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China Leads the World in Fighting the
Global Scourge of Pyramid Schemes

September 2009

A feature article in USA Today, Sept. 8, 2009, describes the ongoing battle in China to fight multi-level marketing (MLM) pyramid schemes. The story is a lesson for the world. In China, the schemes are seen as especially pernicious during a Recession because they cause financial harm to people who are already financially struggling. Additionally, the government of China sees pyramid schemes as a subversion to the general economy and therefore a threat to the nation. The schemes are not legitimate businesses, though they disguise themselves as "direct selling" companies. In reality, they are just "money transfers" that siphon off savings, using deception and fraud. The products that each investor "buys" are really devices for laundering the money and they serve as part of the "direct selling" disguise.

The MLM schemes damage any country in which they operate because they tell people that education is unnecessary. They often encourage people to give up on developing skills or looking for jobs. Instead, people are urged to put their faith and savings in the pyramids which, they are promised, will bring wealth and security.

To combat the MLMs, the USA Today article reports that China is sending armed police to break up pyramid recruitment meetings, seize cash and arrest the recruiters. The enforcement program is being carried out over a 100 day period.

MLM Is Illegal in China

In 1998, when MLM pyramid selling schemes first swept across China – and China was being hailed by the MLM industry as the next frontier – the government banned all direct selling. This was because in China, as in America where many of the scams originated, direct selling had become the main disguise for pyramid schemes. On Wall Street and in financial centers around the world, pyramid schemes disguise themselves as "investment" opportunities and "hedge funds." But on Main Streets all over the world, pyramid schemes are disguised primarily as "business" opportunities and "direct selling."

After the ban in China, the US-based multi-level marketing industry launched a major lobbying campaign to get China's government to legalize multi-level marketing. It even gained the help of the US Trade Representative at that time, Charlene Barschefsky, who worked for the Clinton Administration. Ms. Barschefsky was publicly thanked by Amway for her efforts to help the MLM industry. The usual false claims were put forth by the MLM industry and Ms. Barschefsky that MLM is really "direct selling", not pyramid schemes.

MLM Trying to Recruit Illegally

China's government used consulting firms to investigate the distinctions between MLM and obvious pyramid schemes such as "gifting clubs." In the end, it determined that MLM is only a disguised pyramid scheme. There were differences without distinction. It concluded that MLM is a fraud industry. It decided to maintain the ban. Pyramid Scheme Alert provided videos, news reports, analysis, and technical assistance to the main consulting firm that was working with the Chinese government. It recommended that the government maintain and reaffirm its ban on MLM, which the government ultimately agreed with. In 2005, the ban was reaffirmed while true direct selling (sales by direct sellers to retail customers) was allowed. This action was a great shock to the MLM industry which needs new territory as its existing markets are saturated.

Today, the MLM industry continues its lobbying and there is much evidence that it is enticing Chinese citizens to break the law. Major MLMs such as Usana, Herbalife and Amway operate in China only as retail selling operations. The recruitment-based pay plan is not allowed. But in Taiwan, MLM does operate in the American model. Many people are urged to join downlines based in Taiwan or other countries. Some are encouraged to fake their residences. Additionally, as the USA Today article noted, people are being told that the government will legalize MLM pyramids.

Lies as Main Recruiting Tool

China's battle against pyramid schemes comes up against the most difficult of all challenges: MLM's great expertise and experience with lying. It is so adept at deception it can gain tremendous control over people, as cults. China, as in the USA, is seeing people bankrupting their families and ruining their marriages while under the cult-like spell of MLM promises of wealth and security. Reports of suicides are rising related to MLMs, which is true in the USA also.

As in the USA, there is now a consumer organization in China – the China Anti-Pyramid Scheme Association – to help consumers learn the truth about MLMs and to break free of MLM lies. The first book that exposes the truth about MLM pyramid schemes has also been published by a Chinese author.

MLMs have great ability to mislead people about promised income, and the nature of pyramids and their legality. These lies are combined with lies about products, fake testimonials from shills at recruitment meetings, and fake growth numbers.

While Ponzi schemes collapse quickly after they are exposed, MLM pyramids, even after exposures and analysis, can fight back with campaigns of deception. Ponzi's survive with concealment. Pyramids operate in plain view but with disguise. The USA Today article notes that though MLM is outlawed in China, MLM recruiters tell people that "secretly" the government supports MLM and "wants Amway to succeed" there. And, of course, they use the lie about the "sale of products" being proof against a pyramid.

Contrast with USA

The efforts of China to educate its citizens with the truth about how pyramid schemes work and its aggressive efforts to protect its people from pyramid predators contrast sharply with America's, the land where the "direct selling" pyramid scheme was invented. In the USA, the lies about MLMs offering the average person high income and protection from Recession are published by the mainstream media. The New York Times called MLM recruitment schemes a "fall back" for consumers during Recession and repeated an erroneous average income figure propagated by the MLM industry. MLM schemes that inflict 99% loss rates on consumers sit on the boards of Chambers of Commerce. The former chairman of the Federal Trade Commission was a former Amway lawyer and now works as a lawyer/lobbyist for an MLM. Our former Chief of Consumer Protection at the FTC now represents Amway.

The question must be asked: which economy shows the greatest promise for the future? The one that treats pyramid schemes as corrupting and harmful and works to protect people from losing their money with public education and law enforcement? Or the one that allows the frauds to spread, treats them as legitimate businesses, even as they deceive and harm, and whose government officials take jobs with the schemes?

This page last updated on 9/18/09