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ColumnsCyber Talk: Know all about multi-level marketing scams

Cyber Talk: Know all about multi-level marketing scams

Published: 21st Dec 2021 12:25 am

Hyderabad: Multi-level marketing (MLM) companies sell their products or services directly via person-to-person sales. If you join a multi-level marketing programme, an investor is referred to as a ‘distributor’, ‘participant’, ‘contractor’, or a ‘founder’. There are two different ways you can make money: (a) you are a direct retailer; (b) you could recruit new members and earn commissions based on what they buy and resell directly or through their new members.

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Fraudsters promise you to invest your money and generate high returns at zero risk. They pay money to new investors, after collecting from old investors, and they keep the majority of the shares for themselves.

Most MLM scams have no legitimate earnings, and such schemes require a continuous flow of new money to survive. When it becomes hard to recruit new members, they just vanish into thin air. Existing members earn higher commissions if they introduce new members, a typical multilevel marketing scheme. The vicious cycle in multi-level marketing is that ‘you get cheated to cheat others’.

MLM company promoters make extravagant promises about earning potential. Most multi-level marketing companies do very exhaustively paid PR campaigns via social media influencers to attract people to invest, luring them with high returns. A few MLM schemes that are illegal in India are (a) Pyramid Schemes. (b) Money Circulation Scheme (c) Ponzi scheme.

There are a handful of online MLM scams doing the rounds on the internet. A few of the models are: getting paid for buying applications, cryptocurrencies and stocks, authoring e-books and getting paid for clicks. They use attractive slogans like (a) Earn dollars just by joining the scheme. (b) Work from home and earn Rs 50,000 per month. (c) You are the boss of your business. (d) Do you want to earn extra by sitting at home? (e) Enrol with us for a healthy and wealthy life.

Not all MLM companies are bad. There are a few exceptions like Amway, Avon, MaryKay, Forever Living, Herbalife and Tupperware whose sole purpose is to increase direct sales and provide employment opportunities for unemployed people and those looking for an additional income source.

Legislations that regulate deposit collections:

* The Banning of Unregulated Deposit Schemes Act, 2019
* The Chit Funds Act of 1982 (the Chit Funds Act) governs the operation of chit funds.
* Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
* Companies Act of 2013, as amended by the Companies (Acceptance of Deposits) Rules of 2014.
* Securities and Exchange Board of India Act, 1992 & 1999

Some MLM scams modus operandi: –

  1. Pyramid schemes that have a vertical expansion of their network, wherein a person receives commission irrespective of the sale.
  2. Ponzi schemes involve money laundering across a network of people and do not involve a sale.
  3. Pump and Dump Schemes: Once the victims have purchased, the schemers abruptly lower the price.
  4. Exit Scam: Promoters who collect funds from victims and then disappear, leaving victims in the dark.

Some red flags to be considered: 
* High returns with zero risk.
* The earlier you join, the richer you become.
* Being compensated for bringing in new members
* The more you invest, the more money you get.
* They over-promote but never deliver.
* You have been asked to sell products that you either haven’t seen or are still in the development phase.
* Avoid joining MLM companies selling stocks, cryptocurrencies, web spaces, clicks, watch advertisements, received sms and receive emails.
* Never blindly trust a social media influencer’s videos claiming they became rich by investing in an MLM scheme.

Some homework to do before investing:

* Research the company with the Registrar of Companies
* Research the investors’ complete social profiles on the Internet
* Research on what investors are saying
* Consider the products or services they are selling
* Ask about the refund policy during the purchase
* Visit the company if it has a local office
* Read the paperwork and have a financial advisor review it
* Never buy from unregistered sellers

Contact us if you are scammed:

* Send a legal notice with the help of a reputed lawyer.
* File an FIR against the fraud MLM company on www.cybercrime.gov.in or call 155260 and let the police investigate further.
* File a complaint with the Registrar of Companies.

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