This article aims to educate the consumers to spot pyramiding and unregistered investment scams of companies who claim to be network marketing business opportunities but are actually not. While network marketing or multi level marketing (MLM) is legitimate, many unscrupulous or misguided entrepreneurs create MLM-like compensation plans that are downright illegal violating the laws of the Philippines and destroys the ecosystem of sustainable business practices. I will share cases to dissect and illustrate.
Case no. 1: The late Bernie Madoff was once a very trusted person. Imagine having the credential as a one time non-executive chairman of the Nasdaq stock market while his company was once the 6th largest market maker in S&P 500 stocks in the U.S. In March 2009, after running an unsustainable investment scheme for over a decade, he was convicted of running the biggest Ponzi scheme in the world, valued at about US$64.8 billion, for which he was meted out the maximum 150-year prison term. He also forfeited over US$17 billion, and was banned for life from the securities industry.
Myth no. 1: High profile people, such as a financial expert, a philanthropist, a known socialite, a charismatic religious leader, a known businessman with rich parents, entrepreneurs with expensive cars can never run a scam!
Reality no. 1: There are high profile people who have been convicted of scams in the past.
Case no. 2: Company A sells overpriced products and make more money from registration fee, encouraging its members to earn money by recruiting new members than retailing products. Having no fair market value is evidenced with few buyers buying without joining the company to participate in the money scheme.
Myth no. 2: We sell products, we are not pyramiding!
Reality no. 2: Pyramiding is a hierarchal chain distribution scheme that offers members/investors profits based on recruiting others to join them as downlines (people recruited under an existing member), not based much on any resale of products or real investment. This is illegal in the Philippines, violating Article 53 of Republic Act 7394. Check if there is a direct correlation between recruits and earning payout. If there is, it is an indicator of pyramiding. To go around this rule, no company will be stupid enough not to have products, so they just overprice their products versus other industry players. The income derived are mostly from within recruits through registration fee, not retailing products to outside customers. Since the rewards for recruits are much more compelling, members are attracted to keep recruiting than do retailing of products, after all, their products have no fair market value, the intent is not selling of products to retail customers but that of recruiting.
Case no. 3: A binary company convince its members to buy business centers (known as “Headers”) in order to earn as many times as the business centers they signed up. Binary scheme is based on recruiting two people, with these two recruiting their own two and so on. The “spillover” (excess recruits) are put below a recruit to complete the binary. For instance, Mr. A may have two members on his first level, four on his second level, eight on his third level, sixteen on his fourth, thirty two on his fifth, sixty four on his sixth level, for a total of 127 downlines. Except in a “header” system, instead of downlines/members being recruited by Mr. A, Mr. A signed himself up in all these business centers, at any of the levels. At P10,000 each, the investment paid by Mr. A to the company was P1.27 million, paying the uplines (those who recruited Mr. A) handsome commissions.
Myth no. 3: Business centers or headers are legitimate way to earn income.
Reality no. 3: Binary plan selling “headers” are classified as unregistered investment, a violation of Section 8 of the Securities Regulation Code (SRC), punishable with the penalty or fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million pesos (P5,000,000.00) or imprisonment of not less than seven (7) years nor more than twenty-one (21) years, or both at the discretion of the court as provided for in Sec. 73 of the SRC. Independent members, specially those who lost money, can file charges against the binary company and/or their uplines. This is exploiting the “Theory of Greater Fool” at work, convincing a greater fool to invest, and the greater fool signing himself / herself up multiple times becoming the greatest fool!
Case no. 4: Member A claims the headers company convinced them that they are registered with the Securities and Exchange Commission (SEC) as well as Department of Trade and Industry (DTI) with papers to show, that’s why SEC and DTI never lifted a finger to investigate them ever since.
Myth no. 4: A company registration with SEC and DTI are enough evidence of legitimacy of a MLM-type compensation plan.
Reality: Unlike other countries, SEC and DTI to this day do not require
companies intending to do MLM to have their compensation plan approved before operating. Registration is evidence of legal identity as a company, not legitimacy of MLM scheme. For instance, banks and suppliers would not want to give credit line if a company is unregistered. Last December 15, 2021, DTI issued administrative order 21-09 requiring existing direct selling and MLM companies to apply for the DTI Seal of Legitimacy as part of consumer protection.
Case No. 5: Member B claims their binary company is legitimate being a top taxpayer, major advertiser and given awards by different organizations and publications.
Myth no. 5: Awards, advertising and being top taxpayers are not evidence of the legitimacy of compensation plans.
Reality no. 5: Ask awards body, media company and internal revenue to explain pyramiding, unregistered investment versus legitimate MLM, and chances are, most cannot distinguish the fine print. Simply seeing awards, advertisements and being told the company is a top taxpayer, a major advertiser, or recipient of many awards, is playing on the gullibility of their members.
Case no. 6: Multitel Group of Rose Baladjay, used counsellors and sub-counsellors to attract some 2 million people investing some P100 billion in her company by offering them at least 4% interest monthly, or double-your-money scheme for a lock-in period of 18 months. The scheme collapsed after the number of new people investing started to dwindle.
Myth no. 6: You can take the risk early and withdraw your money just before the collapse of a pyramiding scheme. The benefit far out-weight the risk.
Reality: The penalty imposed by the court to Baladjay was a jail term of 7 years and to return some P8 million to her investors. Many times, investors are left dry!
It is possible that founders may not know they operate a pyramiding or header scam in the beginning, practicing the “Law of Foolish Fellowship”, having simply copied the scheme from other companies. They may later realize the only way to be sustainable is to have more recruits pay an amount in order to have funds to pay uplines but once they see the money, they refuse to amend their compensation plan to be legally compliant.
A sad reality is that many binary companies operating with headers still continue to operate freely as if they are exempted from the law.
It is time for consumers to be reminded to be alert and rely on being educated than simply expect to be protected when victimized. Caveat Emptor, let the buyer beware!
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Josiah Go is chair and chief innovation strategist of Mansmith and Fielders Inc. For related articles on pyramiding and unregistered investment, visit www.josiahgo.com.
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