Tightening the Screws on Illegal Multilevel Marketing Scams

    Scams, Marketing

    The Department of Trade and Industry is focusing on the billion-dollar sector of illegitimate multilevel marketing (MLM) by tightening its regulations and rules on such business activities.

    Trade Secretary Ramon M. Lopez confirmed issuing a department administrative order (DAO) to put up an accreditation system to certify the operations of legitimate direct sellers and MLM firms. Primarily concentrates on protecting consumers, the DAO intends to expose pyramiding schemes posing as MLM programs. DAO consists of a list of indicators the public uses to determine whether they are managing pyramiding schemes efficiently.

    To protect aspiring direct sellers and consumers, DTI is establishing an accreditation system that will provide due recognition to direct sellers and legitimate multilevel marketing so that the public is well informed and guided. They are indicating and raising the alarm for illegitimate MLMs, the procedure for filing of complaints and enforcement. The issuance of the order is coming at a time when the value of consumer goods sold through MLM has touched billions of dollars: $1 billion for underground, $1.4 billion for legitimate. Global sales through MLM programs in 2018 was $193 billion. The DAO is crucial as it recognizes legal MLM firms, setting up alarm signals for illegitimate MLMs, procedures for lodging formal charges and enforcement of the regulations and rules.

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    As per the draft DAO posted on the DTI’s web site, a recognition process is made mandatory wherein a person intending to operate, establish, or advertise a legitimate direct selling. MLM or networking companies shall go through these procedures before the actual operation. The applicant has to meet the DTI prescribed mandate requirements and submit it to the particular agency. Post submission, the DTI shall evaluate the documents and applications submitted within the day of receipt. If an applicant meets the qualifications set by DTI, they shall pay the prescribed fees. The recognition certificate has to be issued within seven working days from receipt of the application.

    The DAO determines whether there is a basis to conduct an investigation. If justified they then file a complaint against a pyramiding scheme masking is similar to an MLM program. The primary indicator is when commission or profit is conditioned upon the recruitment of participants while the recruits are required to pay a decided fee. Another sign is the unusually high returns received on investment in the form of commission or profit over a short period.

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    Also, any MLM could also be a pyramiding scheme where a consumer item is involved, and the price is unreasonably high; therefore, forcing the participant to recruit. The proposed order states that a pyramiding scheme has no refund, policy on return, warranty, or exchange. If any of such indicators show up in any business, then one can file a complaint before the DTI’s Fair Trade Enforcement Bureau investigates. If proven guilty, the illegitimate MLM firm gets sanctioned following DTI regulations and rules, terminating its certificate of registration.

    In 2013 the US Securities and Exchange Commission issued an investor alert warning for individual investors about pyramiding schemes. This described the illegal activity related to an investment scam that fraudsters often pitch as a legitimate business opportunity, as multilevel marketing programs.

    The agency confirmed that pyramiding schemes often go against the federal securities laws, such as laws that prohibit frauds requiring registration of security offerings and broker-dealers. Under such a pyramiding scheme, money obtained from new participants is used to pay recruiting commissions to the earlier participants. This is entirely identical to the infamous Ponzi schemes, where money secured from new investors is used to pay fake profits to the previous investors.

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