companies forbid distributors from carrying additional lines. Most MLM contracts make termination of the distributorship easy and immediate for the company. Short of termination, downlines can be taken away with a variety of means. Participation requires rigid adherence to the 'duplication' model, not independence and individuality. MLM distributors are not entrepreneurs but joiners in a complex hierarchical system over which they have little control.
Lie #10: MLM is not a pyramid scheme because products are sold.
Truth: The sale of products is in no way a protection from anti-pyramid scheme statutes or unfair trade practices set forth in federal and state law. MLMs that sell useful, quality products have been successfully prosecuted under anti-pyramid scheme laws by state and federal officials. MLM is a legal form of business only under certain rigid conditions set forth by the FTC and state Attorneys General. Many MLMs are currently in gross violation of these guidelines and operate only because they have not been prosecuted. Recent court rulings are using a 70% rule to determine an MLM's legality. At least 70% of all goods sold by the MLM company must be purchased by non-distributors. This standard would place most MLM companies outside the law. The largest of all MLMs acknowledges that only 18% of its sales are made to non-distributors.
Robert Fitzpatrick is president of Pyramid Scheme Alert and co-author of the book, False Profits: Seeking Financial and Spiritual Deliverance in Multi-level Marketing and Pyramid Schemes. He is the publisher of THE EAGLE, a quarterly journal on distribution-related issues in the printing and digital imaging industries, continuously published since 1981. He is an author of numerous articles and monographs on distributor marketing in mature industries and he has provided direct consulting services to major manufacturers and distributors including DuPont, Fuji Film USA, Polaroid, and many others. He is a featured speaker at corporate and trade association conferences in the US and abroad. He occasionally serves as expert witness in cases brought by state Attorneys General or by distributors against multi-level marketing companies charged with operating as pyramid schemes. Robert Fitzpatrick can be reached at 1522 Lilac Rd., Charlotte, NC 28209, Tel: (704) 334-2047, email: RFitzPatrick@pyramidschemealert.org, websites: http://www.pyramidschemealert.org and http://www.falseprofits.com
By Robert L. FitzPatrick
T
he multi-level marketing (MLM) field grows and its member companies multiply. Solicitations to join the movement seem to be everywhere. The impression accordingly grows that it is indeed the "wave of the future", a business model that is gaining momentum, growing in acceptance and legitimacy and, as its promoters claim, will eventually replace most other forms of marketing and sales. Many are led to believe the assertions that success can be found by anyone who faithfully believes in the system and steadfastly adheres to its methods and that, eventually, all of us will become MLM distributors.
My analysis of the MLM business is based upon fourteen years experience in corporate consulting specifically in the distribution field and more than 10 years of research and writing about the MLM model. This has included serving as expert witness in state and federal court cases, corresponding directly with more than 1,500 participants, writing a book, being interviewed for local and national radio, television, newspapers and magazines, and carefully studying numerous MLM marketing and pay plans.
This research has shown that the MLM business model, as it is practiced by most companies, is a marketplace hoax. In those cases, the business is primarily a scheme to continuously enroll distributors and little product is ever retailed to consumers who are not also enrolled as distributors.
In general, MLM industry claims of distributor income potential, its descriptions of the 'network' business model and its prophecies of a reigning destiny in product distribution have as much validity in business as UFO sightings do in the realm of science.
Financially, the odds for an individual to achieve financial success under those circumstances rival the odds of winning at the tables in Las Vegas.
The very legality of the MLM system rests tenuously upon a single 1979 ruling on one company. The guidelines for legality that are set forth in that ruling are routinely ignored by the industry. Lack of governing legislation or oversight by any designated authority also enables the industry to endure despite occasional prosecutions by state Attorneys General or the FTC.
MLM is not defined and regulated like, for instance, franchises are. MLMs can be established without federal or state approval. There is no federal law specifically against pyramid schemes. Many state anti-pyramid statutes are vague or weak. State or federal regulation usually involves first proving that the company is a pyramid scheme. This process can take years and by then, the damage to consumers is done. Indeed, even when MLM pyramids are shut down, often the promoters immediately set up new companies under new names and resume scamming the public.
MLM's economic score card is characterized by massive failure rates and financial losses for millions of consumers. Its structure in which positions on an endless sales chain are purchased by selling or buying goods is mathematically unsustainable and its system of allowing unlimited numbers of distributors in any market area is inherently unstable.
MLM's espoused core business - personal retailing - is contrary to trends in communication technology, cost-effective distribution, and consumer buying preferences. The retailing activity is, in reality, only a pretext for the actual core business - enrolling investors in pyramid organizations that promise exponential income growth.
As in all pyramid schemes, the incomes of those distributors at the top and the profits to the sponsoring corporations come from a continuous influx of new investors at the bottom. Viewed superficially in terms of company profits and the wealth of an elite group at the pinnacle of the MLM industry, the model can appear viable to the uninformed, just as all pyramid schemes do before they collapse or are exposed by authorities.
Deceptive marketing that ably plays upon treasured cultural beliefs, social and personal needs, and some economic trends account for MLM's growth, rather than its ability to meet any consumer needs. The deceptive marketing is nurtured by a general lack of professional evaluation or investigation by reputable business media. Consequently, a popular delusion is supported that MLM is a viable business investment or career choice for nearly everyone and the odds of financial success in the venture are comparable or better than other trades, professions, employment or business ventures.
MLM's true constituency is not the consuming public but rather hopeful investors. The market for these investors grows significantly in times of economic transition, globalization and employee displacement. Promises of quick and easy financial deliverance and the beguiling association of wealth with ultimate happiness also play well in this market setting. The marketing thrust of MLM is accordingly directed to prospective distributors, rather than product promotions to purchasers. Its true products are not long distance phone services, vitamin pills, health potions or skin lotions, but rather the investment propositions for distributorships, which are deceptively portrayed with images of high income, minimal time requirements, small capital investments and early success.
The word, lie, is provoking and it is used here for provocative purposes. At some level, everyone who participates in MLM in which little retailing is occurring is unconsciously lying to himself or herself. Many at the top of these organizations are consciously lying to everyone else. Deception is inherent in this type of MLM scheme and is pervasive in its marketing. Here are 10 of the biggest lies I have found to be present in almost every MLM I have encountered.
Lie #1: MLM is a business offering better opportunities for making large sums of money than all other conventional business and professional models.
Truth: For almost everyone who invests MLM turns out to be a losing financial proposition. This is not an opinion, but a historical fact. Consider some notable examples from among the largest MLMs.
In the largest of all MLMs, Amway, only 1/2 of one percent of all distributors make it to the basic level of "direct" distributor, and the average income of all Amway distributors is about $40 a month. That is gross income before taxes and expenses. When costs are factored, it is obvious that nearly all suffer a loss. Making it to "direct", however, is not a ticket to profitability, but to greater losses. When the Wisconsin Attorney General filed charges against Amway, tax returns from all distributors in the state revealed an average net loss of $918 for that state's "direct" distributors.
Extraordinary sales and marketing obstacles account for much of this failure, but even if the business were more feasible, sheer mathematics would severely limit the opportunity. The MLM type of business structure can support only a small number of financial winners. If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need one million more to duplicate the success. How many people can realistically be enrolled? Much of what appears as growth is in fact only the continuous churning of new enrollees. The money for the rare winners comes from the constant enrollment of armies of losers.
The vast majority of the losers in MLM drop out within a year. In a 1999 court case brought against Melaleuca, one of the country's largest MLMs, the company claimed it has the highest "retention" rate among distributors in the entire MLM industry. Melaleuca boasted a drop-out rate is 5.5% per month. This equates to about 60% per year, if the dropouts are replaced each month.
In its annual report to the SEC, Pre-Paid Legal, another large MLM, revealed that more than 1/2 of all its customers and distributors quit each year and are replaced by another group of hopeful investors.
This pattern of 50-70% of all distributors quitting within one year holds true also for NuSkin, the industry's second largest MLM. NuSkin also exemplifies the accompanying pattern in which a tiny percent of the distributors gain the majority of all company rebates. In 1998, NuSkin paid out 2/3rds of its entire rebates to just 200 upliners out of more than 63,000 "active" distributors. The money they received came directly from the unprofitably investments of the 99.7% of the others.
In 1995, Excel Communications, another "fast growing" MLM, reported to regulators an 86% turnover rate of distributors and 48% drop-out rate among all customers.
To obscure their dismal numbers, some MLMs classify their distributors as "active" and "inactive." The Active group includes only recent participants and those still buying products or receiving rebates. Payout and retention statistics are then disclosed only on the "active" group.
If ALL distributors who participate are included the losses and the average incomes are exposed as much worse. And, if all the distributors who enroll and quit over several years are included, the odds of success for a new distributor/investor are shown to be absurdly low. Yet, these companies typically advertise their business as "an opportunity of a life time" with "unlimited potential."
Lie #2: Network marketing is the most popular and effective new way to bring products to market. Consumers like to buy products on a one-to-one basis in the MLM model.
Truth: If you strip MLM of its hallmark activity of continuously reselling distributorships and examine its foundation, the one-to-one retailing of products to customers, you encounter an unproductive and impractical system of sales upon which the entire structure is supposed to rest. Personal retailing is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and awkwardly engage in business transactions with close friends and relatives. The unfeasibility of door-to-door retailing is why MLM is, in reality, a business that just keeps reselling the opportunity to sign up more distributors.
Lie #3: Eventually all products will be sold by MLM, a new form of marketing. Retail stores, shopping malls, catalogues and most forms of advertising will soon be rendered obsolete by MLM.
Truth: MLM is not new. It has been around since the late 1960's. Yet, today it still represents less than one percent of US retail sales. In year 2000, total US retail sales were $3.232 trillion, according to the Dept. of Commerce. MLM's total sales are about $10 billion. That is about 1/3rd of one percent and most of this sales volume is accounted for by the purchases of hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. Not only are MLM sales insignificant in the marketplace, but MLM fails as a sales model also on the other key factor maintaining customers. Most MLM customers quit buying the goods as soon as they quit seeking the "business opportunity." There is no brand loyalty.
These basic facts show that, as a marketing model, MLM is not replacing existing forms of marketing. It does not legitimately compete with other marketing approaches at all. Rather, MLM represents a new investment scheme that uses the language of marketing and sales of products. Its real products are distributorships which are sold with misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person who might join your 'downline,' the 'big fish' as they are called.
MLM's growth is a manifestation not of its value to the economy, customers or distributors but of the recently high levels of economic fear and insecurity and rising expectations of quick and easy wealth. It is growing in the same way day trading on the stock market, legalized gambling and lotteries are.
Lie #4: MLM is a new way of life that offers happiness and fulfillment. It is a means to attain all the good things in life.
Truth: The most prominent motivating appeal of the MLM industry as shown in industry literature and presented at recruitment meetings is the crassest form of materialism. Fortune 100 companies would blush at the excess of promises of wealth and luxury put forth by MLM solicitors. These promises are presented as the ticket to personal fulfillment. MLM's overreaching appeal to wealth and luxury conflicts with most people's true desire for meaningful and fulfilling work in something in which they have special talent or interest. In short, the culture of this business side tracks many people from their personal values and desires to express their unique talents and aspirations.
Lie #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative visualization to promote MLM enrollment, the use of words like 'communion' to describe a sales organization, and claims that MLM is a fulfillment of Christian principles or Scriptural prophecies are great distortions of these spiritual practices. Those who focus their hopes and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as taught by all the great religions and faiths of humankind. The misuse of these spiritual principles should be a signal that the investment opportunity is deceptive. When a product is wrapped in the flag or in religion, buyer beware! The 'community' and 'support' offered by MLM organizations to new recruits are based entirely upon their purchases. If the purchases and enrollment decline, so does the 'communion.'
Lie #6: Success in MLM is easy. Friends and relatives are the natural prospects. Those who love and support you will become your lifetime customers.
Truth: The commercialization of family and friendship relations or the use of 'warm leads' which is required in the MLM marketing program is a destructive element in the community and very unhealthy for individuals involved. Capitalizing upon family ties and loyalties of friendships in order to build a business can destroy ones social foundation. It places stress on relationships that may never return to their original bases of love, loyalty and support. Beyond its destructive social aspects, experience shows that few people enjoy or appreciate being solicited by friends and relatives to buy products.
Lie #7: You can do MLM in your spare time. As a business, it offers the greatest flexibility and personal freedom of time. A few hours a week can earn a significant supplemental income and may grow to a very large income making other work unnecessary
Truth: decades of experience involving millions of people have proven that making money in MLM requires extraordinary time commitment as well as considerable personal wiliness, persistence and deception. Beyond the sheer hard work and special aptitude required, the business model inherently consumes more areas of ones life and greater segments of time. In MLM, everyone is a prospect. Every waking moment is a potential time for marketing. There are no off-limit places, people or times for selling. Consequently, there is no free space or free time once a person enrolls in MLM system.
Under the guise of creating money independently and in your free time, the system gains control and dominance over people's entire lives and requires rigid conformity to the program. This accounts for why so many people who become deeply involved end up needing and relying upon MLM desperately. They alienate or abandon other sustaining relationships.
Lie #8. MLM is a positive, supportive new business that affirms the human spirit and personal freedom.
Truth: MLM marketing materials reveal that much of the message is fear-driven and based upon deception about income potential. Solicitations frequently include dire predictions about the impending collapse of other forms of distribution, the disintegration or insensitivity of corporate America, and the lack of opportunity in other professions or services. Conventional professions, trades and business are routinely demeaned and ridiculed for not offering 'unlimited income.' Employment is cast as wage enslavement for 'losers.' MLM is presented as the last best hope for many people. This approach, in addition to being deceptive, frequently has a discouraging effect on people who otherwise would pursue their own unique visions of success and happiness. A sound business opportunity does not have to base its worth on negative predictions and warnings.
Lie #9. MLM is the best option for owning your own business and attaining real economic independence.
Truth: MLM is not true self-employment. 'Owning' an MLM distributorship is an illusion. Some MLM companies forbid distributors from carrying additional lines. Most MLM contracts make termination of the distributorship easy and immediate for the company. Short of termination, downlines can be taken away with a variety of means. Participation requires rigid adherence to the 'duplication' model, not independence and individuality. MLM distributors are not entrepreneurs but joiners in a complex hierarchical system over which they have little control.
Lie #10: MLM is not a pyramid scheme because products are sold.
Truth: The sale of products is in no way a protection from anti-pyramid scheme statutes or unfair trade practices set forth in federal and state law. MLMs that sell useful, quality products have been successfully prosecuted under anti-pyramid scheme laws by state and federal officials. MLM is a legal form of business only under certain rigid conditions set forth by the FTC and state Attorneys General. Many MLMs are currently in gross violation of these guidelines and operate only because they have not been prosecuted. Recent court rulings are using a 70% rule to determine an MLM's legality. At least 70% of all goods sold by the MLM company must be purchased by non-distributors. This standard would place most MLM companies outside the law. The largest of all MLMs acknowledges that only 18% of its sales are made to non-distributors.
Robert Fitzpatrick is president of Pyramid Scheme Alert and co-author of the book, False Profits: Seeking Financial and Spiritual Deliverance in Multi-level Marketing and Pyramid Schemes. He is the publisher of THE EAGLE, a quarterly journal on distribution-related issues in the printing and digital imaging industries, continuously published since 1981. He is an author of numerous articles and monographs on distributor marketing in mature industries and he has provided direct consulting services to major manufacturers and distributors including DuPont, Fuji Film USA, Polaroid, and many others. He is a featured speaker at corporate and trade association conferences in the US and abroad. He occasionally serves as expert witness in cases brought by state Attorneys General or by distributors against multi-level marketing companies charged with operating as pyramid schemes. Robert Fitzpatrick can be reached at 1522 Lilac Rd., Charlotte, NC 28209, Tel: (704) 334-2047, email: RFitzPatrick@pyramidschemealert.org, websites: http://www.pyramidschemealert.org and http://www.falseprofits.com
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