Are you sure that Multi level Marketing or Network Marketing is not legal?
You are wrong!
Multi-level Marketing (Network Marketing) is a legal process under which people build a network system to ensure the higher sale of products.
However, the Pyramid type of business is an illegal operation under which there is no existence of real products.
Do you know which countries banned Network Marketing partially or completely?
Let’s look at the legality of network marketing in some countries.
Studies and journals show that regulations for network marketing differ from one country to another. Every country has its own approach to introducing legal regulations to limit the operations of multilevel marketing.
By asking such a question we want to check the reason behind this ban. Most countries banned a part of Network Marketing because it hurts people’s feelings and emotions financially. This part is called the Pyramid Scheme.
Is multilevel marketing a pyramid scheme
However, all wrongly say that MLM is banned instead of the Pyramid Scheme or other illegal businesses banned.
But what are the differences between Network Marketing and Pyramid Scheme?
In-Network Marketing, there is always the presence of some products. Their primary purpose is to sell products to the customers. But Pyramid Scheme doesn’t contain actual products and their primary purpose is to build downline channels.
In most cases Pyramid part hurts people financially by conducting fraudulent activities. But we can’t identify which part is legal and which part is illegal. For the following reason authority limits the operations of Multilevel Marketing;
I now say that Network Marketing or MLM business is not always illegal, it is a legal business but restricted to some obligations.
Now let’s look at the Legal regulations taken in the USA, Bangladesh, China, Saudi Arabia, Srilanka, and India.
Is MLM illegal in us?
In the US, MLM works as “Affiliated Marketing” in 50 states. It is also called “Home Based Business Franchising”. Even though multilevel marketing is lawful, some of the practices are considered criminal.
“Avoid multilevel marketing programs that pay commissions for recruiting new distributors,” the US Federal Trade Commission (FTC) advises. They’re actually pyramid schemes that are against the law. What makes pyramiding so risky? Because programs that pay commissions for bringing on new distributors will surely fail if no new distributors can be found.
Federal Trade Commission also advises the people not to join MLM where money-making is the primary objective. Because not at all MLM is legal by law or it may not trustable. The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as “pyramiding”. State Government and FTC formulate and implement the Law regarding MLM.
FTC also gives the warning signs to avoid such scams as;
They also restrict the activity of the Ponzi Scheme because of its nature of activities. It is similar to Pyramid Scheme but it has no hierarchical structure. In a Ponzi scam, “investors” aren’t urged to recruit others, and they’re also not told where their money will come from. Ponzi schemes, in this sense, function at a higher level than ordinary pyramid schemes.
By searching for the first Pyramid Scheme found by FTC, we can see that it was in the 1970s. In re Koscot Interplanetary, Inc., one of the Commission’s earliest cases, involved a corporation that offered the opportunity to become a “Beauty Advisor” and sell cosmetics. The incentive structure of the corporation did not stimulate retail sales. Instead, it enticed users to pay $2000 for the title of “Supervisor” and $5400 in Koscot cosmetics, then earn extra by encouraging others to do the same.
But from all of these, you must know that MLM is legal in the US but restricted to certain obligations.
According to the report submitted by Pyramid Scheme Alert(PSA) president Robert L. FitzPatrick in 2005, Sri Lanka was addressing currency losses and the financial devastation caused by offshore multi-level marketing schemes to many of its residents.
The following are the actions taken by Sri Lankan Government to prevent Pyramid Scheme;
Pyramid schemes offered through Network Marketing have been outlawed by the government in an effort to prevent MLM fraud.
In 2013 Bangladesh Government published Multilevel Marketing (control) Ordinance 2013 to limit the fraudulent activities of the Pyramid scheme which comes from Network Marketing. As per the ordinance, every MLM business needs a license to operate its activities legally. It also suggests 10 years of imprisonment for running MLM without a license.
The gazette of the ordinance also banned MLM companies that deal with non-existence products. They treated such businesses as the Pyramid Scheme. Such businesses offer money for simply recruiting downline members or network channels under the sponsors.
According to the regulation, if an illegal MLM company is caught selling nonexistent products, its operators will face a maximum punishment of ten years in prison and a fine of Tk 50 lakh.
They also found that in Bangladesh most of the companies follow the Pyramid model business pattern which benefits the members at the top level of the pyramid.
Following the Chinese economic reform of 1978, American, Taiwanese, and Japanese corporations were the first to introduce MLM to mainland China. The popularity of multi-level marketing grew in tandem with economic uncertainty and a new focus on individual consumption.
Due to social, economic, and taxation issues, the Chinese Government Banned MLM in 1998. In 2005 further regulations were enacted namely “ Prohibition of Chuanxiao” and as per this regulation having downlines is illegal.
In China, they promote Direct Sales, not Multi-Level Marketing, which means they limit the operations of appointing downlines. Chinese or foreign firms (“FIEs”) intending to engage in direct selling operations in mainland China must apply for and get a direct selling license from the Ministry of Commerce, according to regulations (“MOFCOM”)
MLM marketing is forbidden in Saudi Arabia by applying religious fatwa countrywide not legally, for this reason, MLM businesses like Amway, Mary Kay, Oriflame, and Herbalife sell their products using the internet selling method instead of MLM.
Fatwa is the guidelines or religious practices which show how to do something by an Islamic resident. As per the religious belief, they consider MLM as bad practice or haram.
According to KPMG FICCI analysis from 2015, India’s direct selling market is worth INR 75 billion. Direct selling is a respectable business that generates significant tax income and provides prospects for self-employment across the country.
In India, network marketing is legal. So are multi-level marketing schemes, with the exception of certain enterprises that are classified as unlawful multi-level marketing since they are used to deceive unsuspecting consumers who engage in MLM schemes, and there is no direct exchange of goods and services between the investors and promoters.
As a result, the Indian government has declared a few types of network marketing fraud strategies illegal in the country in order to protect consumers. Under the Direct Selling Guidelines 2016 and the Prize Chits and Money Circulation Schemes (Banning) Act 1978, these network marketing schemes are illegal in India.
The following Schemes are considered to be illegal MLM in India;
Pyramid scheme meaning: In Indian law, a pyramid scheme is defined as a scheme in which the organizer constructs a pyramid structure starting with one person who symbolizes the pyramid’s tip.
A Ponzi Scam is a deceptive investment scheme, similar to a multilevel marketing (MLM) scheme, that promises a high rate of return to its investors.
The returns are paid to the existing investors using the new investors’ price hike. As a result, the program is reliant on a steady stream of fresh investments, and it collapses when that flow ceases.
“A transaction, whether termed chit, chit fund, chitty, Kuri, or by any other name by or under which a person enters into an agreement with a certain number of others that each of them should contribute a particular sum of money (or a particular amount of grain instead) by way of monthly installments over a specific period”
– Chit Funds Act, 1982(1).
However, network marketing in India is legal except for some activities.
You can check the below information to identify the illegal businesses in Network Marketing. If the company satisfies all the conditions formulated by authorities like DSA, you can associate with them, because that Network Marketing business is legal.
As I conclude, I can say that MLM (Multi level Marketing) or network marketing business is legal in most countries but except some categories.
MLM or Multi-level Marketing is a legal form of activity, formed for the purpose of promoting and increasing the sale of products.
Because it is a legal form of marketing activity to promote the company’s product. However, in some countries, it is banned based on their customs and tradition.