There is a “Ponzi” for everyone

Ponzi schemes manifest in diverse forms and structures

Some use multilevel marketing compensation plans, while others use the agent model to collect money from the public.

These schemes range from the money-doubling Jinn of Dubai Islamic Bank to ICOs offered by Bit connect to Cryptocurrencies supported by diamonds or real-world commodities, farming projects, Trading Signals on stocks and commodities and high-returns on investments using Algo trading bots in unauthorized forex trading platforms.

These enticing schemes often leave regulators in a difficult situation, trying to figure out who is responsible for investigating them.

Multilevel marketing compensation plans in Ponzi schemes are highly damaging, turning victims into potential perpetrators.

Premeditated scams

increase the challenge for the Police, other government departments and the public at large:

Accept money via multiple mule accounts in India and other countries, in the form of cryptocurrency, in various currencies in the bank accounts in other countries.

Promote possibilities in the form of virtual offerings (and not physical products)

The MLM frauds do it for:

  • Evasion of taxes (IT and GST)
  • Conceal the magnitude of the fraud and, therefore, the number of victims.
  • For siphoning money out of the country to nullify the chances of recovery.

What is the Solution:

To effectively combat fraudulent multilevel marketing (MLM) schemes and prevent them from concealing transactions and draining money out of the country, it is imperative to enforce a ban on the following practices immediately

  • Using bank accounts not belonging to the MLM company for their transactions.
  • Using international payment gateways or foreign bank accounts for transactions from customers/participants/members from India.
  • Dealing (including transacting) with hardware/software/licenses/rentals/leases related to cryptocurrencies, NFTs, and tokens.

To prevent the promoters of fraudulent Multilevel marking (MLM) Schemes from relaunching new schemes: The following urgent steps are recommended:

  • Establishing a Monitoring Committee (Central)
    Establishing a monitoring authority is imperative to ensure India's public safety. This authority must be equipped to prevent the occurrence of money circulation schemes, pyramid schemes, and unethical practices. This can only be achieved through strict regulation, monitoring, and supervision of the direct selling business and implementing the Consumer Protection (Direct Selling) Rules in 2021 and relevant laws.

    Roles of the Monitoring Committee

    • Share information on the entities operating without approvals with the specialized division of the economic offences wing of the respective state or country (since these operations are spread in multiple states).
    • Conduct annual regional information workshops for the service providers, including software developers, trainers and speakers, attorneys, and industry product suppliers.
    • Carry out Quarterly Information Sessions for the economic offence's wings and the cybercrimes divisions of the Police in various states.
    • Conduct an annual review to update the Regulations.

    "The monitoring authority must priorities optimizing resources, maintaining transparency, ensuring accountability, and taking timely action to prevent unlawful activities."

    The Monitoring committee shall be divided into two subcommittees - one dedicated to scrutinizing and reassessing applications, while the other focused solely on conducting thorough investigations.

    The Evaluation Subcommittee (within the monitoring committee) should be established at the Central level (not the state level- since the participants of any entity are spread across the country) to reduce the wastage of time, transparency, coordination, pooling, and access to data. States to check and acknowledge the evaluation report (prepared by the evaluation subcommittee) and the undertaking, the documents wrt compliance in the state, i.e., GST registration, Shops and Establishment licenses, or any other state registrations or licenses, etc.

    Role: This subcommittee will only evaluate and certify if an applicant complies with all the applicable rules.

    The Online and Offline Evaluation is an exhaustive process and would require the development of application forms, SOPs, and their implementation in the case of the following:

    • Compliance by the applicant.
    • Noncompliance by the applicant
    • False information submitted by the applicant.
    • Partial disclosure by the applicant.
    • Invalid documents submitted by the applicant.

    Recommended Evaluation Fees/Timelines:

    • Application: INR. 50,000 / 30 days
    • 1st Review/ Reconsideration: INR. 35,000/30 days
    • 2nd Review/Reconsideration: INR. 35,000/30 days

    The Investigative Subcommittee (within the monitoring committee) should be established at the Central Level to investigate unethical practices related to fraud in similar business models.

    Investigation and Reporting – Suo moto and on receipt of the complaints.
    Coordinate with enforcement/investigative agencies at the central and state levels.

  • Tool
    Web Portal: "Creating a web portal is imperative to optimize the process, enhance transparency and accountability and consolidate all data in one place". The SOPs for the portal (including the logins for the monitoring committee and the subcommittees) must be created with utmost care. The following must be strictly adhered to:

    • Record maintenance in the database.
    • Application formats in various conditions
    • Undertaking format
    • Evaluation results, including the report on the mathematical viability of the compensation plan.
    • Warnings
    • Periodic Backup
    • Logins for the evaluators and the monitors.
    • Alerts on certain events
    • Time-bound alerts (milestones)
    • Capability to take complaints from the public.
    • Use of precise terminology.
  • Vital recommendations for inclusions/changes to The CP(DS)R, 2021 must include the following without exception:
    • Definitions of the terms Direct Selling, Independent Contractor, Direct Seller, Prospect, Enroll, Compensation Plan and the Organization structure to be included/improvised.
      • Direct selling means marketing, distribution, and sale of goods or provision of services through a network of persons (registered with the entity as independent contractors) other than through a permanent retail location/s.
      • An Independent Contractor is a person who signs a service contract* with the entity. *A service contract implies an agreement wherein one party undertakes to provide services to or for another in the performance of which he is not subject to detailed direction and control but exercises professional or technical skills and uses their knowledge and discretion.
      • Direct Seller is a person above the age of 18 years on the date of enrolment with eligibility to enter into a business contract who enrolls/registers/signs up with the direct selling entity through a legally enforceable agreement (as an "independent contractor") to undertake direct selling business on principal to principal basis for purchasing the goods at a discount for self-consumption and/or an opportunity to earn income by retailing goods and/or helping others enroll and retail the goods. A direct seller may be a consumer/user, customer/purchaser/buyer, reseller, or all three.
      • Prospect means a person to whom the Direct Seller makes an offer or a proposal to join a Direct Selling business opportunity or to purchase a product/service.
      • Enroll means to formally introduce/register/signup through a legally enforceable contract (as per the latest version of the Indian Contract Act and IT Act) for undertaking the business on a principal-to-principal basis as a participant, person, or entity.
      • A compensation plan is a technique to calculate the returns/commissions/incentives and/or the rewards assured/promised to be given to/among participant/s from the money invested/turnover from the sales of goods/provision of services directly/indirectly provided by them personally or by other participants in their organization structure.
      • An Organization structure represents the tiered nature of persons in a graphical form to help them recognize their relative positions to the entity or the participants above or below them. This arrangement is also known as the Tree structure or Network Structure.
    • The entity will only change/modify the organization structure of participant/s if provided by the CP(DS)R, 2021, and the conditions mentioned in the policies and procedures published by the entity in advance and explicitly accepted by the participants.
    • The entity will not change the ownership of the position/s in the organisation structure except conditions in the terms and conditions of the direct seller agreement, including the policies and procedures.
    • The entity will not generate/deal/transact/trade or make claims to deal in any Virtual digital assets, including but not limited to cryptocurrency and non-fungible tokens, unless formally recognised as a mode of the transaction by the concerned authority (i.e. Reserve Bank of India).
    • The entity should publish the compensation plan in the text format on the official website/mobile application in the public domain with at least two illustrations for each type of income.
    • The calculations for all the illustrations used for explaining the compensation plan (online and offline) should be made and displayed in Indian rupees only.
    • The entity must have a website with the required details for India.
    • The entity should not promise/provide/offer any commission/incentives other than the percentage/amount mentioned in the compensation plan.
    • The entity should only accept payments against the sales of goods in India, displayed on the official website (for India).
    • The entity should not offer/provide any commitments of returns on investment/s (on purchase of product/s or without the purchase of product/s) to/ through the participants of the entity to the other individual/s in the form of interest, salary, loan, help, donation, market development fees and support fund.
    • The entity should not offer/provide any compensation in any form, including loans to be paid against part payments, advances, and deposits.
    • The entity should not offer/provide to pay any compensation before the complete redemption of vouchers/coupons promoted by itself or others. i.e., Should not pay or claim to pay any compensation except for a justifiable sale.
    • The entity should only accept payments for the goods listed on the website (for India).
    • The entity should offer a reasonable money-back guarantee for all goods it promotes starting from the delivery date to the customer.
    • The entity shall implicitly inform all customers about the days (from the date of delivery) of their money back and satisfaction guarantee clearly to all the customers in print(brochures) and on the website on the page/s where products are displayed.
    • The entity should not pay commissions/incentives to the participants on promotional/marketing materials/events/software/mobile applications/replicating websites.
    • The entity should always publish an income/opportunity disclaimer with the compensation plan literature.
    • The entity should receive the payments against sales of product/s in its bank account/s in India, and payments to the participants in India should be made via their bank accounts in India. i.e. payments should be only accepted via payment gateways in India, which are connected to bank accounts (of the entity/in the registered name of the entity) in India.
    • The entity should not circulate/promote/transact in Virtual digital assets, including but not limited to tokens, NFT and cryptocurrencies.
    • The entity should not charge and offer/provide pay-outs for/to participants' enrolment/registration/renewal.
    • The entity should not make any deductions except the statutory ones and those mentioned in the compensation plan.
    • The entity should ensure delivery of prepaid products within twenty days of receipt of the payment by the entity except in extraordinary circumstances so informed to the customer.
    • The entity should own/hold/be a licensee of the trademark of goods being sold and can only commit/offer/provide pay-outs or display products for which they own/hold/be a trademark licensee in India.

Implementing these simple steps can effectively discourage MLM fraud promoters and minimize the launch of new money circulation schemes.