Citizens' Issues
Ponzi schemes: The fraudulent art of chain game

Even as India bans pyramid schemes under a statute called the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, the country continues to be a happy hunting ground for pyramids because our legislation is deliberately unworkable

Each pyramid or a multi-level marketing (MLM) company has typical business plan. Get more into their scheme/plan and earn commission on it. The level of income, commission, attached to recruitment, rises as new members pour in. However, this technique, experts say is bound to collapse the plan, as it is mathematically unsustainable.

According to the Robert Fitzpatrick co-author of the book, False Profits, the first book-length analysis of pyramid schemes and multi-level marketing, such MLM enrolment technique is the root cause of the failure of these schemes.
On his blog, titled, “This is Not a Pyramid”, (http://www.falseprofits.com/files/6b364baa6fc2093ce159e272bbc423e5-34.html) he has presented a satirical explanation on the typical MLM enrolment plan. “Each one, just like you, gets the right to recruit as many as they can, and every time the person they sign up as a salesperson makes a purchase, they get paid, just like you do, on your recruits’ purchases. But, here’s the kicker! You’ll get a payment on the purchases of their recruits? Think about that! If you sign up five new salespeople and they each do the same, you have 25 more salespeople working for you, a total of 30.

Remember, you didn’t get money from the sign-up fees, only on the purchases made after the sign up fees are paid, and you didn’t get paid to recruit, but you got paid because you recruited. Is that perfectly clear?”

He adds, “When their recruits (the 25 additional salespeople) each recruit five more, you’ll get paid on their purchases to! That’s 125 more! Now, you’ve got155 salespeople, each one making purchases and you’re getting a commission from every one of them. How’s that sound? All you need to do is find five new salespeople.”

However, Mr FitzPatrick explains that, “it is obvious no one will actually make the promised profits, unless they recruit others to invest as ‘salespeople’ and the newly recruited salespeople, in turn, would have to do the same, ad infinitum. The presenter makes it obvious that it's all about recruiting, even as he insists it all about sales.  (No one is ever paid to recruit!)  Compounding rewards from recruiting are promoted as the main attraction of the scheme's ‘unique’ compensation plan.”  

Generally, such plans are divided in two categories—pyramid and MLM schemes.

Both have certain difference with pyramids being pure fraud. Their business is unsustainable—they promise payment for goods or services of dubious value. Often the products are notional, something like SpeakAsia, which claimed to sell e-zines (online magazines). MLMs claim to be serious businesses and have a product to sell. For instance, Amway, Tupperware, Herbalife, etc.

In case of MLMs, often people give up on selling the product. According to False Profits, 50-70% of the ‘distributors’ (members) quit in the first year and less than 1% of make money.

Take the case of Vivek Kumar (name changed) an engineering student, who in the lure of earning extra money invested in one such MLM scheme selling personal care products. Soon, he was unable to convince anyone to buy or invest. He eventually stopped chasing people and neither was his principal recovered, nor were the products sold.

More importantly, since most sensible countries have placed outright bans on pyramid marketing schemes, they tend to disguise their true nature by pretending to sell a product or a service, often of doubtful value. Most MLMs have attracted lawsuits due to high start-up costs, tiered sales and exploitation of personal relationships and cult-like sales techniques.

According to False Profits, the US courts often use the 70% test to analyze if the plan, based on building a downline, is legal or illegal. The test says that all the MLM must derive at least 70% of its income from retail sales to non-distributors. “If less than 70% of income comes from sales to these non-distributors, the courts have concluded the MLM company is in the business of endlessly recruiting distributors who recruit distributors. In short, they are pyramid schemes, not sales and distribution companies.”

But Mr Fitzpatrick says that even if the plans pass 70%, which also used by the Federal State Commission (FTC) test, the salespersons would still lose their money. “This is because a pyramid scheme is inherently deceptive and harmful. The fraud is in the design and the pay plan. Regardless of the minimal retailing that occurs per salesperson, under the scheme's compensation plan, recruiting a downline is still needed to recoup expenses.”

He adds, “By a pyramid's design, only a small minority can be in the upper ranks and have an adequate downline to achieve profitability. All the others are that downline! Like all MLMs, this scheme pays the recruiters more in commission, per sales of the entire downline, as their downline grows through recruiting.”

Interestingly, even as India bans pyramid schemes under a statute called the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, the country continues to be a happy hunting ground for pyramids because our legislation is deliberately unworkable.

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COMMENTS

AntiPonzi

5 years ago

It is greatly surprising why the union Government is not coming out with any legislation against Multi level racketeers!!! The opposition is also silent on MLM scams.

Vikas Gupta

5 years ago

Yes, u r very right that due to the favourable conditions in our country, these ponzi schemes grow like INSTANT FOREX. Our Govt. must look into that seriously.

Plan panel defends govt’s decision to go slow on disinvestment

“Disinvestment will be decided by market conditions. So if market conditions are not normal, it is sensible for the government to hold back,” Planning Commission deputy chairman Montek Singh Ahluwalia said in an interview to a business news channel

New Delhi: Defending the government’s decision to hold back disinvestment due to bad stock market conditions, the Planning Commission today said the process of stake sale in state-owned companies could begin after the improvement in market situation, reports PTI.

“Disinvestment will be decided by market conditions. So if market conditions are not normal, it is sensible for the government to hold back,” Planning Commission deputy chairman Montek Singh Ahluwalia said in an interview to business news channel CNBC TV18.

He further said: “I don't think there is any change in the government’s plans that we can realise the value of these assets over time. If the government decides not to disinvest in the certain period because it feels the stock prices are unduly low, that's not only understandable but it is actually quite a sensible decision.”

The Department of Disinvestment (DoD) is running against time to meet its ambitious disinvestment target of Rs40,000 crore for the current fiscal. Till date it has been able to raise only Rs1,145 crore through disinvestment in PFC.

In order to fast track the disinvestment programme, the DoD had sought opinion of concerned ministries for buyback of shares and prepared a list of cash-rich PSUs in this regard.

Several ministries like oil, power, steel, coal and mines are believed to have opposed the proposal as it could impact the business expansion plans of the PSUs.

Market regulator Securities and Exchange Board of India (SEBI) has relaxed norms for buyback of shares and dilution of equity by companies.

The new norms would help the companies to complete the process of selling shares within days against the normal process which can take months, a move that will facilitate offloading of government shares in central PSUs.

Mr Ahluwalia said that timing of the disinvestment will be decided by market conditions.

“I think we will continue with the disinvestment and the timing of the disinvestment will be decided by market conditions. Which means that whenever we put a number in for disinvestment, it assumes normal market conditions,” he said.

He also brushed aside concerns about the impact of failure in disinvestment front and its impact on the government’s fiscal deficit target of 4.6% of gross domestic product (GDP) in 2011-12.

“If, for example, a certain amount of resources get shifted from one year to the next, I don’t think that the impact of that on the fiscal deficit should be a matter of great concern,” Mr Ahluwalia said.

He also said that in the next three months the government should focus on removing impediments to project implementation.

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Oil ministry asks RIL to withdraw arbitration notice

Partha Sarthi Das, director in the exploration division of the oil ministry, on 25th January wrote to RIL executive director PMS Prasad saying “as on date”, no dispute has arisen to warrant arbitration and the company should withdraw the notice invoking arbitration forthwith

New Delhi: The petroleum ministry has asked Reliance Industries (RIL) to immediately withdraw its arbitration notice against the proposed move to curtail cost-recovery at its KG-D6 gas fields, saying “as on date”, there was no cause for such action, reports PTI.

Partha Sarthi Das, director in the exploration division of the ministry, on 25th January wrote to RIL executive director PMS Prasad saying “as on date”, no dispute has arisen to warrant arbitration and the company should withdraw the notice invoking arbitration forthwith, ministry sources said.

RIL had on 24 November 2011, slapped the notice upon learning that the ministry was moving to restrict cost-recovery in the KG-D6 block after flagging gas production led to utilisation of less than half of the 80 million metric standard cubic metres per day (mmscmd) of infrastructure the company had built.

The ministry’s technical advisor, the Directorate General of Hydrocarbons (DGH), advised disallowing $1.235 billion of out of the $5.7 billion expenditure already made as RIL has drilled and completed only 18 wells as against agreed the 31 wells in the block, resulting in lower gas output.

Gas production averaged 48.13 mmscmd against the target of 53.40 mmscmd in 2010-11 and 38.61 mmscmd (up to 31 October 2011), compared to the target of 61.88 mmscmd, in 2011-12.

Production of 80 mmscmd was envisaged in 2012-13.

RIL says it has not drilled the committed wells as the reservoir has not behaved as previously predicted and output dipped due to a fall in pressure and water and sand ingress in wells.

Sources said before the ministry could write to RIL on restricting cost-recovery, the company slapped the arbitration notice.

The ministry had referred the arbitration notice to the law ministry, which was of the opinion that as on date, there was no cause of action for RIL to raise a dispute (as defined in Article 33 of the Production Sharing Contract) entitling the company to refer it for arbitration.

Also, RIL did not wait for the mandatory 90 days from the date on which the dispute arose, they said, adding that the three-month period expired on 15 December 2011, and not 15 November 2011, as ‘wrongfully’ mentioned in the arbitration notice.

RIL had appointed SP Bharucha, former chief justice of the Supreme Court, as its arbitrator and had asked the ministry to appoint its arbitrator within 30 days.

The ministry had days before the 23rd December deadline expiry sought a one month extension to respond to the notice and after receiving the law ministry’s opinion, has now written to the company saying its claims are based on surmises, conjecture and apprehensions, sources added.

It remains to be seen how RIL will respond to the ministry’s letter. Under the dispute resolution process set out in the PSC, the claimant (RIL) can ask the Chief Justice of India to appoint an arbitrator on behalf of the government.

The two arbitrators would then appoint a third neutral arbitrator.

Sources said RIL, as per the revised field development plan approved in 2006, was required to drill, connect and put on stream 22 wells by 1 April 2011, with an envisaged production rate of 61.88 mmscmd and 31 wells by 1 April 2012, at an envisaged production rate of 80 mmscmd.

However, till date, it has completed the drilling of only 18 wells and out of these 18 wells too, only 13 wells are presently in operation.

The ministry and the DGH feels RIL had ‘woefully’ fallen short of drilling the required number of wells and/or utilising the total number of wells already drilled has taken an irreparable toll on the projected production targets.

They feel that had RIL performed its obligations under the PSC and the approved field development plan, the production rate ought to have been touching 80 mmscmd at present, rather than showing a gradual trend to decline.

Further, RIL drilled two wells in 2010-11 and another two wells in 2011-13. However, these have not been connected to production facilities, thereby resulting in less output.

The company has indicated that these wells would be completed and connected to the production facilities by mid 2013-14, which the ministry saw as clear non-compliance with the approved field development plan.

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