FAQs on Multi-level Marketing and Pyramid Selling

A Multi-Level Marketing or Pyramid Selling scheme will typically require participants to pay an upfront charge. In return, the participants are promised financial rewards for each additional participant recruited, as well as all new participants who are in turn brought in by their recruits - hence the pyramid-like structure.

As more salespersons are recruited, participants hope to recover their upfront charges and earn sizeable profits. However, such a pyramid schemes will eventually collapse when they run out of new recruits, resulting in those salespersons at the bottom of the pyramid losing all their upfront charges.

In the interest of consumer protection, the Government's regulation effort is targeted at preventing the proliferation of such high-risk schemes.

Many pyramid schemes often disguise themselves as sellers collectors' items, software, training programmes, etc, when all they are interested is to make a quick buck through recruitment. Members of the public who attend sales talks must be vigilant to such schemes.

Illegitimate MLM schemes usually share the following characteristics:

• When the promoter hype about how easy it is to earn money, people can get very rich in a very short time and that the way to earn money is by recruiting others to join the scheme;
• The so-called product that you are supposed to sell is not something you would normally buy at its price; Participants are required to invest money into the scheme, whether in the form of a joining fee, or buying inventory.

Remember - there is no easy money, you must believe in what you are selling and you should not put your money at unnecessary risk.

MLM activities in Singapore are governed by the Multi-level Marketing and Pyramid Selling(Prohibition) Act.

The Ministry of Trade and Industry administers the Act. The original Multi-Level Marketing and Pyramid Selling (Prohibition) Act was first passed in 1973.

In June 2000, Parliament approved an amendment to the Act to widen the definition of pyramid selling to catch all business schemes that were multi-level in nature. However, as not all multi-level marketing techniques are undesirable, the Government concurrently enacted the Multi-Level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order (hereafter, referred to as the 'Exclusion Order') to exclude legitimate businesses from the Act, such as insurance companies, master franchises, and direct selling companies which fulfill certain criteria. This Exclusion Order was implemented in June 2000.

Not all multi-level marketing techniques are undesirable. There are legitimate businesses using innovative sales tactics, and should not be lumped together with pyramid schemes.

Hence, the Government enacted the Multi-Level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order (hereafter, referred to as the 'Exclusion Order') in June 2000, to exempt legitimate businesses from the Act. The following categories of businesses were exempted:

(1) Insurance businesses that are registered, approved or licensed under the Insurance Act, the Insurance Intermediaries Act 1999 and the regulations made thereunder;

(2) Master franchise schemes and direct selling schemes which satisfy the following conditions:

• The benefit received by any promoter or participant is as a result of the sale, lease, license or other distribution of a commodity and not as a result of the recruitment of additional participants;
• The promoter of the scheme shall not knowingly make false or misleading representation or omission relating to the scheme or the commodity;
• The promoter shall not make any representation on the benefits other than those allowed; There should be a clearly stated policy on refund or buy-back guarantee.

After the Exclusion Order was enacted in 2000, the Government received feedback that the provisions in the Exclusion Order were not sufficiently clear.

Some members of the public were also confused by claims of legitimacy by companies and often requested for the Government to clarify if particular schemes were legitimate. In response to the feedback, the Government reviewed the Exclusion Order, and subsequently amended the Order in 2001.

The Exclusion Order 2001 continued to maintain that insurance companies and master franchises would be excluded from the MLM Act.

However, it also introduced the following rules for direct selling companies:

Safeguards - A participant cannot be required to provide any benefit or acquire any commodity in order to become a participant in the scheme, other than the purchase of demonstration equipment which is not for resale, at no more than cost price and for which no commission can be given out. A legitimate multi-level marketing scheme would not impose a financial risk on salespersons. For example, salespersons should be entitled to full refunds, under reasonable commercial terms, for any inventories kept or purchased by them which are not sold to end consumers, so long as the inventories are returned within a period of 60 days.

Behavioural checks - The companies must not misrepresent the scheme as get-rich-quick opportunities, and should not use fraud, coercion, harassment, or unconscionable means to force people to join the scheme. Instead, the companies should focus their efforts on promoting the quality and features of the products. If a company wishes to show potential participants the earning potential, they must keep records of the maximum, minimum, mean, mode and median earnings of their salespeople in the past.

Sharing of commission - It is all right for a salesperson to share commissions from several layers of salespersons recruited by him. However, such commissions must be generated by sale of the product or service in question, and not through the recruitment of additional participants into the scheme.

The amendments to the Exclusion Order were published on 14 December 2001, and came into effect on 01 January 2002.

The full text of the current Multi-Level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order can be accessed at the MTI website.

During the review of the MLM Act in 2000, the fines were raised from $30,000 to $200,000.

Currently, a conviction under the Act will result in a fine of up to $200,000 or to imprisonment for a term not exceeding 5 years, or to both.

The fines are for the following offences:

• promoting or participating in a multi-level marketing, or
• pyramid selling, scheme or arrangement. registering a business which is designed to promote multi-level marketing, or
• pyramid selling, scheme or arrangement. registering a company which proposes to promote multi-level marketing, or
• pyramid selling, scheme or arrangement.

In addition, the Act empowers a Court that convicts a promoter or participant of a multi-level marketing or pyramid selling an additional penalty of an amount not exceeding the amount or value of any benefit which the promoter or participant has received. This additional penalty ensures that the Act serves as an effective deterrent to potential offenders.

Under the Act, all persons who participate in multi-level marketing or pyramid selling would commit an offence. This is because the participants would have played an active but destructive role of attracting others into the scheme.

We believe that this is the best way to deter the potential promoters of such schemes. Hence, we would urge the public to be extra careful and to exercise due diligence when deciding whether to participate in business schemes. They should be doubly suspicious of get-rich-quick promises. If they believe empty promises and hand over their money to the promoter, chances are they will be cheated of the money. At the same time, they might be guilty of committing an offence as they are participating in an illegal scheme.

Companies whose business schemes fall under the Exclusion Order are not required to obtain a special licence.

It is not proper, nor appropriate, for Government agencies to give legal advice on which scheme is legal and which is not, as this would circumscribe the Government's effectiveness in enforcing regulation against fraudulent schemes that may evolve over time.

Instead, the operators and members of the public should acquaint themselves with the relevant laws, and seek legal advice from lawyers, where necessary. Lawyers should be able to advise on specific cases, according to the context and how the actual events unfold.

The Commercial Affairs Department (CAD) investigates pyramid selling schemes.

If you suspect a scheme has contravened the MLM Act, you may wish to lodge a Police report. A Police report can be lodged:

- online via https://eservices4.police.gov.sg/efocus/aem/content/policehubhome/homepage/police-report.html if you have a SingPass account or

- at 391 New Bridge Road, #06-701 Block D, Police Cantonment Complex, Singapore 088762.