How MLMs wave an annulled letter to claim legitimacy of their operations and con people

Moneylife Digital Team 04 December 2012

Spokespersons and promoters of MLM companies repeatedly refer to a letter from the ministry of consumer affairs (MCA) granting legitimacy and legal basis to the operations of their ‘business’. However, facts are rather different. The effect of the letter has been since nullified

Spokespersons and dealers of multi-level marketing (MLM) schemes or network marketing schemes respond to questions about their legitimacy by brandishing a 2003 letter issued by the then secretary, ministry of corporate affairs (MCA). What they omit to mention is that the letter was subsequently annulled following complaints about its misuse. This means, the letter used by these scamsters is no more valid.

The letter says, “...the provisions of PCMCSB Act [Prize Chits and Money Circulation Schemes (Banning) Act, 1978] are not applicable to ‘companies dealing with distribution of goods’ including multi level/net work marketing companies”. MLM and pyramid companies immediately used this letter as a sort of approval by the government of their dubious activities to ensnare people into what is essentially a losing proposition that only enriches a small percentage of people who promote these schemes.

Soon after, the ministry began to receive references from the Central Economic Intelligence Bureau (CEIB) at the ministry of finance about the misuse of the letter by MLM, network-marketing companies. The MCA issued another letter (F NO 21/(22)/IT/2001 dated 23 September 2003), which in effect annulled the earlier one.

The second letter said, “Subsequent feedback/response have showed that companies using pyramid structured marketing techniques to sell their products putting forth their schemes based on the clarification issued vide DO letter of even no dated the 31 March 2003 claiming that their activities also do not fall within the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. It is clarified that this Department's clarification of even number dated 31 March 2003 does not cover pyramid structured marketing schemes. That area also does not fall within the purview of this Department”.

In fact, both the mischievous letter that seemed to grant legitimacy to MLM schemes as well as the subsequent clarification both are badly worded and vague. What is worse, having issued a clarification based on specific complaints, the ministry does not seem to have found it fit to follow it up with action to stop or ban the proliferation of Ponzi schemes. So much so that a decade later, experts who have tried to warn people about Ponzi schemes say, “we can’t help it if your country is overrun by such schemes”.

At the same time, unnamed government officials continue to pass the buck. Only yesterday, government officials told the Indian Express that they had asked ‘states’ to initiate action to ban MLM and Ponzi schemes. This is precisely what the Reserve Bank of India (RBI) has been doing for several years. It responds to complaints about Ponzi schemes by writing to chief secretaries of states to initiate action.

The Indian Express, quoting unnamed government sources reported on Monday, 3rd December that – “An inter-ministerial committee comprising the Reserve Bank of India, and ministries of consumer affairs, corporate affairs, finance and law, was formed to look into the matter. It suggested setting up of a central agency to oversee MLM schemes and also proposed to filter and block websites above a certain number of subscribers to curb such schemes”. This report is however not in the public domain.

The newspaper goes on to quote the source as saying, “In fact, we are working on bringing in these companies under the Companies Act. This is possible under Section 583 of the Act where such unregistered companies will be considered deemed registered, thereby bringing them under the MCA’s purview”. Ironically, this is in direct contrast to the newspaper’s initial assertion that state governments would be asked to impose a ban on MLMs and pyramids.

To add to the confusion and obfuscation, the report goes on to point out that the MCA has circulated The State Money Circulation Scheme (Banning), 2012 which had the state police as the nodal authority. This again contradicts the claim that the MCA is looking at a central legislation. This strange contradiction and obfuscation is only an indicator of the enormous influence that pyramid companies and their associations have on politicians and bureaucrats.

It is important to remember that in 2003, the very same year that the MCA issued a dubious circular that appeared to legitimise pyramids and MLMs, minister Jaipal Reddy had initiated a detailed discussion in Parliament and demanded a new and strong central legislation to prevent people from being lured to invest in such schemes.

This only shows how deeply compromised bureaucrats and politicians are only pretending to be serious about checking the proliferation of pyramid and MLM companies, while in fact muddying the regulatory environment to allow them to operate unhindered, as they are doing today. This works well for the UPA (United Progressive Alliance) government, since many of its regional political allies are funded by promoters of such shady finance companies.

To read about MLMs and ponzy schemes, click here.

Comments