Pyramid fraud also disguised as a multilevel marketing scheme, is basically an investment scam, based on network marketing or referral marketing in which one person invests in the company and further refers more people and they will add further more like a chain. Let’s say there is one person named ‘A’, he invested in the company and added 2 more people ‘B’ and ‘C’ in the chain, and further ‘B’ and ‘C’ added more people namely ‘D’, ‘E’, and ‘F’. So, whatever ‘D’, ‘E’ and ‘F’ will earn, some percentage of that will be given to ‘B’ and ‘C’ and whatever ‘D’, ‘E’, ‘F’, ‘B’, and ‘C’ will earn, some percentage of that will be given to the person ‘A’ so it works like a never ending chain.
How is Pyramid Fraud different from Multi Level Marketing (MLM) and what exactly the Pyramid scheme is?
In India there are a number of multi level marketing companies but pyramid schemes are illegal. A pyramid scheme is a sketchy and unsustainable business model, where fewer top level members recruit newer members. Those members pay upfront costs up the chain to those who enrolled them. As in turn, newer members will recruit underlings of their own, a portion of the subsequent fees they receive is also kicked up the chain. The main difference between the Pyramid scheme and Multi level marketing (MLM) is that in MLM, the company sells some products as well, while in Pyramid fraud the main focus is on money schemes only and not on products. Pyramid scheme is illegal in many countries including India and a lot of companies are practicing this Pyramid scheme in the name of MLM. In this scheme the top level members are earning but the newer members are actually losing their money and becoming a part of this scam. These types of companies engage a large number of distributors and do rigorous marketing of the schemes of the company, convincing them to buy their products at unreasonably high prices, that there is quick and easy money by becoming a member and then further recruitments under one's down line. In the Pyramid scheme, the major profit comes from recruitment fees rather than the sale of the actual products. MLM are similar to pyramid schemes but in MLM they involve the sale of tangible goods. So why is it called the Pyramid Scheme? This is because the scheme often takes the shape of a pyramid, where there’s one person at the top and the number keeps increasing as more and more people are hired at the base level.
Amway Pyramid Fraud - the Modus Operandi
In April 2022, ED (Enforcement Directorate) attached assets worth over Rs 757 crore belonging to MLM (multi level marketing) scheme promoting company, Amway India, in a money laundering case. The central agency has accused the company of perpetrating the scam by running a pyramid fraud. Out of the total Rs 757.77 crore of assets attached under the Prevention of Money Laundering Act, immovable and movable properties are worth Rs. 411.83 crore while the rest are bank balance of Rs. 345.94 crore kept in 36 accounts belonging to Amway.
Amway is a US-based multilevel marketing company, founded in 1959 and headquartered in Michigan. It mainly deals in FMCG i.e. Fast Moving Consumer Goods products and uses a combination of direct selling and multi-level marketing schemes. A money laundering investigation by ED revealed that Amway was running the pyramid fraud in the guise of direct selling and MLM network. ED stated that Amway collected Rs. 27,562 crore from its business operations from 2002-03 to 2021-22 out of which Rs. 7,588 crore is paid as a commission to its distributors and members in India and US.
As per the findings of the investigation, the entire focus of Amway in this Pyramid Fraud is about propagating how members can become rich by becoming members. There is no focus on the products. So, if Amway has any product, they will propose other people to become their member and buy their starter packs, in that way they are lured to become the investor and distributor of the company but these distributors or members are basically the customers of the company as they are buying their packs and distributing them further as well.
Its Amway or the Highway - previous fraud cases against the company
ED stated that Amway brought Rs. 21.39 crore as share capital in India in 1996-97 and remitted Rs. 2,859.10 crore until 2020-21 in the name of dividend, royalty and other payments to investors and parent entities. This pyramid fraud case on Amway is not a recent case; it has been running for several years. Between 2006 and 2014, several cases were filed in the Andhra Pradesh police station under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and IPC Section 420. The FIRs were based on the complaints from Amway associates, who felt cheated, lawyers, and activists, and who alleged Amway of running a pyramid fraud and an illegal money laundering scheme in the name of MLM. More complaints were lodged in Andhra Pradesh and Kerala in 2014 and 2011. As a result of those complaints, Amway Chairman and CEO was arrested, offices were sealed at Kozhikode, Kannur, Kochi, Kottayam, Thrissur, Kollam and Thiruvananthapuram. Further, in 2017, a Chandigarh court framed charges under IPC Section 420 and the Prize Chits and Money Circulation Scheme (Banning Act), against two directors of Amway India. Apart from these Indian cases, a number of cases from abroad are also running against Amway. The class action alleged fraud, racketeering, and an illegal pyramid scheme was filed in Federal District Court, in California in 2007.
Other examples of Pyramid Fraud
In Sep 2019, the Enforcement Directorate attached assets worth Rs. 31.63 crore belonging to eBiz.com and its directors in a pyramid style, multi-level marketing fraud case.
In Feb 2022, around 500 customers alleged a financial pyramid scheme against the company MSK Operação e Investimentos, involving the false market of cryptocurrencies.
Contributed by:
Shivani B. ,
Research Associate
Intelaw Consulting
