Pyramid Schemes and Multi Level Marketing Explained

I have just done a radio interview about pyramid schemes and why they are a bad idea. I only had ten minutes so I struggled to get in all the information. Click on the image below to listen to it. I am at 1.32.

 

 

Here, I cover the information I gave, with references and further information that I couldn’t cram in.

What is a pyramid scheme?

It is useful to think of pyramid schemes on a spectrum. Just before you get to pyramid schemes, there is Direct Selling. This is where people sell things and get a commission from the sales. Like a double glazing salesperson who goes door to door and gets a cut of the sales. That is perfectly legal, although it can be hard on the salesperson to earn money if they don’t sell much.

On the other extreme, after pyramid schemes, there are Ponzis. These are schemes where people pay a fee to join. They have to recruit to people and they recruit two people, and they recruit two people. When the pyramid is a certain size, all the joining fees from the people on the bottom rung go to the person at the top. They then retire with a large amount of money and everyone moves up a rung. To be successful and leave with money, 64 people would have to pay the fee. Quite often, not al the spaces can be filled and the whole thing collapses. An example of a Ponzi is the Airplane game.

Ponzi schemes are illegal in the UK. In Albania in 1997, there was a civil war due to a Ponzi scheme collapsing. Two thousand people died and a government was toppled.

Between Ponzi schemes and direct selling, you have pyramid schemes. These are defined by the Fair Trading Act 1973, under the section called ‘Part IX Pyramid selling and similar trading schemes’. The law calls these schemes ‘Trading schemes’ that have to comply with the pyramid selling regulations. It talks about the pyramid structure of the schemes. In 1996, when the Trading schemes laws were being updated, there was an attempt by Amway ( a large multilevel marketing scheme) to have the term ‘pyramid scheme’ defined as an illegal scheme. The Government stated that they saw the terms ‘pyramid selling’ and ‘multi level marketing’ as interchangeable.

It doesn’t sound very good though, to say that you are in a pyramid scheme. It would be very hard to recruit people if you said you were in a pyramid scheme. The Direct Selling Association (DSA) are a trade association and promote these schemes, trying t make them appear respectable. Of course, they wouldn’t want to put off people joining their schemes so they say this on their website.

I challenge them to show me where in law it says pyramid schemes are illegal. I believe in fact checking and looking at the evidence and I will be happy to change my statements if they are wrong.

So what is a pyramid/multi level marketing scheme? The 1997 consultation document makes this clear-

More simply, this means that people are in a trading scheme if they sell products, usually in their home, and recruit others to do the same. They can earn commissions from the sales of the people they recruit, and also get bonus payments. The structure is pyramid in shape. To be considered legitimate, they must adhere to a set of rules. These are The Trading Schemes Act 1996. The Pyramid Selling Schemes Regulations 1973 , and later The Trading Schemes Regulations 1997  lay out the conditions that a scheme must follow to be considered legal. If any of the conditions are broken, the scheme is illegal. Importantly, the law says that the definition of a ‘trading scheme’ remains the same as in previous legislation.

““trading scheme” has the same meaning as in Part XI of the Fair Trading Act 1973.”

These are the conditions-

Part 3. Adverts for the scheme must say the name of the company, describe what is being sold, and give the statutory warning.

Part 4. A written contract has to be given to anyone joining up.

Part 5. The contract can be cancelled within 14 days. People must be told of their financial obligations for the first year. Further minor contract details.

Part 6. When someone leaves a scheme, they are entitled to a refund for the products bought in the previous 90 days.

Part 7. Some technical rule about refunds.

Part 8. People in these schemes must be given receipts from the company for every transaction.

Part 9. Rules about commission payments once someone leaves a scheme.

Part 10. People cannot pay more than £200 in the first week of joining a scheme.

Part 11. People who join up are under no obligation to buy anything unless it was clearly stated in their initial join up agreement. They should not be tricked into buying anything.

Section 1, part 3 of The Trading Schemes Act 1996 says that trading schemes must provide products or services to external customers. The participants can’t just purchase products for themselves.

That is quite a list of rules that a company must adhere to be considered legitimate. You can see why it is difficult to determine if a scheme that is being presented to you is ok or not.

These schemes cause problems for people, regardless of whether they are legitimate or not.

These problems are-

1. Dr Jon M Taylor analysed the statistics of MLMs and found that participants typically lost money in 99.9% of cases. He concluded that gambling on roulette gives 286 times more chance of winning money than earning anything in Amway. These statistics were presented to the Federal Trade Commission.

Image from MLM-The Truth Website.

2. People lose money through paying for training, going to conferences, buying their own marketing products, petrol costs from driving everywhere, buying nibbles and drinks for in-house parties, buying samples, buying prizes for raffles, buying products for themselves, paying for stalls at fairs.

3. People in these schemes follow the Law Of Attraction where they are taught to believe that bad things happen if you have bad or negative thoughts. They also believe that good things happen if you exclusively concentrate on positive things. The Law teaches that if you want something, you can have it if you want it hard enough and visualise it enough, sending out the correct ‘vibrations’. You are encouraged to act rich if you want to be rich. The theory is that you acting all successful will attract success and will attract recruits who want to be like you.

Hence you see memes like this

People in these schemes become afraid to think of their failure and will not allow themselves to focus on the money they are losing. This type of dangerous thinking could be called a mind control technique. People stop themselves from being critical and lose the ability to be rational. This is a very dangerous state to be in. It keeps people in these schemes longer than they would otherwise stay.

Another side effect of this way of thinking is that people are encouraged to cut contact with people who are being critical. I know people who have lost brothers, sisters and children through these schemes. They were taught that the negative vibrations from these people would bring failure. This further isolates people and they surround themselves by other scheme members who are all believing the same thing.

A further problem with this type of thinking is that when people inevitably fail, they will blame themselves. They will have attracted the failure to themselves. This makes them feel ashamed and they will often try to forget about the whole thing, and not come forward to speak about their experiences. So the deception continues. When people leave a scheme, they often find themselves ostracised from the group, who now see the person as a failure who could bring them down. They are now left feeling like a failure, lost friends/ family and no support group. This can make people feel terribly isolated.

4. People in these schemes are often seen making false health claims for the products they sell. This is because the products are expensive due to the added amounts that are needed to be fed up the pyramid. The sellers become desperate to make sales so that they cam achieve their monthly targets and to earn money themselves. The products are nothing special so people will lie about how good they are, breaking advertising laws and encouraging people to ditch their medications in favour of their snake oil.

Truth in Advertising (TINA) have documented some false health claims they came across with MLM products. They found that of the DSA member companies in the USA“( 97%) have made or are making — either directly or through their distributors — claims that the companies’ products (which include supplements, as well as devices, clothing, and skin care products) can treat, cure, prevent, alleviate the symptoms of, or reduce the risk of developing diseases or disorders, in violation of the law.”

Who joins these schemes?

Anyone can be vulnerable to joining one of these loss making schemes. People who need money and are not getting what they need from their current situation could join. They are vulnerable because often it is a trusted person who approaches them to join and people don’t think their loved ones would lie to them. Often, people are promised that it is easy to earn money, just follow the system, recruit people and you will be successful. Examples are held up of the few people that earn large amounts of money.

Image from TINA.org

It is easy to see why people would want to try pyramid schemes when their current situation is less than ideal.

Intelligent people and professionals are sometimes targeted because they can lend credibility to the company. I have seen adverts on Facebook aimed at NHS staff, trying to recruit them to sell MLM products and the opportunity.

It is important to realise that anyone is vulnerable to being recruited. The best protection is to educate yourself. Stay one step ahead and be as aware as you can. If you are on Twitter or Facebook, follow me or the MLMtruth coalition. There are a few campaigners you can add to the people you follow. Keep these scams at the forefront of your mind and you may be better able to resist.

What to do if a friend is involved

This can often be a very difficult situation. Your friend may be asking for your support and may be desperate to make a success of it. They may not know of the full facts around MLMs and may not be willing to hear it.

I wrote a blog post full of tips that you can look at for ideas on how to deal with your situation. Have a read of it here.

If you have a friend who goes from one scheme to another, get them to read this article on how to choose their next one. You may not be able to help them leave just yet, but you might be able to stop them joining one of the more ridiculous ones.

If your friend is maybe open to the idea of listening to reason and they want to hear what you have to say, get them to read this or this.

If you would like more of an insight into what is going on with your friend, you would do well to read up on cults. Pyramid schemes have been described as commercial cults or greed cults. Once you read up on why they are cults and how they work, it can be quite concerning. However, it will give you a good understanding of the behaviours you might be witnessing. Have a read of Steve Hassan’s work. He has written two really good books on the subject called Combatting Mind Control and Freedom of Mind. Margaret Singer has a good book on the subject too, called ‘Cults in our Midst: The continuing fight against their hidden menace’.

Cultwatch explain how cults work, and they delve into commercial/greed cults.

Steve Hassan has a website about cults that you may find useful.

I have written a piece on MLM and cults with John Evans from Juice Plus Lies website.

How to fight MLM

Become a Bot Watcher and join the team. You might be able to help us or the coalition if you have any skills or experience that might be useful in our cause. Perhaps you could help with some research or advise us.

If you have had an MLM experience, consider telling us about it and we can get your story out there to warn others.

Write emails to complain if you see something dodgy going on. Complain to fairs that allow MLM stalls. Complain to schools if they allow MLMs anywhere on the premises. Write to your MP if you feel things need changing. I have some letter templates here to help you guide your writing.

Report dodgy health claims to the ASA and get the advert pulled. Blog post on understanding about health claims.

Order something from the coalition’s little shop to help our cause and help spread awareness.

 

Take the cup to work to spread the message. Keep cards in your pocket to slip to people that you might hear being prospected. Someone we know has been slipping the cards in library books aimed at MLM reps!

Please contact us if you need any advice with any of the issues discussed in this article.

If you come across a Ponzi scheme or a pyramid scheme that you suspect is an illegal one, complain to Trading Standards via their Consumer Line. You can also report illegal schemes and fraud to Action Fraud. They are part of the police.

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