Merchants of Dreams

Prof E. Bijoykumar Singh *

Multi-level marketing (MLM) tree diagram :: Pix - Wikipedia/JohnDoe0007

I have an old friend who used to meet me every month and a few months back he declared that his lot would improve as he was in Amway. He was excited. I felt happy because he would be happier. Amway (American Way), Herbalife are very familiar names and every section of our society has been touched by such money making schemes in some way or the other. Dreams have been realised and the bandwagon effect has set in. But can dreams last forever?

We hear the rumblings from the southern states. The Kerala police recently arrested Amway India chairman and managing director William Scott Pinckney and two others. They have been charged under section 420 of Indian Penal Code (cheating) along with sections dealing with chit funds and the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

A typical complaint is like this. Amway agents collected Rs.3.5 lakh from the complainant for products sold by the companies and was asked to add more members to the chain. When the complainant could not add more members and hence sought a refund, the agents refused. The Andhra Pradesh High Court had a few years ago declared that the business run by Amway attracts provisions of the Money Circulation Schemes (Banning) Act. . The CID in Andhra Pradesh cautioned people not to participate or join the Amway India Enterprises or any of its kind as "the business is illegal and the government ....has banned even advertisements of Amway products,''. Money Circulation Schemes are banned under the provisions of Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

Money Circulation Scheme means any scheme wherein the person has to enrol into the scheme through an already enrolled member by subscribing to the scheme by paying initial kit / membership amount and purchasing goods and services, wherein by this the introducer of the enrolled member will get benefits (easy money) and the company which promotes the scheme earns quick money. The enrolled member again has to enrol further members to get his amount back and also the benefits.

By this the promoter of the company by just promoting the scheme gets benefits and the person who enrols at the initial of the scheme reaps the benefits. By enrolment into such scheme one would be getting back the initial paid investment and keep gaining financially by enrolling new members. The second set of enrollers keeps multiplying and gain financially, fascinating every onlooker to get engrossed into such money circulation schemes. The promoters promote their schemes through high profile campaign by using film stars, Government servants, Doctors, Engineers and well known personalities of the society in their meetings which are conducted in star hotels with lots of fanfare.

They give attractive names to the enrolled members depending upon their enrolment with titles such as Silver member, Gold member, Diamond members, Platinum member, etc. some common catchy slogans misleading the public are "Earn in rupees or dollars. Work from home", "Work four hours and earn Rs., 50,000 per month", "U R the boss of your business, so enrol immediately", "Earn up to Rs.35,000/- + Monthly by just working 2 hours at home", "Do u want to earn extra by sitting at Home?"

These companies take advantage of personal influence of each and every distributor or his close relative. If a Superior officer or his ward is involved in MLM, the subordinates are forced to become members in the chain. Likewise, if a close friend comes with a scheme, one finds it difficult to say "No". I had this experience with TVI and lost Rs 13000 because I could not say no. I did not complain because the friendship was worth much more. Plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited due to the saturation of the market.

When a plan collapses, it results in the financial benefit to some who joined the scheme at initial stages, mostly the promoters of the scheme, and resulting in big financial loss to those who joined at a later stage. Most people - except perhaps those at the very top of the pyramid - end up empty-handed. By the time the people realize that they have been taken for a ride and cheated, it would be too late.

Money Circulation Schemes are being promoted in the name of Direct marketing (DM), Multi-Level Marketing schemes (MLM), Network marketing (NWM), Referral Marketing, Introduction Marketing, Chain Marketing, etc. These schemes are nothing but camouflaged Money Circulation Schemes. In the front end the promoters display products and services and at the back end it is nothing but Money Circulation Schemes. Multi-Level Marketing (MLM) schemes fall within the purview of 'Money Circulation' which is an offence under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

That Act is administered by the Ministry of Finance (Department of Financial Services) through the State Governments. Recently Ministry of Finance in consultation with the Reserve Bank of India, have circulated Model Rules to be notified by the States. These rules make it amply clear that investment schemes run in the MLM mode are illegal under the above Act and organizers of such schemes need to be prosecuted.

In effect, all companies, firm or business associations in any form or individuals will not be allowed to run a scheme with a compensation plan in which the subscribers would compulsorily have to enrol certain minimum number of subscribers to become entitled to the promised benefits or link the monetary benefits or commission to the subscribers.

Criticism of MLM companies has focused on their similarity to illegal pyramid schemes, price fixing of products, high initial entry costs (for marketing kit and first products), emphasis on recruitment of others over actual sales, encouraging if not requiring members to purchase and use the company's products, exploitation of personal relationships as both sales and recruiting targets, complex and sometimes exaggerated compensation schemes, the company making money off its training events and materials, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion.

The Odisha government proposes to ban all kinds of money circulation schemes, as hundreds of gullible persons have been duped by many individuals and business entities in the past couple of years.The Centre has proposed state governments to ban all companies running schemes which offer monetary benefits to subscriber for enrolling members to their scheme. The draft Money Circulation Scheme (Banning) Rules, 2012, under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, says, "No individual or firm or business association, in any form, shall promote, run, or participate in the money circulation scheme, including earning commissions through sale of products."

It further says, "No individual or company or firm or business association, in any form, shall run a scheme that induces enrolment of new members by offering benefits or commission, by whatever name called, to upline members in the pyramid out of the action or performance like sale or purported sale of goods or services by the downline members," Amway is a multibillion-dollar international business operating in more than 80 countries. It is one of the world's largest, global, direct selling companies. Sociologist David G. Bromley calls Amway a "quasi-religious corporation" having sectarian characteristics.

Half of its agents are actually consumers who have become distributers primarily to buy for themselves at a discount. Amway earns a little over half of its revenue from Nutrilite, the vitamins and dietary supplements brand which is also recommended by doctors. Its toothpaste brand, Glister, and liquid detergent brand, SA8, are other top-selling brands of the company.

Amway's Competitors include Oriflame, Herbalife, Avon and Modicare. It has a 36 per cent share of the Rs 6,300 crore direct selling market in India. It began by importing products and now produces 95 per cent of these within the country, through seven contract manufacturers. Amway India Enterprises Pvt Ltd, which reported a turnover of Rs. 2,288 crore for the 2012-13 fiscal, has been facing allegations of irregularities in Kerala.

Amway India has also entered the services business doubling up as a corporate agent for Max Life Insurance and health insurance for Royal Sundaram Alliance through its subsidiary, AmSure Insurance Agency Ltd. It is about to enter the consumer durable space. Incidentally, India is the seventh largest market for Amway Corp and contributes 7% of its global turnover. China is the biggest market followed by Japan and the US.

The decision of the Federal Trade Commission of USA was one of the earliest instances in which a judicial authority examined multi-level marketing and some ancillary issues as early as 1975. The FTC considered the arguments on these issues, and was of the opinion that the scheme of multi-level marketing per se was not illegal, or against the Federal Trade Commission Act.

The FTC opined that the business and distribution structure of Amway was not an illegal pyramid structure because of certain characteristic features. However, the FTC opined that Amway did act illegally in fixing resale price and misrepresenting profits, leading people to believe the venture to be highly profitable. The prevalent view even at present is that MLM in and of itself is not illegal, despite the criticism of being a disguised form of illegal pyramid structures. Therefore, if one follows a technical and restricted approach, the requirements of 'Money Circulation Scheme' are not met. However, on a closer scrutiny of the ground reality, it can be observed that in effect, it is identical. This was recognized by the Andhra Pradesh High Court.

The government should not remain a silent spectator when the investments of the people are at stake. At least it should clarify and offer advice, instead of waiting for the culprit to get away. Silence will affect their credibility and people would suspect their complicity because MLM has grown on the power structure of the society.

An economic offences wing should be established in the home department. Law violators are normally smart people and cannot be tackled with nuts and bolts technology. I have not met my old friend for months. I do not know whether he could come out in time.