Pyramid / MLM Schemes – Illegality, Lack of Action.

A pyramid scheme is a non-sustainable business model that involves promising participant’s payment, services or ideals, primarily for enrolling other people into the scheme or training them to take part, rather than supplying any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud.

A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula which is used for profit. The essential idea is that a "con artist" Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the "business" expands.

Such "businesses" seldom involve sales of real products or services to which a monetary value might be easily attached. However, sometimes the "payment" itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials, and information. The flaw is that there is no end benefit. The money simply travels up the chain. Only the originator and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Individuals at the bottom of the pyramid (those who subscribed to the plan, but were not able to recruit any followers themselves) end up with a deficit.

The network marketing (NM) or multi-level marketing (MLM) business has become associated with pyramid schemes as "Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure." and the fact while some people call MLMs in general "pyramid selling" others use the term to denote an illegal pyramid scheme masquerading as an MLM.

In modern days, it is also called as "Chain Business", "Introduction Business", "Referral Business", "Direct Marketing Business", "Direct Selling through Independent Business owner" etc. 

Multi-level marketing (MLM) is a purported income opportunity, in which persons recruited into a pyramid of participants make ongoing purchases of products and services, and recruit others to do the same, and they still others, etc. – in an endless chain of recruitment and personal consumption, in order to qualify for commissions and bonuses and to advance upward in the hierarchy of levels in a pyramid of participants. Product purchases become the means of disguising or laundering investments in what is in fact a product-based pyramid scheme.

Typically, prospects are lured into the scheme with exaggerated product and income claims. And because the pay plan is heavily stacked in favor of those at the highest levels in the pyramid, the vast majority of participants spend more than they receive and eventually drop out, only to be replaced by a stream of similarly misled recruits, approximately 99% of whom are likewise destined to experience loss and disappointment.

Multi Level Marketing (MLM) offers an inexpensive alternative to other more expensive options for owning a business. A good franchise or buying a business from someone else may cost a fortune, and starting a business from scratch may take years to get off the ground. MLM is easy to get into and can be a very pleasant way to be your own boss. Most of the people get into MLM because of the potential of virtually unlimited income as advertised by the MLM companies. The products and company are usually marketed directly to consumers and potential business partners by means of relationship referrals and word of mouth marketing. 

Independent distributors develop their organizations by either building an active customer base, who buy direct from the company, or by recruiting a downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the company at wholesale price.

it has become apparent that a typical strategy of MLM sponsors is to produce dietary supplements that supposedly cure or – with appropriate anti-oxidants - prevent every disease under the sun. Most MLM companies I have studied claim to have the latest and greatest supplement that is just not available anywhere else in such high quality for the price. They even claim to bypass the middle man,‖ when in fact with their endless chain of recruitment, they create thousands of middle men – all hoping for a share of commissions.

Each new recruit has a personal stake in advancing the scheme so that he or she may profit from an expanding downline. New recruits are taught to ―be a product of the products‖ and to set the example of model recruiting and purchasing in suggested amounts so that others will duplicate their recruiting efforts and purchases, carrying them to success on the backs of downline participants. 

Sympathy Buyer: As new recruits struggle to maintain purchases in order to qualify for commissions and to advance up the various levels in the scheme, they soon become desperate for buyers. They may pressure family members or colleges to buy - or give them away even if they are not interested.

Counterfeit customers: Other participants would buy products that they could not use in the name of someone they knew but who had no interest in the products just to satisfy any retail requirement the company may have. They may even give products away to these people as gifts or samples.

Dummy distributors: who were persons who agreed to sign up and allow their name to be used to satisfy the head count, even though they were not interested in becoming a distributor. The distributor would then buy products in their name to satisfy head count requirements. Many people re-join as members in their own chain when they are able to get more downline members.

Innocent leaders : Some MLM leaders truly do not understand the inherent flaws in MLM as endless chain recruitment schemes. Since they interact mostly with high level people in the MLM organization, they don‟t get much feedback from recruits who lose money and drop out. Since they live and work in an echo chamber of enthusiastic promoters, they ignore or remain in denial of the harm when they see signs of serious problems, such as high attrition or high loss rates.

White collar criminals : The rapid and huge gains that can be made can be very enticing to someone who is willing to set principles of fairness and honesty aside in order to cash in at others’ expense. These are the people who continuously float and break companies.

Forced customers: People are compelled by their superious officers to join such schemes. If a Sub Inspector is member of the scheme, he can force all policemen under him to join the scheme too.

Greedy customers: people can join the scheme for making quick money without any effort. They are largly unaware of the repercussions of the fraoud. A large number of housewives have been cheated by such schemes.
  

The unemployed or underemployed: Many are struggling and eager to improve their situation – often willing to grasp at any straw that looks promising. They are sitting ducks for the oft-repeated slogans of MLM recruiters that portray MLM as a solution to their financial woes.

The unsophisticated and uneducated. Persons unschooled or weak in their understanding of basic mathematics or economics may they fail to see the inherent flaws in endless chain recruitment systems. These folks may not be of low intelligence, just lacking in mathematical savvy.

Affinity groups: MLM recruiters have enjoyed an unusual pattern of success with tightly-knit groups. Kudumbasree units in Kerala is an example for this.

Since the upline‘s income is dependent on the recruiting success of downline participants, the upline is motivated to promote aggressive recruitment. And new recruits expect help with their recruiting from their uplline in order to qualify for commissions and advancement in the scheme. This pressure from above and below can create explosive growth in recruitment and purchases by participants and sympathetic family members.

A study conducted by Jon M. Taylor based on a careful analysis of more than 350 MLM Companies, found that approximately 99.6% of ALL participants in such schemes lose money (after subtracting ALL expenses)!

According to Eric Scheibeler, Who studied the functioning of Amway concluded that  out of 10,000 participating members, only 414 remained in the business after the 5th renewal. That‘s a 95.9% dropout rate in only five years for the largest of all MLMs .

MLMs are recruitment-driven with very little incentive to sell products to non-participants. Products are priced too high to be competitive, and compensation plans provide rewards to participants that escalate exponentially as they climb the hierarchy (pyramid) of participants. To show how saturation is inevitable, in a binary pyramid one person recruits two people, each of them two more, and they two more, etc., as follows: 

LEVEL	PEOPLE NEEDED	TOTAL PEOPLE
1	1	1
2	2	3
3	4	7
4	8	15
5	16	31
6	32	63
7	64	127
8	128	255
9	256	511
10	512	1023
11	1024	2047
12	2048	4095
13	4096	8191
14	8192	16383
15	16384	32767
16	32768	65535
17	65536	131071
18	131072	262143
19	262144	524287
20	524288	1048575
21	1048576	2097151
22	2097152	4194303
23	4194304	8388607
24	8388608	16777215
25	16777216	33554431
26	33554432	67108863
27	67108864	134217727
28	134217728	268435455
29	268435456	536870911
30	536870912	1073741823
31	1073741824	2147483647
32	2147483648	4294967295
33	4294967296	8589934591

. . . and so on until by the 33rd person in the chain of recruitment, the total number of recruits exceeds the population of the earth. Of course, it happens much more quickly if three or more participants are recruited by each new recruit.

It is important to draw a distinction between total saturation and market saturation. A city of 100,000 people surely could not support 100,000 direct selling distri-butors. Any expectation of such total saturation would be absurd unless everyone was selling only to himself/herself. On the other hand, market saturation may be reached with only 10 or 20 distributors.

1. Each person recruited is empowered and given incentives to recruit other participants, who are empowered and motivated to recruit still other participants, etc. – in an endless chain of empowered and motivated recruiters recruiting recruiters – without regard to market saturation. 

2. Advancement in a hierarchy of multiple levels of “distributors” is achieved by recruitment and/or by purchase amounts, rather than by appointment.

3.Company payout (in commissions & bonuses) per sale for the total of all upline participants equals or exceeds that for the person selling the product – resulting in inadequate incentive to retail and excessive incentive to recruit. This is what is meant by a “top-weighted” pay plan.

4.The MLM company pays commissions and bonuses on more “distributor” levels than are functionally justified; i.e., five or more levels, which only further enriches those at the top of the pyramid.

As a business model, MLM is likely the most successful con game of all time. The very people who are out recruiting are themselves victims until they run out of money and quit. And because victims seldom file complaints, law enforcement rarely acts. It is a vicious cycle, No complaints, no law enforcement action; no law enforcement action, no complaints. So the game goes on.

The issue is not TOTAL saturation, but MARKET SATURATION. In a city of 100,000 people, the notion of 100,000 distributors to serve them is absurd. Perhaps the MARKET could be saturated with at most 5 or 10 distributors. Each added distributor would reduce the opportunity for existing distributors, and resistance would build up for those who have been approached several times. In fact, market saturation occurs rather quickly.

It is both very demanding and very expensive to achieve success at recruiting a downline, which is essential if one is to realize significant ongoing profits from MLM. Those who lock in a position as the first ones in the chain of recruitment have a huge advantage over those who come in later, but this is seldom disclosed to new recruits.

MLM assumes both infinite markets and virgin markets, neither of which exists in the real world.

Victims almost never file complaints about such frauds for a variety of reasons, including the following:

1. Most people blame themselves, since they’ve been taught that anyone who properly “works the system” will succeed and that if a new participant fails it is their fault, rather than the fault of the system. Companies DO pay if the members bring new members.

2. Since they are part of an endless chain of recruitment, they fear consequences for filing a complaint from or to those they recruited or those who recruited them, who may be close friends or relatives still in the program. 

3. They may fear self-incrimination, since in MLM every major victim has likely been a perpetrator, recruiting unwitting persons in order to cover their escalating expenses of participation. In fact The Prize Chits and Money Circulation Scheme (Banning) Act, 1978 makes every participant in such schemes an offender.

4.Law enforcement agencies are generally hand in gloves with the scamsters as many people in the law enforcement agencies themselves  are active participants in such schemes.Some companies ensure that close relatives of police officers are made distributers of their schemes.

5.Many people are ashamed to admit that they are swindled of their money and suffers silently.

MLM observers have noticed cultish and even compulsive behavior from MLM participation. Some MLM programs adopt cultist patterns in recruitment and retention of members, becoming a rather closed society. Also, the evolution of ―MLM junkies‖ has been observed, with traits of addiction similar to those for other addictions.

Except for TOPPs (top-of-the-pyramid promoters), almost all MLM participants wind up losing money – and eventually drop out of the program, many of them discouraged and blaming themselves – rather than a flawed program.

Such Schemes give it’s perpetuators a “license to steal.”It is so widespread that a July 2011 google search for combination of “fraud” and “Multi Level Marketing” yielded 31,100,000 results .

There are three types of Pyramid schemes in existence.

1.Unilevel – There is no limit to the number of distributors that can be recruited on the first level (who ―retail products to end users). However, there is usually a limit on the number of levels deep that can qualify for commissions or overrides. It could be considered a ―flat pyramid and is probably the most fair of the compensation plans – though few would get rich. 

2.Binary – Binary plans promote recruiting in a downline of two legs of distributors (left and right ―profit centers), with incentives to maintain matching sales volume between the two legs. Commissions are paid only on matching volume, and this can sharply limit company payout. Seldom are high volume producers matched in the same leg of the downline. Binary plans could be considered ―split pyramids. Companies like Bizarre and BikMaark follow this model.Most Indian MLM Scemes are variations of this model.

3.Matrix – A limit is placed on the number of distributors in the first level and on the number of levels deep. Additional recruits ―spill over into the next level. Growth is limited (for example, 4x12=48 total downline). Can be played like a lottery – lazy participants can win. Matrix plans could be viewed as a ―block pyramids.