CNA Explains: What are pyramid schemes and are they legal in Singapore?
What are pyramid schemes and how do they work?
Fraudulent pyramid schemes can be distinguished from legitimate multi-level marketing (MLM) sales structures.
In an MLM, independent, non-salaried distributors earn revenue through direct sales and recruitment, said lawyer Tania Chin, partner at Lighthouse Law.
They also earn a commission from sales made by new representatives they recruit into the business.
“Individuals pay an entry fee or purchase a starter pack of goods. They are then incentivised to build a ‘downline’ by persuading friends, family and others to sign up under them,” she said.
“When the new recruits buy or sell inventory, the original distributor receives a percentage of the profit.
“This structure runs indefinitely, where we will then see the earliest participants at the top earning the most from the base of new recruits at the bottom.”
However, in a pyramid scheme, participants make money solely by recruiting new participants, according to the US Securities and Exchange Commission.
Are MLM schemes allowed in Singapore?
No. It is a criminal offence to promote or participate in an MLM scheme. Offenders can be jailed for up to five years and fined up to S$200,000.
However, there is legislation excluding certain schemes and arrangements from the MLM prohibition. These include insurance agencies and master franchises, said Ms Chin.
“In order for a scheme to be legitimate, you have to apply for it to be scrutinised and approved and excluded (from the prohibition),” said lawyer Andy Yeo, managing director of his eponymous law firm.
“Just because it is a financial or franchise label alone, it cannot be sufficient for you to be excluded.”
Are MLM schemes legal in other countries?
Around the world, MLM programmes are generally legal if participants earn their commissions mostly from actual product sales rather than recruitment fees or mandatory purchases, said Ms Chin.
In China, the MLM model is banned and only single-level direct selling is permitted, she added.
Gathering commission or bonuses based on a downline hierarchy or recruitment structure is not allowed in such businesses.
Direct selling is regulated in China and licences are issued to legitimate businesses, said Mr Edward Lehman, foreign counsel at law firm Lehman, Lee & Xu based in Beijing.
To be licensed, a business must submit a written “compensation plan” showing the income that it generates without the inclusion of any payments for recruiting members, he said.
These legal direct selling schemes (“zhixiao”) are distinct from illegal pyramid schemes (“chuanxiao”).
What are the risks of getting involved in MLM in Singapore?
Ms Chin said participants may feel pressured to buy high monthly quotas of products to maintain an “active tier status”, potentially leaving them with a large amount of unsellable stock.
“Social capital bankruptcy is also an issue when one feels pressured to recruit from your immediate social circle, which may burn bridges and strain family ties and friendships,” she said.