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Illegal Aspects of MLM (Multi-Level Marketing) Business in Bangladesh

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Some of the top experts on MLMs and pyramid schemes have been consulted in the preparation of this paper.

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Table of Contains

Name of the Topics

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01. 02. 03. 04.

Report Abstract Introductory Discussion of Relevant Terms Types of MLM compensation plans A simple analysis of a pyramid scheme based binary compensation plan

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Difference between Legitimate Multi-Level Marketing Plan and Pyramid Scheme


06. 07.

How to identify product-based illegal pyramid schemes (illegal MLM) Critical Hypothetical Analysis of Multi-Level Marketing Binary Compensation Plan An Ultimate Pyramid Scheme Why Pyramid Schemes are Popular? Disadvantages of illegal MLM as A Business Model Destructive Effects on the Lives of MLM Participants A Brief Case study on Destiny-2000 Ltd. Government Regulation and Recommendations Conclusion Reference

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08. 09. 10. 11. 12. 13. 14.

31 32 34 36 39 41 42

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Report Abstract One of the most problematical of business models is multi-level or network marketing (MLM). Many MLM programs show all the effects and characteristics of a pyramid scheme, but the MLM industry has nonetheless been allowed to continue and flourish in Bangladesh. The MLM participants are considerably suffered by the tricky and corrupting influence of the MLM companies, and the financial and social harms. Unfortunately, victims of these programs seldom complain, blaming themselves for their failures. This problem is compounded by limited resources available to the enforcement agencies in Bangladesh, faced with MLM companies which are operating using both Naked Pyramid Schemes (NPS, where no products are offered actually) and Product-based Pyramid Schemes (PPS, where products are offered but using illegal pyramid scheme). Due to inadequate definitions of what constitute a pyramid scheme, insufficient resources, corruption and lack of prosecutorial wills in enforcement of existing laws, enforcement agencies often fail to catching the fraud MLM companies, but letting them go free. The consequences are enormousmillions of consumers are being cheated out of billions of money each year. A pyramid scheme, as currently defined as are plans which (1) concentrate on the commissions you could earn just for recruiting new distributors and which (2) generally ignore the marketing and selling of products and services. The above two criteria have proven to be inadequate for determining whether any given MLM program is a pyramid scheme or not. Legislators, courts, and consumer protection agencies would serve consumers better if they improved their methods of determining whether an MLM business fits the definition of a pyramid scheme or not. At least, it is needed to point out that an MLM program is not a pyramid scheme, when in fact it is more likely a Product-based Pyramid Schemes that has managed to escape corrective action. However, in Bangladesh some 62 registered Multilevel Marketing (MLMs) companies are now operating in the country and most of them are following Product-based Pyramid Schemes (PPS). In this report it has been tried to discuss on the illegal aspects of MLM business, and how to determine a MLM business as illegal Pyramid Scheme along with discussing the disadvantages of illegal MLM business. A brief study on the largest MLM Company in Bangladesh, Destiny2000 Ltd., has been done here from the legal perspective. This report has recommended for banning of illegal MLM business in Bangladesh.

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Introductory Discussion of Relevant Terms As a long-time critic of MLM programs, I was curious to know why so many otherwise intelligent and capable persons were involved. The growth of MLM amazed me; since it seemed obvious it was just a disguised pyramid scheme. Yet several persons whom I trusted and respected tried to recruit me into their downline. They tried to convince me that I may have misjudged the industry and that MLM may have a real future as a viable and ethical business model. Finally, I decided to investigate MLM for myselfto prove for myself whether or not my original objections to MLM were valid. There are about 62 so-called MLM companies in Bangladesh and most of them are using Pyramid Scheme in disguise of legitimate MLM business which is illegal. Lets see the definition of some relative terms to understand the illegal aspects of MLM business. Multi-level marketing program (MLM for short, also referred to as network marketing), as defined as Any marketing program in which participants pay money to the program promoter in return for which the participants obtain the right to (1) recruit additional participants, or any other person into the program participants downline, tree, cooperative, income center, or other similar program grouping; (2) sell goods or services; and (3) receive payment or other compensations; provided that: (a) the payments received by each program participant are derived primarily from retail sales of goods or services, and not from recruiting additional participants nor having additional participants placed into the program participants downline, tree, cooperative, income center, or other similar program grouping, and (b) the marketing program has instituted and enforces rules to ensure that it is not a plan in which participants earn profits primarily by the recruiting of additional participants rather than retail sales. In Multi-level marketing the sales force is compensated not only for sales they personally generate, but also, secondly, for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. Pyramid Scheme As its name indicates, the pyramid scheme is structured like a pyramid. It starts with one person - the initial recruiter - who is on top, at the apex of the pyramid. This person recruits a second person, who is required to "invest" $100 which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest $100. If the recruit gets 10 more people to invest, this person will make $900 with just a $100 investment.

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Fig: Pyramid Scheme Now if the 10 new people become recruiters and each one is in turn required to enlist an additional 10 people, resulting in a total of 100 more people. Each of those 100 new recruits is also obligated to pay $100 to the person who recruited him or her; recruiters get a profit of all of the money received minus the initial $100 paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure (meaning there are no more recruits). The Fraud The problem is that the Pyramid Scheme cannot go on forever because there are a finite number of people who can join the scheme (even if all the people in the world join). People are deceived into believing that by giving money they will make more money ("with an investment of just $100, you will receive $900 in return"). But no wealth has been created; no product has been sold; no investment has been made; and no service has been provided. In MLM, Pyramid scheme as currently defined as plans which concentrate on the commissions you could earn just for recruiting new distributors/participants and which generally ignore the marketing and selling of products and services. The main characteristic of an illegal Pyramid Scheme is that participants only make money by recruiting more members, and the results of pyramids are inevitable and obviously predictable. All Pyramid Schemes eventually collapse and fail. In order for everyone to win under a pyramid scheme, the recruiting would have to go on forever which is impossible due to saturation of the market. Although illegal, pyramid schemes remain popular because the promise of quick, easy money lures people. The following chart illustrates how difficult it is for those who are not at the top of the pyramid to expect payment.MLM or Scam Page 6

Since many people know pyramids are illegal, so they need to convince other new people that what they are involved into a pyramid scheme. As a result, pyramid schemes today are being described in different terms, such as clubs or gifting groups. Pyramid scheme operators attempt to convince people they are involved in a club to make an investment or to raise money by making "gifts" to help someone else.

Different kinds of pyramid schemes The two most basic types are Product-based Pyramid Scheme (PPS) and Naked Pyramid Scheme (NPS). Naked Pyramid Scheme refers to an obvious pyramid scheme that is easy to detect because no products are offered, but merely a participation fee or investment. It is a continuous chain ofparticipants or investors is recruited, in which each pays a fee to participate and receives money by recruiting others into the system. A product-based pyramid scheme (PPS) is a pyramid scheme that in most respects resembles a naked pyramid scheme, except that products are purchased by distributors at higher cost. Such product purchases often combined with other incentives, qualifies distributors for commissions in ascending levels in the distributor hierarchy.

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A product-based pyramid scheme is the same concept disguised as a legitimate direct sales

opportunity. Here's how it works: 1. A distributor recruits 10 salespeople who each pay $500 for a starter kit of products to sell. 2. The distributor gets 10 percent of each starter kit that's sold. 3. The distributor also gets 10 percent of each product