Illegal prospects of MLM Companies

7/30/2019 Illegal prospects of MLM Companies

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Illegal Aspects of MLM (Multi-Level Marketing) Business in Bangladesh

Report Abstract

One of the most problematical of business models is multi-level or network marketing (MLM).Many MLM

programs show all the effects and characteristics of a pyramid scheme, but the MLM industry hasnonetheless been allowed to continue and flourish in Bangladesh. The MLM participants are considerably

suffered by the tricky and corrupting influence of the MLM companies, and the financial and social harms.

Unfortunately, victims of these programs seldom complain, blaming themselves for their failures.This

problem is compounded by limited resources available to the enforcement agencies in

Bangladesh, faced with MLM companies which are operating using both Naked

Pyramid Schemes (NPS, where no products are offered actually) and Product-based Pyramid Schemes(PPS,

where products are offered but using illegal pyramid scheme).Due to inadequate definitions of

what constitute a pyramid scheme, insufficient resources, corruption and lack of prosecutorial

wills in enforcement of existing laws, enforcement agencies often fail to catching the fraud MLMcompanies, but letting them go free. The consequences are enormous

Millions of consumers are being cheated out of billions of money each year.

A pyramid scheme, as currently defined as are plans which

(1) Concentrate on the commissions you could earn just for recruiting new distributors and

which

(2) Generally ignore the marketingand selling of products and services.

The above two criteria have proven to be inadequate for determining whether any given MLM program is a

pyramid scheme or not. Legislators, courts, and consumer protection agencies would serve

consumers better if they improved their methods of determining whether an MLM business fits the

definition of a pyramid scheme or not. At least, it is needed to point out that an MLM program

is not a pyramid scheme, when in fact it is more likely a Product-based Pyramid Schemes that has

managed to escape corrective action. However, in Bangladesh some 62registered Multilevel Marketing (MLMs)

companies are now operating in the country and most of them are following Product-based Pyramid

Schemes (PPS).In this report it has been tried to discuss on the illegal aspects of MLM business,

and how to determine a MLM business as illegal Pyramid Scheme along with discussing the disadvantages of

illegal MLM business. A brief study on the largest MLM Company in Bangladesh, Destiny-2000

Ltd., has been done here from the legal perspective. This report has recommended for banning of illegal MLM

business in Bangladesh.


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Introductory Discussion of Relevant Terms

As a long-time critic of MLM programs, I was curious to know why so many otherwise

intelligent and capable persons were involved. The growth of MLM amazed me; since it seemed

obvious it was just a disguised pyramid scheme. Yet several persons whom I trusted and

respected tried to recruit me into their down line. They tried to convince me that I may have

misjudged the industry and that MLM may have a real future as a viable and ethical business

model. Finally, I decided to investigate MLM for myself - to prove for myself whether or not my

original objections to MLM were valid.

There are about 62 so-called MLM companies in Bangladesh and most of them are using

Pyramid Scheme in disguise of legitimate MLM business which is illegal. Lets see the definition

of some relative terms to understand the illegal aspects of MLM business.

Multi-level marketing program

(MLM for short, also referred to as network marketing), as defined as

Any marketing program in which participants pay money to the program promoter in return for

which the participants obtain the right to (1) recruit additional participants, or any other person

Into the program participants down line, tree, cooperative , income center, or other similar

program groupings; (2) sell goods or services; and (3) receive payment or other compensations;

provided that: (a) the payments received by each program participant are derived primarily

from retail sales of goods or services, and not from recruiting additional participants nor having

additional participants placed into the program participants down line, tree, cooperative,

income center, or other similar program grouping, and (b) the marketing program has instituted

and enforces rules to ensure that it is not a plan in which participants earn profits primarily by

the recruiting of additional participants rather than retail sales.

In Multi-level marketing the sales force is compensated not only for sales they personally

generate, but also, secondly, for the sales of others they recruit, creating a down line

of distributors and a hierarchy of multiple levels of compensation.

Pyramid Scheme

As its name indicates, the pyramid scheme is structured like a pyramid. It starts with one

person- the initial recruiter - who is on top, at the apex of the pyramid. This person recruits a

second person, who is required to "invest" $100 which is paid to the initial recruiter. In order to

make his or her money back, the new recruit must recruit more people under him or her, each

of whom will also have to invest $100. If the recruit gets 10 more people to invest, this person

will make $900 with just a $100 investment.


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Now if the 10 new people become recruiters and each one is in turn required to enlist an

additional 10 people, resulting in a total of 100 more people. Each of those 100 new recruits is

also obligated to pay $100 to the person who recruited him or her; recruiters get a profit of allof the money received minus the initial $100 paid to the person who recruited them. The

process continues until the base of the pyramid is no longer strong enough to support the

upper structure (meaning there are no more recruits).

The Fraud:

The problem is that the Pyramid Scheme cannot go on forever because there are a finite

number of people who can join the scheme (even if all the people in the world join). People are

deceived into believing that by giving money they will make more money ("with an investment

of just $100, you will receive $900 in return"). But no wealth has been created; no product has-been sold; no investment has been made; and no service has been provided. In MLM, Pyramid

scheme as currently defined as plans which concentrate on the commissions you could earn

just for recruiting new distributors/participants and which generally ignore the marketing and

selling of products and services. The main characteristic of an illegal Pyramid Scheme is that

participants only make money by recruiting more members, and the results of pyramids are

inevitable and obviously predictable. All Pyramid Schemes eventually collapse and fail. In order

for everyone to win under a pyramid scheme, the recruiting would have to go on forever which

is impossible due to saturation of the market. Although illegal, pyramid schemes remain

popular because the promise of quick, easy money lures people. The following chart illustrateshow difficult it is for those who are not at the top of the pyramid to expect payment.


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Since many people know pyramids are illegal, so they need to convince other new people that

what they are involved into a pyramid scheme. As a result, pyramid schemes today are being

described in different terms, such as clubs or gifting groups. Pyramid scheme operators attempt

to convince people they are involved in a club to make an investment or to raise money by

making "gifts" to help someone else.

Different kinds of pyramid schemes

The two most basic types are Product-based Pyramid Scheme (PPS) and Naked Pyramid Scheme

(NPS).

Naked Pyramid Scheme refers to an obvious pyramid scheme that is easy to detect because no

products are offered, but merely a participation fee or investment. It is a continuous chain of

Participants or investors is recruited, in which each pays a fee to participate and receives

money by recruiting others into the system.

A product-based pyramid scheme (PPS) is a pyramid scheme that in most respects resembles a

naked pyramid scheme, except that products are purchased by distributors at higher cost. Such

product purchases often combined with other incentives, qualifies distributors for commissions

in ascending levels in the distributor hierarchy.

A product-based pyramid scheme is the same concept disguised as a legitimate direct sales

opportunity.


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Here's how it works:

1. A distributor recruits 10 salespeople who each pay $500 for a starter kit of products to sell.

2. The distributor gets 10 percent of each starter kit that's sold.

3. The distributor also gets 10 percent of each product that any of his recruits sells, including

more starter kits.

4. The recruits are told that the fastest way to make money isn't by selling products, but by

recruiting more people to buy starter kits.

5. The people at the top of the pyramid get commissions from everyone in their down line; the

many levels of recruits below them on the pyramid.

Several MLM programs generate goods or services for just show - not of real value to its

members. These are completed just to tick the authority and eye-wash legal police.

Network marketinga term devised by the MLM companies to get around the implications

ofmulti-level marketingwhich sounds too much like a chain distribution or pyramid form

of marketing.

Down lineall of the MLM distributors who are recruited under a given distributor and from

whom are generated overrides on product sales.

Up linethe direct line of distributors who are above a given distributor in the MLM distributor

hierarchy or pyramid scheme and who receive overrides from his/her sales or purchases.

SchemeA plan or program of action, especially a crafty or secret one, that can be a systematic

or organized framework.

Compensation plan a structure which determines how distributors are paid from their own

sales and earn residual income from the sales of the distributors in their down line.

A binary compensation plan uses a network marketing structure, which means the company

pays a specified amount or percentage based on a specified sales volume regardless of the

number of levels needed to achieve it. This is in contrast to a multi-level compensation

structure, which pays a specific percentage based on a specified level up from the person

originating the sale, regardless of the sales volume.


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Types of MLM compensation plans

Unilevel plans:

This type of plan is often considered the simplest of compensation plans. As the name suggests,

the plan allows a person to sponsor one line of distributors, called a frontline. Every

distributor the person sponsors is considered to be on that sponsors frontline and there is no

width limitations, meaning there is no limit to the amount of people one can sponsor in the

frontline. The common goal of this plan is to recruit a large number of frontline distributors and

then encourage them to do the same. This is due to the fact that commissions are normally

paid out on a limited depth, which typically means sponsor can earn commissions on sales

between 5 and 7 levels deep.

Matrix Plans:

This type of plan is similar to a Uni-Level plan, except there are also a limited number

of representatives who can be placed on the first level. Recruits beyond the maximum number

of first level positions allowed are automatically placed in other down line (lower level)

positions. Matrix plans often have a maximum width and depth. When all positions in a

representatives down line matrix are filled (maximum width and depth is reached for allparticipants in a matrix),a new matrix may be started. Like Uni-Level plans, representatives in a

matrix earn unlimited commissions on limited levels of volume with minimal sales quotas.


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Binary Plans:

A binary plan is a multilevel marketing compensation plan which allows distributors to have

only two front-line distributors. If a distributor sponsors more than two distributors, the excess

are placed at levels below the sponsoring distributors front-line. This spillover feature is one of

the most attractive features to new distributors since they only need to sponsor two

distributors to participate in the compensation plan. The primary limitation is that distributors

must balance their two down line legs to receive commissions. Balancing legs typically

requires that the number of sales from one down line leg constitute no more than a specified

percentage of the distributors total sales

A simple analysis of a pyramid scheme based binary compensation plan

Suppose there are only 15 people in this world and the market is fully saturated. Now if we do

simple hypothesis then we will understand that how the people of the bottom level in a

pyramid scheme will never get money as per the people in above 2 levels in a pyramid.


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Here there are 8 people in the bottom level which is 53% of total people in the pyramid (8/15

=53%) and the market is completely saturated. Now if those 8 people want to earn, then each

of them has to recruit, at least, 2 new people into their down line which is the minimum

condition to be paid. So, conditionally, they will need 16 new people to recruit to be paid but

there are no new people to join.

Now, even, in an ideal situation, if those 7 distributors (15-8 = 7) in above 2 levels want to join

below the 8 distributors in the bottom level, then only 2 people will be able to earn money.

Because 16 people are needed to be paid for 8 people, but only 7 people are available in above

2levels.So we can see in bottom level in picture-02 that only 2 distributors out of 8 distributes

will be able to earn in an ideal scenario, that is, only 25% distributors will be paid only once and

75%people will not be paid ever in the bottom level. Now sometimes the scam artists claim

that, still, those 25% people in the bottom level can be able to be paid more than once if those

newly rejoined distributors from the above levels buy their own products again and again. But

in that case, those newly rejoined distributors must buy their own products again and again at

higher price than the usual market price to benefit those25% distributors in the bottom line

which is impractical and losable. So it is simply not possible to pay those 25% distributors in the

bottom line without buying own products again and again at higher price by the newly rejoined

distributors because of market saturation and other factors.


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Difference between Legitimate Multi-Level Marketing Plan and Pyramid Scheme


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How to identify product-based illegal pyramid schemes (illegal MLM)

Those pyramid schemes that offer money for simply recruiting people. This money can come

as a commission from the sale of a starter kit or as a recruiting "bonus."

Avoid any MLM that puts much more emphasis on recruiting salespeople than selling theactual product.

Pyramid schemes charge steep startup costs for joining, including mandatory training, a

starter kit and a non-refundable membership fee.

Beware of any MLM that allows five or more levels of distributors to collect commissions on a

single sale.

Make sure that the products being sold have real value and a competitive price. Are they

reputable brands? Have the manufacturers been involved in recent lawsuits?

Avoid MLMs that only sell lists of sales leads to other MLM salespeople. This is most likely

outdated information that has made the MLM rounds several times before.

Avoid signing up for an MLM as part of a high-pressure motivational event. Consider the

information carefully and take it home to think about it.

Be wary of anyone who tries to sell you on an MLM by displaying their personal wealth.

Realize that many of the people who claim to have made millions through MLM have actually

made their money selling books and videos on how to make millions through MLMs.

MLM companies charge for in-house seminars and sales materials a source of revenue

unique to the industry.

As the direct result of relative vertical equality in MLM company compensation systems,

extreme horizontal inequality (EHI) is seen in payout to the entire network of distributors.

Demand is distributor-driven, not market-driven.

The distinction between the consumer and the seller of the product becomes unclear in MLM

programs.

Emphasis when prospecting is on the opportunity, rather than on the value of the products.

The illusion of virtually unlimited financial growth opportunities masks the mathematical reality

of limited advancement opportunities. Charts of compensations systems in MLM programs

often show an almost limitless opportunity for financial growth by advancing geometrically


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through levels in the hierarchy of distributors to extraordinary incomes at the top levels.

Recruiters imply that such income can be reached by anyone promises of extreme financial

opportunities often mask the reality that very few could actually make the top level.

Very small rewards are paid to distributors by the company for retailing the products.

Net profits from MLM participation are rarely sufficient to be reported by distributors.

The acid test for success as a MLM distributor is whether or not significant profits remain

after all expenses and product purchases from the company were accounted for enough to

actually report a profit on their income taxes.

Products are promoted through MLM that are unique, emotionally appealing, and

consumable or renewable to perpetuate the pyramid. MLM products have been

characterized as notions, potions, and lotions. For example, personal care and nutritional

products have for years been the staples for MLM companies.

More recently, MLM founders have promoted telecommunications (long distance), internet

services, or other new technologies, which in the public mind represent almost unlimited

even magical opportunities for growth.

Intangibles, such as investments, buying clubs, and travel opportunities have also been

promoted through MLM companies because they are renewable and allow for repeat business.

MLM promoters engage in extensive deception and self-deception probably more so than

with any other distribution system.

Critical Hypothetical Analysis of Multi-Level Marketing Binary Compensation Plan An Ultimate

Pyramid Scheme:

Binary means 2. Thus, each sponsor can have only 2 distributors in their immediate down line

.The down line is the term used for those recruited distributors who are placed beneath you.

The Sponsor is the distributor who is immediately above you. However, the number of levels in

the down line is infinite in binary compensation plans. This creates a pyramid that looks like 1-

2-4-8-16-32-64- so on when each level is added up.The first number (1) is you. In this

example, when you add up all the distributors in your down line, you would get2+4+8+16+32+64+etc =126+ so on


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In a binary compensation plan, the distributor must balance their down line. The down line

is divided into two sides; one is the LEFT side and another one is the RIGHT side. The sides are

created due to the binary structure. Binary compensation plans are infinite in levels because

group sales volume points are added up and max out at 5000 points on each side generally. You

can have 1000 distributors in your first Business Center (1-BC) possibly giving you 25,000 sales

points, but since the maximum you can calculate for commissions on each side of your down

line is 5000 points, you max out at 10,000 group sales points. If you have 5000 group sales

points on your left side but only 250 group sales points on your right side, then your

commission payout is calculated based on the lower of the two sides. In this case, you add

up250 group sales points from each side giving you a total of 500 group sales points. The

remaining 4750 GSP (Group Sales Points) on the one side rolls over to the next month. Only a

maximum of 5000 points can roll over. If you had 20,000 points on your left side, it is first

readjusted to 5000 points, and then calculated for commissions. Whatever is left over that rolls

over later.

If you manage to collect 5000 points on your left side and 5000 points on your right side, you

max out your business center. In the event this happens, you receive a Re-Entry Certificate. This

certificate allows you to create a new Business Center at the bottom of your current business

center. This gives the distributor the chance to try and max out another business center, and

soon. Each business center can collect up to two Re-Entry Certificates. This allows the

distributor to maintain an inevitable balancing act for those earlier business centers created,and continues the incentive to recruit more distributors. This happens because you can get 2

re-entries per business center. You put one of the new business centers on the left side of the

earlier business center, and place the next business center on the right side of that earlier

business center. So now you are essentially balancing your stacking business centers. The

following examples will demonstrate. But first, here is the commission payout table.


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Now suppose, in an ideal situation, if I have one business center which each distributor

purchases 25 sales points worth of product each week. Suppose I have 126 distributors in your

down line (2-4-8-16-32-64) making 6 levels. Level 1 has 2 distributors while level 6 has

64distributors. Here, the total sales points are calculated by adding together the left and right

side of the down line including your own sales points: (Left Side Points + Right Side Points +

Your Own Points). Your own points can be applied to either side of your down lines group sales

points when calculating commission payout

Scenario 1:


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In the above example, everything is equally balanced. But what happens if I get a re-entry

certificate and begin a new business center at the bottom of the previous one? I will place a

Business Center #2 at the bottom left side of my Business Center #1.

Scenario 2 :


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Business Center 1(gray)

The table here represents the distributors who pass the sales points from one business center

to the top of the other. These distributors are represented in the gray blocks in the image

above.


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Now the calculation is showing that in the 2nd level in Business Center 1, after adding the

Business Center 2, one distributor (right side) gets 1575 SP (Sales Points) and the other

distributor (left side) gets 4750 SP (3950+775+25). So I will get 6350 SP (4750+1575+25) in total

after adding Business Centre 2.

In the example above, I have two business centers. You can see that after I built my second

business center, the first business center changed and became highly unbalanced. You notice

that each level contained 1 distributor that carried on the sales points from the business center

underneath them. I will call this anomaly the Line Connecting Business Center Distributors. In

the graphical images, these distributors are represented by the gray blocks. This line

of distributors passes the total sales points from Business Center 2 on up to the top of Business

Center 1 to benefit the same distributor for a second time. As you can see, the distributor on

the6th level whom I placed my second business center underneath inherited 3175 SP! But this

doesnt mean the distributor will collect any commission. You can see that while the distributor

collected 3175 SP on their left side, they collected 0 SP on the right side. The best thing that this

distributor could do is to apply his own points to the right side for the commission calculation.

Thus, the distributor will have 3175 SP on the left side and 25 SP on the right side. The

commission pay out chart shows that the first commission payout comes when you collect at

least 250 SP on both sides! At this current rate, it will take 10 weeks for this particular

distributor to make $40 in commissions. So just because I started my new business center at

the bottom of my previous business center does not necessarily greatly benefit those Line

Connecting Business Center Distributors.

Now, even I have an unbalancing problem. While my Business Center #2 is quite balanced

(1575+1575+25), this is not the case for my Business Center #1. Business Center #1 is

unbalanced and looks like (4750+1575+25). However, this can be fixed. This is the reason the

Binary Compensation plan allows for TWO re-entry certificates PER business center.

Lets see what happens when I put a new business center at the bottom of the right side on my

first business center. Now I will have 3 business centers. They will look like the following:

Illegal prospects of MLM Companies

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