“Ponzi Zombies” – The Monetary Plague.

"Successful multilevel marketing (MLM) scams have promised easy money with little to no effort on the victim's part. They take a novel approach to making money online and couple it with the allure of instant wealth every time."

"MLM operations frequently use crypto tokens to steal money out of countries with little chance for the LEAs to realize the damage, let alone the recovery."

"MLM operations that promise easy money through investments in cryptocurrency, investments in gear for mining cryptocurrency, or rentals for outsourcing the mining, are luring away Direct Sellers from legitimate MLM organizations."

"People can now mint their cash as if the problem of counterfeit currency wasn't bad enough."

Over the centuries, humans have undergone a lengthy process of evolution, acquiring new abilities, intelligence levels, and depth of perception. Today, humanity is proud of its ability to produce complex ideas such as citizenship, way of life, religion, culture, education, social connections, and economics. However, such levels of confidence can sometimes be detrimental to humanity, leading people to believe that the world will always function as they think it should.

In this sense, direct selling, and multilevel marketing (MLM) are not exempt from these distortions, as they can be confused with Ponzi schemes due to the similarities between some MLM characteristics and fraud. This confusion occurs due to the thin lines that distinguish various business models from one another.

Some people take advantage of others by exploiting loopholes and deceiving investors for an extended period before being discovered. As a result of such conduct, many ethical and reputable direct-selling MLM companies are criticized.


Why do the promoters of money circulation schemes use Multilevel compensation plans?

By utilizing the goodwill of gullible investors, they hope to achieve faster growth and broader popularity before being exposed.
Once a fraud is on the verge of getting exposed, the leading promoters start new MLM operations with a similar modus operandi and entice the investors to become a part of the new venture to recover the losses- of course, by getting new ones to invest.

Victims refrain from complaining:

  • Apprehension of police harassment if Primary profits are related to participant recruitment and renewals.
  • Fear of losing the investments.
  • Intimidation by other participants.
  • Apprehension about losing social standing (on the admission of mistake)
  • Commitment from other participants to return their lost funds.
  • If the investments were made using black money.
  • Commitment by other participants to help recover the money lost by joining a similar MLM operation.


What is direct selling?

Direct selling refers to the marketing, distribution, and selling goods or services through a network of sellers instead of a single retail location. The unique advantage of direct selling is that the participants' confidence in selling the products after directly experiencing and using them is significantly greater than that of online or retail sellers. Direct selling, therefore, creates a new retail category of products with distinct selling points and advantages over the competition.

Moreover, direct selling is a business activity that is regarded as highly significant in both economic and social terms.

Numerous high-quality products that failed in other retail models, such as e- commerce, have been introduced to direct-selling companies and are now exceeding the manufacturers' and brands' expectations.

Individuals join direct selling businesses for various reasons, including the opportunity to earn extra money and recognition, the chance to work with people they like, the stability of a routine, the opportunity to travel to new places locally and internationally, and the satisfaction of assisting others. However, the retention rate presents a significant challenge for direct selling companies, as participants are more likely to be enticed by money companies offering high commissions and easy money.

The direct selling industry has long been plagued by criminals attempting to profit from participants' confusion regarding the business model and luring innocent investors to part with their hard-earned savings with the promise of immediate generous compensation and a better, wealthier, and more luxurious lifestyle.

By studying 20 new MLM operations in India weekly since 2007, our consulting firm has acquired extensive expertise in understanding these types of businesses.

More specifically, our recent study has found that, out of 200 MLM operations launched in India in the last ten weeks, 191 of them were categorized by our experts as money circulation or Ponzi schemes.

According to our research, the distinguishing characteristic of Ponzi schemes is that they continue as long as they can receive funds from new investors to pay off the commitments made to earlier investors.

Once the funds are depleted, the scheme's creators begin compensating participants with tokens they have created. Existing participants can then use the tokens to register new participants and retain the cash received.

In this manner, the actual revenue generated by fraudulent activities remains unknown during the investigation.

In addition, the media only cover some MLM-style Ponzi operations because their turnover figures need to be more sensational to make headlines.

The confusion surrounding the business model, legal loopholes, and corruption are the primary factors preventing victims from sharing their stories.


Concerns regarding direct, single-level, and multilevel marketing compensation operation

A.  Pyramid schemes
The individual who joins a pyramid scheme first earns the most significant profit, whereas those who join later stand to gain a pittance, if anything. The investors either pay a hefty sum for a one-time purchase or make smaller purchases repeatedly by paying substantial amounts to earn a profit from the participants' performance in the downline organization structure.

Types of pyramids:

  • Investing without products: One-time or Recurring investments
  • With products (Token, Actual price, Inflated price): One-time or recurring purchases

B.  Money circulation schemes
Money circulation schemes are unsustainable operations that rely on future investments or purchases made by participants to pay off obligations instead of generating and utilizing the entity's profits.

Such schemes typically rely on new investments to come in under the guise of product purchases, as exemplified by mainstream investment trends and unapproved financial products by the respective regulators, thus exploiting legal loopholes.

The organizations committed to offering fixed or high returns on purchases or investments, luring gullible, desperate people with the promise of easy money. Therefore, all these operations promise to pay more than is feasible and rely on the Rob Peter to Pay Paul principle (depends on the principle of taking money from one person and giving it to others)
Such schemes are commonly referred to as Ponzi schemes.

Types of money circulation schemes:

  • With products (real value or token): In these schemes, promoters commit to paying a fixed or a variable amount, typically expressed as a percentage, at predetermined intervals, the amount of which varies based on the total purchase amount.
  • Without products: In these schemes, investors are not offered any products. Instead, the promoters agree to pay a fixed/variable sum, typically expressed as a percentage, at regular intervals that vary based on the investment. In general, the larger the investment, the greater the expected rate of return.
  • Unethical conduct
    The behaviours of the operations are skewed against the consumers, customers, participants, and direct sellers


Would it not be preferable to ban MLM?

First, let us explain MLM in detail.

"Is MLM identical to direct selling and network marketing?

The brief response is "no." The organization's structure, whether it be direct, single-level, or multilevel, is determined by the compensation plan.


What is a compensation plan?

A compensation plan is a method for calculating the returns, commissions, incentives, and rewards promised to participants from the funds received by the entity on the sale of goods or services provided by them personally or by other participants in their organizational structure.

The compensation plans are designed to encourage and reward various participants, such as personal purchases for self-consumption or retail, participant support within the organizational structure, and enrolment of new participants (Offering compensation on conscription is an unfair practice and prohibited as per the Prize chits and money circulation (banning) act,1978)

Compensation plan types:

  • Paid-on-generation marketing includes Direct, Single-level, and multilevel-level marketing.
  • Rank or title accomplishments include both Non-Cumulative and Cumulative components.
  • As and when, daily, weekly, and monthly are among the compensation payment frequencies.

The organization structure will be multilevel if an entity adopts a single-level or multilevel marketing compensation plan.


What is the organizational structure?

The organizational structure graphically depicts the tiered organization of individuals to assist them in identifying their relative positions within the entity and the positions of individuals above or below them. This configuration is referred to as the "tree structure" or the "network structure."

Organizational structure types

a. Different types of frontline or leg structures.
The number of participants allowed in the frontline. Participants directly mapped to the participant in their organization's structure are referred to as frontline—single, Binary, Trinary, Fixed, and Infinity.

b. Generational structure types
A business may structure its participants in direct, single-level, or multilevel generations. The compensation plan of the company has a significant impact on the structure. It is also possible to refer to a generation as a"level" There are direct, single-level, and multilevel variants.


Why do the police and the media confuse direct-selling MLM and Ponzi schemes if there are significant distinctions between the two?

This is because most of the online content on direct selling is created by search engine optimization specialists who need more insight.

As part of our efforts, we have held several workshops for police officers, educating them on the distinctions between money circulation entities and direct selling entities and the proper investigation techniques.


What features do the money circulation pyramid schemes adopt from the direct selling operations to mimic direct selling models?

  • The common person
  • The compensation plans
  • The organizational structure and arrangement of participants
  • The meetings and events
  • The online back office
  • Office and infrastructure
  • The motivators


What characteristics distinguish unethical and unsustainable MLM models?

A. The Money circulation/ Ponzi schemes:

  • Financial mismanagement – using money intended for distribution to pay for other activities and diverting the funds into foreign or domestic personal bank accounts.
  • Promising greater returns than are achievable through sales and investments.
  • Registration and renewal fees.
  • Compensation for enrolments and renewals.
  • Siphon off the revenue from the country using unconventional methods. E.g., Hawala, Cryptocurrency exchanges, etc.
  • Producing or claiming to produce and distribute virtual digital tokens. E.g., Epins, Vouchers, etc.
  • Majority of payouts happen via tokens produced and not in conventiona banking channels
  • Impersonating an international firm.
  • Employing techniques to remain undetected: no website, operating through mobile applications; compensation plans unavailable to the public; promoters using dummy directors to represent the company; no office in the country or a fictitious address.

B. Pyramid schemes:

  • Inventory loading at the front
  • Periodic high-priced purchases required to earn commissions based on the performance of participants in the downline organization structure
  • Individuals with multiple positions are permitted to earn more with the same efforts: the more they invest, the more they earn.
  • Recruiting new members is required to earn commissions.
  • Registration and renewal fees.
  • Compensation for enrolments and renewals.

C. Unethical practices:

  • Online and offline inferior goods and services offered at exorbitant prices.
  • Goods or services devoid of genuine advantages.
  • Promotion of complex concepts as products or services.
  • Products or services not requiring delivery and with a low probability of consumption.
  • Promising high payouts through compensation plans while paying less.
  • Making deductions from payouts other than TDS.
  • A high percentage of product returns incur restocking fees.
  • Selling contraband goods into the country for resale.
  • Obligatory purchase of products during registration.
  • Product non-delivery or late delivery.
  • Displaying and promoting third-party products without permission from brand owners.
  • Altering the organizational structure of the participants.
  • Altering the positional ownership in the organizational structure.


Damages to the country because of money circulation Schemes:

  • Money laundering – Since most of these operations have a seamless process for sending the money out of the country, they also are made to enter quid pro quo arrangements with individuals of influence who want to send their ill-gotten assets out of the country. With the introduction of Crypto tokens, it has become easier to send money across borders.
  • Increase Corruption – These operations also have go-betweens to connect them to political leaders, senior government officials, and law firms to obstruct investigations.
  • Funding anti-national elements


What is the solution?

As part of our efforts, our firm regularly lists unviable money circulation schemes using the MLM compensation plans on our scam alert list, saving millions of citizens from financial losses.

In addition, we provide a platform for the members of the public to report suspicious operations, which our experts study. These operations are also listed in the scam alert list if found unsustainable.

The government authorities and companies should also consider the following actions:

  1. Formulate technically accurate definitions of the nuts and bolts to ensure that all the direct, single-level and multilevel formats are covered, including sustainable direct selling operations.
  2.  Expand legislation to eradicate the unethical practices employed by the money circulation organization and pyramid schemes.
  3. Have a Single window (Central) for approving (and allowing) businesses operating using MLM compensation plans after checking the sustainability of the compensation plan, the products/services promoted, and the company's required licences/permissions and policies.
  4. The central authority would share information on the MLM operations operating without approvals with the specialized division of the Economic offences wing of the respective state.
  5. Conduct annual regional information workshops for the service providers, including software developers, trainers and speakers, attorneys, and industry product suppliers.
  6. Carry out quarterly information sessions for the economic offence's wings and the cybercrimes divisions of the police in various states.
  7. Conduct an annual review to update the regulations.