What are pyramid scams the ED accuses Amway of? What laws apply to direct selling companies?
What are pyramid scams the ED accuses Amway of? What laws apply to direct selling companies?
The story so far: The Enforcement Directorate (ED) on Monday April 18 seized assets worth £757.77 billion of direct selling company Amway India Enterprises Private Limited, accusing it of operating a multi-level marketing fraud.
The attached properties include immovable and movable property valued at over £400 million including land and Amway’s factory building in Dindigul district of Tamil Nadu, plant and machinery and vehicles. The remaining attached assets include bank balances and time deposits in 36 bank accounts identified so far for a total balance of £345.94 billion, the ED said.
What do we know about the current case?
Amway is an American FMCG (Fast Moving Consumer Goods) direct selling company that started operations in India in 1995 in the form of the Indian Direct Selling Association. Then, in 1996, the company formed a charity called the Amway Opportunity Foundation, which ran seminars to enroll members, and eventually formed a subsidiary in 1998. Its business is based on the direct selling and multi-level marketing (MLM) models.
Amway India faced multiple police complaints and court cases in Hyderabad and Kerala between 2006 and 2014 related to fraudulent activities and fraud, with former CEO William Scott Pinckney arrested twice in 2013 and 2014.
ED’s current action is based on a previous complaint registered in Hyderabad. The ED said its investigations into Amway revealed that the company operated a “pyramid fraud” under the guise of a direct-selling, multi-level marketing network.
The central agency claimed Amway raised approximately ₹27,562 crore through its operations from 2002-03 to 2021-22, of which it paid commissions of 7,588 crore to its distributors and members in India and the US during the same period.
The ED continued: “Amway raised £21.39 million as share capital in India between 1996-1997 and by 2020-21 the company has a huge amount of £2,859.10 million on behalf of dividends, royalties and others Payments remitted by their investors and parent companies.”
What are pyramid schemes?
In a pyramid scheme, a company promises payments or services to participants primarily for adding other people to the scheme, rather than delivering a product or service to the public. As the new entrants onboard fresh recruits, the money continues to flow up the chain, eventually forming an ever-expanding pyramid or hierarchy. These are also called money circulation systems.
This is essentially what the ED claimed in the case of Amway. The agency said: “The whole focus of the company is to spread the word about how members can get rich by becoming members. The products are not the focus. Products are used to mask this MLM pyramid scam as a direct selling company.”
A pyramid scheme becomes untenable after a significant number of people have been involved, since profits are minimized if the money earned circulates within the group, as opposed to profits made from actually selling products.
In response to previous lawsuits against Amway, Amway had argued that commissions earned by its distributors were not distributed lump-sum to everyone in the company’s distribution network. It had denied running a pyramid scheme, saying it was selling directly through its members, whose hierarchical network was dedicated to selling its products and spreading the network further. The ED, meanwhile, has pointed out the “exorbitant” prices of Amway products.
Amway has been claiming all along that its business model is multi-level marketing (MLM).
What is a Multi-Level Marketing (MLM) model?
There is a fine line between a pyramid scheme and an MLM model. The focus on selling more products as a compensation model rather than commissions for attracting more members distinguishes an MLM model from a pyramid scheme.
Unlike indirect sales companies, which use a network of wholesalers, distributors, and retailers to sell their products, MLM companies engage members of the public to sell their products directly. These members, while not employees of the company, recruit more people to join the product sales network, creating a mechanism that expands that network and revenue.
Amway’s independent members are called Amway Business Owners, who, according to The Business Model Analyst’s website, make profits by selling products directly to customers, receiving bonuses according to increasing sales volume, and finally receiving incentives as the business grows. Each recruited member pays a registration fee at the beginning.
What laws regulate such systems in India?
In December 2021, the center released new guidelines for direct selling companies like Tupperware, Amway and Oriflame, banning them from promoting pyramid or circulating money schemes.
With the Consumer Protection (Direct Selling) Rules 2021, direct selling companies were brought within the scope of the Consumer Protection Act for the first time. The new rules were introduced to hold companies like Amway liable for complaints arising from the sale of goods or services by their direct sellers.
The rules stated that direct selling companies and direct sellers would be prohibited from promoting or enrolling people in a pyramid scheme or engaging in any way in such an arrangement under the guise of direct selling. The ED accused Amway of this.
Following the ED’s recent action, Amway India said last year’s inclusion of direct sellers under the Rules of the Consumer Protection (Direct Selling) Act 2021 “brought much-needed legal and regulatory clarity to the industry and reconfirmed Amway’s continued adherence to the spirit of Amway.” and letter of all laws and regulations in India”.
In addition to last year’s rules, another piece of legislation prohibiting such activities is the Prize Chits and Money Circulation Schemes (Banning) Act 1978. This prohibits “Prize Chits and Money Circulation Schemes (Banning)”.
“No one shall promote or conduct any award mark or money circulation program, or enroll as a member of or otherwise participate in any such card or program, or receive or transfer money pursuant to any such card or program,” Section 3 of the Act states. Paragraphs 4 and 5 underline the penal provisions and penalties for violations of the law.
Section 6 describes how the law would apply to companies committing such crimes, stating that “any person who, at the time the crime was committed, was responsible for the company and responsible for the management of the business of the company as well as the Companies are considered guilty and must be prosecuted and punished accordingly.
What are the previous cases Amway has been involved in?
In 2006, a recruiter’s complaint against Amway was filed with the Hyderabad Crime Investigation Department (CID). In the case against Amway, the CID had involved Section 420 of the IPC (relating to fraud) along with Sections 3, 4, 5 and 6 of the Prize Chits and Money Circulation Schemes (Banning) Act 1978.
The CID, based on its investigation of a Hyderabad resident and the complaint of an Amway recruit Sathyanarayana, had stated that the company promoted an illegal money circulation system and misled and goaded the general public with promises of huge commissions, and also tormented members, the distribution network to enlarge on a large scale to sell products.
In the years that followed, several complaints were filed by Amway dealers in undivided Andra Pradesh reporting similar complaints. Several complaints have also been filed in different parts of Kerala.
In 2013, the Kerala Crime Department’s Economic Crimes Division arrested former CEO and Chairman of Amway India, William Scott Pinckney, and two directors of the company on charges of financial irregularities and fraud. The same penal provisions as in the 2006 case were invoked against the three individuals in multi-layered fraud cases registered in Wayanad district in 2011.
After being released on bail, the CEO was re-arrested in Gurgoan on similar cases filed by recruits in Kerala in 2013 and again challenged the fraud and money circulation fraud provisions.
In response to the ED’s current freeze on its assets, the company said in a statement: “The authorities’ actions relate to the investigation dating back to 2011 and since then we have been cooperating with the department and have shared all information since 2011 from time to time.” Looking for time.”
It added that the company has “a rich history of maintaining the highest levels of probity, integrity, corporate governance and consumer protection that are ahead of the curve in the interests of consumers at large.”
