Have you heard about MLM? What does MLM mean?
Multi-level Marketing (MLM) is a vast business across the globe. Multi-level Marketing or MLM is a marketing strategy for selling goods or services by engaging distributors. The MLM is also known as network marketing or direct selling. Generally, the MLM program works through recruitments. Companies recruit associates or consultants or distributors to advertise their products and sell company products and earn money or recruit another distributor, and in return, the distributor gets a portion of the income those distributors generate; one can do both. When the distributors recruited by one distributor recruit new distributors, the former will get the money on the income they generate too; this is known as the distributor’s downline.
Initially, in the mid-twentieth century, the MLM was introduced by a Nutrilite company to educate health-conscious people about the benefits of vitamins in daily life. Since then, it has proved to be a dynamic and modern marketing practice in various parts of the world and adopted and appreciated by many businessmen. Many companies and organizations have adopted this marketing strategy to sell their unpopular products to potential users. It is used to convince potential users to purchase their novel products.
Governments around the world very closely examine the legality of MLM due to its legitimacy issues. In a very few countries of the world, it is legalized, whereas, in some, it is banned, and the MLM strategy is not allowed to be practiced in their territories due to its controversial marketing strategy. Different countries have legalized the MLM through strict legislation to protect the public from any fraud or financial loss. It has been legalized in Europe, Singapore, Vietnam, Hong Kong, the UK, and the USA. In the USA, the MLM was declared legal by the United States Federal Trade Commission (FTC) in 1979. This marketing strategy is in operation across all 50 states of the USA. The FTC has outlawed the practice of obtaining a commission on recruiting new members in many states, considering it as pyramiding. The FTC warns people that all multi-level marketing methods are lawful; some are pyramid schemes. Individuals should observe utmost caution while entering into such a business marketing strategy. However, it is prohibited in the majority of countries for being fraudulent and controversial in nature.
For example, Bangladesh, China, Saudi Arabia, and many other countries have banned multi-level marketing mechanisms. In China, many MLM companies strive to find their way through this prohibition and develop new strategies, such as direct sales, to bring their products into retail operations in China. The Direct Sales Regulations in China limit direct selling to cosmetics, health food, sanitary products, bodybuilding equipment, and kitchen utensils only. The MLM companies need to obtain a license from the Ministry of Commerce.
The Ministry of Corporate Affairs Saudi Arabia prohibited the MLM in 2018 by imposing a fatwa and declared a particular multi-level marketing platform haram due to its misleading activities and alleged fraud, and several people were arrested who were involved in this business; that is why many MLM companies like Oriflame, Amway, Herbalife, etc., use other online selling methods to sell their products in Saudi Arabia. That MLM company canceled its annual event; V-Con 2018 was scheduled to happen in Dubai in 2018 due to Saudi Arabia’s declaration that that company’s activities were prohibited. The event’s cancellation put more than 20,000 people who were independent representatives of the said company at a loss and created a huge uproar amongst those who had made all arrangements to attend the event. The said company faced numerous litigations for defrauding and malpractice in different countries and got banned in several territories.
In the UAE, the direct selling strategy of MLM is lawful only, and other forms of MLM are prohibited in the UAE. The UAE has taken rigorous measures to protect its residents from any fraudulent business plans. Dubai’s Department of Economic activity (DED) considers direct selling as a part-time activity, and sellers are not protected by the same vigorous laws that protect full-time employees. Moreover, only 14 companies are legally certified to work as direct sellers in the UAE. According to the DED, foreign companies are not entitled to direct selling activities unless the share of the local is 51%. In 2012, an association, namely, the Direct Selling Association UAE (DSA UAE), was established to encourage direct selling in the Middle East. The Department of Economic Development Dubai has given consent in the year 2009 to form the DSA UAE. DSA UAE is the Silver Member of the WFDSA (World Federation of Direct Selling Association).
The DSA UAE’s mission is to promote the direct selling industry in the UAE and the Middle East and safeguard consumers’ rights by adhering to the peak level of business integrity. Its objective is to create awareness in consumers about the direct selling industry. The Code of Practice of the DSA UAE has clearly defined the moral standards and ethics for the direct sellers and the companies required to adhere to the direct sellers or end-users. Moreover, the DSA UAE aims to identify and represent reputable local and international direct selling companies in the Middle East market. The direct selling companies need to comply with all UAE federal and local laws. Many people are still unaware of the difference between a direct selling multi-level marketing strategy and a pyramid scheme. Some financial firms claim that the MLM and pyramid are the same; the only difference is MLMs have been stated as legitimate kind of marketing and business whereas, the pyramid schemes are illegal because of their pyramid structure and the recruitment of recruits and paying the distributors commission on recruits instead of selling company’s products.
However, MLM companies sell products as well as recruit others to the company, so they are considered to be legal. Technically, most of the participants in MLMs do not earn enough profit; in contrast, they overwhelmingly make losses, 99% of the participants lose, and only a very tiny number of people sitting on top get profit from the work of the distributors in the downline, claimed by various financial business critics. The legality of multi-level marketing is still doubtful for various people, and it is still ambiguous due to its business model and nature, which is considered by some governments legitimate; and on the other hand, many governments declare it a fraudulent and illegal activity and ban it in their countries.
In the UAE, the Direct Selling Association (DSA) has explained direct selling MLM and how a layperson can understand its legality and its distinction from the pyramid scheme model. According to DSA UAE in Multi-level Marketing, the distributors are remunerated not only for the products or services they sell and personally generate profit but also for the sales of the other people they recruit. It is interesting to note that over 95% of these companies offer their products with a networking marketing compensation plan. The applicant would be mindful about the distinguishing feature of pyramid schemes is that the product they sell has little to no elementary value of its own or is sold at a price out of line with its fair market value. DSA UAE, while accepting the application of membership from direct selling companies, collects all legal documents of the company, compensation plan, and registered products for each direct selling company intending to obtain membership of the DSA UAE. It ensures that the company is legitimate, ethical and reflects the direct selling business model. The DSA advises selecting DSA UAE member companies while choosing a Direct Selling MLM in the UAE because the DSA UAE member companies already pass the legality test while getting membership of DSA UAE.
The legitimate direct selling companies play a vital role in the socio-economic development of the UAE and the Middle East. The DSA UAE has also defined some tests for finding out before joining whether a direct selling company operating its business in the UAE is legitimate or not; a legitimate direct selling company has the following characteristics, if the company lacks these characteristics, then it is assumed that is an illegal and more possibly a pyramid scam. The direct selling company registered with the DSA UAE is legitimate.
The registration permits salespeople to work for the direct selling business entity on a commission-only basis without having a personal trade license as sellers operate under their master license. The company not registered with the DSA is not abiding by the law because the DSA is the representative of direct selling entities in the UAE. The unregistered company could be a scam and would be subject to hefty penalties in such a case. A legal and legitimate direct selling multi-level marketing company holds a valid trade license to operate its direct selling business in the UAE, as well as has an office or retail space and to handle member inquiries and support efficiently employs a local support team. To have more glimpse about validating your trade license, our legal agents could assist you with that too.
The company must have a UAE VAT registration number and need to issue VAT invoices against each sales transaction.The company and its members shall provide accurate information about the company, its products, and what one can expect as a company member. The company would be charging a reasonable fee for a starter kit which typically includes items, such as samples, catalogs, order forms, and other tools that help the member get started. The company should have tangible products or services that are competitive in the marketplace and are desired to be purchased by most consumers. The company requires members to hold little or no products for their personal use or as samples, and the company shall have a clear buyback policy according to the local Consumer Protection Authority’s recommendations to protect them against inventory loading. The company grants bonus/compensation primarily on the sales of products and services to the consumers. The bonus/compensation is generated only through sales of approved products and services across the members’ network. The company or its members take time to describe the products and services and the business model in a straightforward and easy-to-understand way and give potential consumers sufficient time to decide to buy products or join the company. The legitimate direct selling multi-level marketing companies guarantee to protect consumers’ rights and carry out business justly and lawfully. In contrast, pyramid schemes defraud people by enticing them with easy and large earnings in a short period and for recruiting others.
Multi-level marketing thrives in the USA and India for decades; a large population is involved in this industry. To regulate the MLM industry and differentiate it from other pyramid schemes and illegal, deceptive marketing and selling businesses, legislation is necessary. In the USA, every state has adopted MLM laws and regulations. Although the enforcement activities come from the federal legislation through FTC, SEC, and the US Postal Service, most enforcement activity is at the state level.
The Federal Trade Commission (FTC) was established in 1914 in the USA to regulate trade-related matters and to keep a check on anticompetitive, unfair, and deceptive practices in the marketplace across the states. Through its Federal Trade Commission Act (FTCA), federal legislation promoted fair competition between businesses and the protection of consumers against fraudulent business practices. FTCA has empowered the FTC to regulate multi-level marketing activities and other marketing and selling activities to ensure consumer rights protection. Section 5 of the FTCA vests the power to the FTC to enforce against the unfair and deceptive activities, practices in or affecting commerce. However, multi-level marketing programs’ state regulation is comparatively a new phenomenon because the major multi-level marketing companies laid down their foundation in the late 1950s. The multi-level marketing companies’ activities were going relatively smoothly until the major pyramid cases of the early 1970s surfaced.The state multi-level marketing legislation has taken various forms like pyramid statutes, endless chain scheme statutes, lottery statutes, sales referral laws, and, most recently, multi-level distribution statutes.
In the 1980s and 1990s, many states comprehended that the pyramid statutes should only be kept back for pyramid schemes. Many states realized that the multi-level marketing industry is a legitimate activity, and it needs statutory consumer protection. Thus, several states, including Massachusetts, Louisiana, Wyoming, Georgia, Maryland, and Puerto Rico, implemented multi-level marketing distribution laws. Some states, such as South Dakota and New Mexico, which executed regulation, later realized that the regulation’s administration is complicated and repealed the multi-level marketing registration requirements. Georgia, Louisiana, Maryland, Massachusetts, Montana, and Wyoming led the way to enact laws regulating multi-level marketing companies, including some requiring actual state registrations. Whereas Puerto Rico has similar legislation, and several more states have enacted similar multi-level regulations, including Texas, Utah, Washington, etc.
Most of these regulations impose restrictions on multi-level marketing companies’ activities, such as buy-back requirements; it is one of the statutes’ essential restrictions. This restriction grants the distributors the right to cancel the contract of participation anytime, and the company is bound to buyback/purchase the products from the distributor not less than 90% of the distributor’s net cost and refund the fees distributors have paid. Other than these states, Texas and Oklahoma have also adopted a 12-month, 90% buyback requirement. Louisiana also requires a 12-month buyback. In India, the multi-level marketing industry gained momentum in the mid-nineties. Oriflame, a global MLM network marketing company, is the flagbearer that started its business in India in 1995 but nowadays Amway is the leading MLM company in India. Several MLM companies are running in India to date. In the past, there was no proper legislation on the regulation of multi-level marketing and lack of awareness; many people fell prey to deceitful and illegal pyramid schemes, which are almost similar to the multi-level marketing models. That is why multi-level marketing is always under the scanner.
In India, MLM schemes are governed by the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (PCMC Act), intending to bar the promotion of prize chits and money circulation schemes and matters connected to such schemes. Therefore, interpretation of the PCMC Act clarifies that all MLM schemes that lure people of easy returns without considerable work and establish a reward system that pays on enrollment of recruits without any sales generated are illegal schemes. Saradha and SpeakAsia are the best examples of MLM schemes hit by the PCMC Act. The Reserve Bank of India, through its press release dated January 1, 2015, notified the masses against MLM business activities and stated that the functioning of MLM investment schemes that are meant to generate a chain marketing structure or a Pyramid scheme and receives money under the same scheme constitutes a cognizable offense under the PCMC Act. However, the direct selling MLM does not promise easy return and bulk of amount or pays any commission on new members’ new recruitment. Instead, it provides an equal income through a fair compensation plan for all members selling products of the MLM company.The Ministry of Consumers Affairs, Food, and Public Distribution India formulated the Direct Selling Guidelines in September 2016, making direct selling structures acceptable as long as they align with the guidelines and these guidelines exclude the pyramid schemes. These guidelines outline that any entity that practices the direct selling activities shall submit an undertaking of compliance with the guideline to the Ministry. Furthermore, the guidelines for fair enrollment of members prohibit any fees from the members at the time of enrollment by the direct selling entities. Moreover, the direct selling entity is bound to ensure that the distributors or participants are not paid any remuneration to recruit a new member. Instead, the direct sellers should be paid remuneration for the sale of products and services they perform. In 2018, Kerala became the first Indian state who made MLM Guidelines for MLM companies in India for regulating the activities of multi-level marketing/direct selling companies/entities in the state of Kerala based on central guidelines issued in 2016. The guidelines are intended to regulate the business of direct selling and multi-level marketing (MLM) and strengthen the existing regulatory mechanism on direct selling and MLM for preventing fraud and protecting the legitimate rights and interests of consumers. Multi-level marketing schemes like pyramid schemes are considered illegal in India, and the direct selling multi-level marketing companies who remunerate their participants on the sale of the products and services are deemed legitimate. The direct selling MLM companies in India are bound to follow the Direct Selling Guidelines 2016 and the PMCA Act and ensure compliance with these legislations. Like the DSA UAE, in India, there is an Authority formed by direct selling entities, namely, the Indian Direct Selling Authority (IDSA), it is a private body established by Amway India and other prominent network marketing entities to aiming to govern the direct selling companies in India and prevent unethical and prohibited MLM businesses from misusing the MLM business route. The IDSA has formulated a code of ethics for all the businesses that prescribe to the Authority. India needs steadfast federal legislation to provide the multi-level marketing direct selling businesses a better environment to operate and flourish and check and control the illegal pyramid schemes that deceive the innocent public by pretending to be multi-level direct selling entities and steal their hard-earned money.