Mr Sarma, former secretary of the Government of India, in a letter said the finance ministry should coordinate with MCA, SEBI and RBI to find effective answers to money circulation schemes which do not evidently add any value to the economy but siphon off the incomes of the people

EAS Sarma, former secretary to the Government of India (GoI) said the government should perhaps set up an inter-disciplinary team to investigate the existing companies operating pyramid and multi-level marketing (MLM) schemes and their multifarious links to establish the patterns that have emerged.

“While there are committed officials in Andhra Pradesh (AP) and the other states and professional journalists who have meticulously investigated some of these cases single-handed and brought the culprits to the book, the task that is faced by us is far too formidable to be left to single individuals or a single agency,” Mr Sarma said in a letter sent to finance minister Pranab Mukherjee.

He said, “The team should comprise of Central Bureau of Investigation (CBI), Enforcement Directorate (ED), Revenue Intelligence, Department of Corporate Affairs, the Serious Fraud Investigation Office (SFIO), the Registrar of Companies (RoC), Intelligence Bureau (IB) and investigating agencies from various states. Fast-track courts should be set up for speedy trials. It is possible that the ongoing investigations into the mining scams, land deals, spectrum sales and so on with political links have their tentacles extending into these 'pyramid' schemes”.

In the recent times, one finds a proliferation of unsustainable money circulation schemes initiated by fly-by-night operators with the sole aim of swindling the people and decamping with huge amounts of funds, by offering the gullible public, unreasonably high returns for small initial subscriptions. These are variously known as ‘chit funds’, ‘pyramid’ or ‘matrix’ schemes and MLM schemes, which involve promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public. These schemes do not evidently add value to the economy but siphon off the incomes of the people to fill the pockets of a few, says Mr Sarma.
 
These schemes have permeated almost all sections of the society today. The operators of these schemes face no hurdles at all in launching their schemes at will and luring unsuspecting people into the trap set for them. It has become commonplace to find each of these schemes collapsing under its own weight, causing immense trauma to unsuspecting households participating in the scheme. Every other day, one finds promoters letting down the subscribers and getting away with thousands of crores of rupees. These schemes, if allowed to operate unchecked, will promote among the people, the urge to gamble and destroy the social fabric of the society.
 
According to the estimates made by those familiar with these schemes, in AP alone, there are more than 10,000 such schemes in operation today. At the national level, the number could run into lakhs involving hundreds of thousands of crores of rupees, far exceeding the amounts involved in the scams uncovered recently. While the government is spending huge amounts on its social security programmes, these pyramid schemes act counter to them and neutralise their effect.
 
While there are existing laws such as Indian Penal Code (IPC), the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (PCMCS Act) and others under which concerned agencies could prosecute the culprits, there is no effective mechanism in place to ensure a coordinated approach to identify the fraudulent operators in advance and book them well before they destroy the livelihoods of thousands of households and launder the ill-gotten funds to unknown destinations.

“Apart from the two laws referred above, the transactions involved in these schemes violate several other laws such as the Income tax Act, the VAT Act, the Sales Tax Act, the Drugs & Cosmetics Act, the Food Adulteration Act, Prevention of Money Laundering Act, Foreign Exchange Management Act and so on. Many private and public sector financial institutions are partners in these schemes. It is possible that the funds generated by these schemes are so large that they have links to drug peddling, arms purchases and terrorist activity within and outside the country. These schemes have far reaching implications from the point of view of the security of the country,” the former secretary said.
 
Realising the pernicious impact of these schemes, several countries (e.g. USA, UK, Canada, Australia, New Zealand, Germany, Sri Lanka and others) have enacted laws to ban them.
 
In India, AP was the first state to enact a law to ban money circulation schemes in 1965. Both the Supreme Court and several high courts have passed landmark judgements against the operation of these schemes as they violate the law of the land and are detrimental to the interests of the public. There are ongoing cases against Speak Asia and Amway, to cite two examples.
 
There are infirmities in the existing laws to tackle the problem of these schemes effectively. For example, the penalty for offences committed under PCMCS Act does not exceed a few years of imprisonment and a few thousands of crores of rupees of fine, whereas the schemes act as a “slow poison” in the society; the culprits would have violated several economic laws and have links to anti-national groups and swindled thousands of crores of public money. An urgent review of the relevant laws is called for.
 
According to Mr Sarma, the central government in conjunction with the states should promote public awareness of the futility of these schemes and their negative impact on the families’ ability to invest adequately on education, health and other essential facilities, he added.
 
In the letter to the finance minister, Mr Sarma said, “I request the government not to underestimate the need to tackle the operators of these money circulation schemes. In my view, this item should occupy a very high place on the agenda of the ministry of finance. I believe that your ministry should co-ordinate with the ministry of corporate affairs, SEBI and RBI to find effective answers to this problem.”