Multi-level marketing (MLM) companies have been a plague in society around the world. Singapore has not been an exception. With a pitch that promises free training opportunities, zero upfront capital, and flexible work hours, MLM companies promise people that they will be their own bosses in a worthy business. Unfortunately, with time the scheme collapses and people are left with losses. How does one know that they are dealing with a multi-level marketing scheme?
So, how do these MLM Schemes work?
Most multi-level marketing schemes require that a person join by making a minimum purchase of a product that they are selling. In addition, he or she promises to recruit others to make sales for the company. The recruiter makes a commission on the sales they make, and those that their recruits make as well. The recruit is also expected to recruit people, and the sales they make earn a commission for the first recruit, and the person who recruited him or her. On and on it goes. The rewards system therefore, is for sales made and for recruiting people to sell products too.
The difference between and MLM and a pyramid scheme is that in a pyramid scheme, people are expected to pay to join the organization. He or she is then paid commissions on the joining fees paid by any recruits that he or she brings in.
Why Are MLM Schemes Prohibited in Singapore?
If people are making money, why are MLMs banned in Singapore?
Singaporean law governs MLMs and Pyramid schemes. It is important to note that it does not distinguish between the two which can cause a bit of confusion. The reason why they are considered bad is because many times, the product or service they are selling will not make sales. In fact, product sales are not how they make money. They make money from recruitment fees charged, or from the initial inventory amount paid by those wanting to participate. This investment is usually quite large. As such, they are dependent on people continually joining the scheme. Once people stop joining, it collapses and people lose significant amounts of money.
An example is the famous Sunshine Empire which conned people out of money for 15 months. From August 2006 to November 2007 they sold what they referred to as “lifestyle packages” to Singaporeans. The packages ranged between $240 and $12,000 and they sold 26,000 of them. The total amount swindled from Singaporeans was $190,000,000 and only $21,000,000 was ever recovered. Those who made any money were the early investors, the rest all lost money.
Multi-level Marketing and Pyramid Selling (Prohibition) Act
The law prohibits Multi-level marketing in Singapore, unless they fall within the group specifically excluded from this prohibition. Those that have been excluded include direct selling companies, master franchises, and insurance companies. If the company is involved in direct selling, it must be fully registered and must abide by the laid-out Code of Ethics and Conduct. The Direct Selling Association of Singapore has put the code of ethics together. The goal is to make sure that consumers as well as participants are protected when it comes to direct sales. To further ensure that consumers are protected from unscrupulous people, information on Multi-level marketing has been passed on to the public by the Consumers Association of Singapore.
Enforcing the prohibition has been left to the police force, and specifically the Commercial Affairs Department. The administration of the act however, is done by MTI (Ministry of Trade and Industry).
Recognizing an Illegal MLM
Most of these come disguised as training companies, software sellers, or even traders in collector’s items. Their main goal, though, is to make quick money by recruiting members. MLM schemes can be identified by the following traits:
- Most times, the promoters will talk of how easy making money is with the scheme. They will also encourage people to recruit others to make money easily. They promise near instant riches.
- Expensive products. Most times, the products that one is supposed to be selling tends to be very expensive. Most people are not willing to purchase it at such a high price. In the meantime, to join the MLM scheme, the person is required to purchase an amount of inventory or pay a fee to join.
It is important to make sure that the product one is required to sell is one that they believe in and is affordable. Additionally, one must remember that easy money really does not exist. There is no point of exposing his/ herself to unnecessary financial risk.
Exclusion Order Amendments of 2001
The amendments upheld the exclusion of master franchises and insurance companies, but introduced additional rules to govern direct selling companies:
- To participate in the scheme, one must not be required to purchase any commodity. The only purchase that one can make is that of demonstration equipment and this equipment cannot be sold. The cost of the demonstration equipment must not be elevated and no part of that cost should be given out as a commission. In addition, the company should not impose any financial risk on its salespeople. This means that if the product does not sell, the person is entitled to a full refund within reasonable terms. These products must be returned to the company within 60 days to take advantage of the refund.
- Behavioral checks. Recruitment tactics should not include harassment, fraud, coercion or other unconscionable means. In addition, the company cannot promote itself as an opportunity to get rich quickly. The sales pitch must be focused on the great features of their products and their quality. To show how well one can do in the business, they must refer to the maximum, minimum and average earnings of the people who have worked for them in the past.
- Commission sharing. One can get commission shares from people they have recruited into the business but these commissions must come from product or service sales and not from recruitment fees of any kind.
Breaching the Multi-level Marketing and Pyramid Selling (Prohibition) Act: Penalties
It is an offence to participate in an illegal multi-level marketing scheme and ignorance is no defense. Even if one claims that they didn’t know it was an MLM, the penalties will still be meted out against them. This is important to note and the reasoning behind it is that even though he or she was unaware, the person still caused damage to those that he or she recruited into the scheme.
If convicted of this offense, the fines are stiff. One can be fined as much as $200,000, or he or she can be imprisoned for as many as 5 years. In some cases, the person can have both the fine and imprisonment as their judgment. This means that anyone faced with such an opportunity will be required to carry out their due diligence prior to signing up and recruiting others.
Reporting MLM Schemes
If while doing ones due diligence a person comes upon suspicious activity, a company that they suspect to be a pyramid scheme that is illegally erected, they can report the company and its activities to the commercial affairs department (CAD) of the police. There are 3 ways to make a report as follows:
- One can personally go to their offices and lodge a report. Their physical address is 391 New Bridge Road, #06-701 Block D, Police Cantonment Complex, Singapore 088762.
- One can log onto the CAD website and lodge a report that way.
- Finally, one can make a call using this number: 6325 0000.