Consumers should be on the lookout for an entrapping and misleading document circulating and being widely referenced on the Internet entitled, “Business Guidance Concerning Multi-Level Marketing.” It purports to offer guidelines for legal and legitimate “multi-level marketing” companies. It is being referenced by “MLM” companies to validate deceptive practices. It is a smokescreen for protecting pyramid schemes. If followed, the “guidance” leads to virtually certain financial loss for a consumer.
A brief factual analysis reveals the document to be deceptive, misleading and disingenuous. Its contradictory double-talk produces a state of confusion. Presented as a “guide” it guilefully leads the reader toward investing in MLM.
Who is behind this fraudulent document? An outfit, officially known as the Federal Trade Commission, aka FTC. Based on this document, consumers should be calling it: Fool The Consumer. That is what this document intends to do. And who is backing it? MLMs and their recruiters. The president of the DSA, Herbalife’s and Amway’s trade association, stated, “This is a very positive statement … We look forward to our continued collaboration with the FTC…”
It turns out that this “FTC” has a long and close financial relationship with “MLM” and the DSA. The recent chair of the FTC is now on staff of Herbalife as are several other “commissioners.” Other top level officials have become lobbyists for MLMs or work for law firms that represent MLMs – protecting them from prosecutions and consumer lawsuits. MLMs and their law firms are a lucrative career path for some FTC officials. As the “guidance” document shows, the FTC protects MLM, using “fool the consumer” tactics, refusing to investigate the MLM industry, and by failing to prosecute or even to respond to consumer complaints, research or class action lawsuits against MLMs.
To get a picture of how the “FTC” protects MLMs, see, Pyramid Politics: The FTC’s Long History of Protecting “Multi-Level Marketing”
To understand how “multi-level marketing” operates, see, “10 Big Truths about Multi-Level Marketing… Hidden, Disguised and Denied.“
FTC “Guidance”… into a Financial Trap
Here are a few key points that reveal the dishonesty of the FTC’s “guidance.”
2. Supposedly about “muli-level marketing”, the document confuses the consumer by not defining “MLM”.
To the question, What is multi-level marketing? the document offers the very same disguise used by MLM recruiters to set the financial trap, one that covers up the reality that rewards depend totally on recruiting, not retailing. Previously, the “FTC” officially defined “MLM” as a sales business in which participants earn profit on their own retail sales and the retail sales of all others on their chain of recruits. But, recent revelations in the Herbalife case showed that virtually no one was making a retail profit. Herbalife is one of the oldest, largest and most representative of MLMs. An investigation revealed that the money gained by top recruiters came from their recruits’ purchases, not their retail sales. The only way to make money was to recruit and get your recruits to buy as much as possible. Retailing was a sham.
Rewarding recruiting over retailing used to be the red flag of an illegal pyramid scheme. Now, the “FTC” covers up the red flag by excluding the word “retail” entirely from the definition of “MLM.” In fact, the new definition never actually refers to “selling” as a source of profit at all, even though it calls MLMers “salespeople” and a “sales force.”
The “Guidance” states, “a multi-level marketer (MLM) distributes products or services through a network of salespeople who are not employees of the company and do not receive a salary or wage. Instead, members of the company’s salesforce usually are treated as independent contractors, who may earn income depending on their own revenues and expenses. Typically, the company does not directly recruit its salesforce, but relies upon its existing salespeople to recruit additional salespeople, which creates multiple levels of “distributors” or “participants” organized in “downlines.” A participant’s “downline” is the network of his or her recruits, and recruits of those recruits, and so on.”
Notice what’s missing from the definition? How people get paid! The classic and defining MLM compensation plan – the one thing that all MLMs share and which them MLMs, and which drives MLM’s hallmark recruiting and the purchases (without sales) made by the participants – is left out of the definition. The claim that “MLM” is “direct selling” is how consumers are lured into MLM as a “legitimate” business. Soon, they discover it’s all about purchasing and recruiting. This is the classic fraud. Yet, the “FTC” does not include the word “retail” or “selling” in the “definition. This is dishonest. This is cover-up.
The “FTC” definition does acknowledge, but downplays and disguises, one key part of MLM’s pay plan – the “endless chain” proposition. Each recruit is promised “unlimited” rewards based on purchases from a line of recruits that, according to the MLM “structure” can extend to “infinity.” The “guidance” dismisses this deception of promising every person money from future recruits with: ““downline” is the network of his or her recruits, and recruits of those recruits, and so on.”
And so on? And so on… what? The “so on” is the impossible and deceptive promise that lures millions of new recruits at the end of the chain where they will lose money while trying to recoup their investments by recruiting friends and family, who will lose money.
3. The Guidance” separates “MLM” compensation from the definition, as if each MLM’s plan was unique. In fact, all MLMs promote same income scheme.
Apart from the “definition”, the “guidance” states, “Where an MLM has a compensation structure in which participants’ purchases are driven by the aspiration to earn compensation based on other participants’ purchases rather than demand by ultimate users, a substantial percentage of participants will lose money.”
Such a plan actually and historically causes a 99% loss rate, which the FTC refers to only as “substantial.” But, what else is missing here? Reality. All MLMs “drive” purchasing products with rules and rewards. All MLMs “drive” recruiting by rewarding the recruiters with “commissions” on the recruits’ purchases, not sales. This is done in all MLMs with volume quotas that can be met with personal purchasing and required start up payments. What the “FTC” describes as a “compensation structure” that causes “substantial” consumer loss is actually the classic and universal “MLM model.”
4. After acknowledging that what is universally practiced by “MLMs” causes widespread consumer harm, the “FTC” states it will not look at the MLM industry, but only MLMs one at a time – to protect the industry from harm!
It states, “The assessment of an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation… a case-by-case approach allows the FTC to address bad actors engaged in a specific harm, without directly affecting an entire industry. This approach also limits the potential unintended consequences…”
Since 1980, the FTC has prosecuted only about 30 MLMs for operating pyramid schemes, out of hundred, perhaps thousands of MLMs and all were smaller schemes. Yet, small in size and numbers, they harmed millions of people. Recently, under intense public pressure and revelation of wrongdoing, the FTC prosecuted one of the oldest, largest and most well known MLM, Herbalife, for engaging in practices identified with pyramid fraud. Yet, the document states none of this history will prompt the FTC to look at the MLM “industry”. The “guidance” states the FTC will not do so in order to protect the “entire industry” from “unintended consequences” – at the expense of the public.
The “guidance” from the “FTC” leaves the consumers with nothing to go on, not the “answers” in the document, not recent prosecutions, not the historical findings of any past pyramid scheme cases. The “guidance” has no legal status. It distorts reality and contradicts itself. Using it as a “guide” will likely lead to confusion. For many people, this confusion may result in accepting MLM promises and claims, and in assuming the MLM that is soliciting them to be legal and legitimate. The guidance leads to this conclusion since the “FTC” treats all MLMs as legal unless prosecuted “case by case” and does not investigate the industry because it might cause “unintended consequences.”
To get a full picture of how the “FTC” works for MLMs at the public’s expense, see, Pyramid Politics: The FTC’s Long History of Protecting “Multi-Level Marketing”