Multilevel marketing is top scam

0 Comments | Deseret News (Salt Lake City), Mar 19, 2008 | by Jon M. Taylor

The article "Leaders warn LDS against scams" (March 13) was welcome news for those of us advocating for consumer protection.

However, 12 years of research convinces me that investment fraud is eclipsed many times over by the massive fraud committed by Utah- based MLM (multilevel marketing) companies.

While investment fraud, including Ponzi schemes, result in losses of tens of millions of dollars, Utah-based MLM fraud has led to aggregate annual losses totaling billions of dollars worldwide. Utah leads the world in concentration of these schemes.

MLM promoters have successfully duped law enforcement, legislatures, reporters and the public into believing MLM is legitimate "direct selling." However, analysis of 250 MLM compensation plans reveals that virtually all of them follow essentially the same chaining structure as chain letters or no- product pyramid schemes, except that investments are laundered through purchases of expensive products. In chain selling, people are recruited into an endless chain of participants in a supposed "business opportunity" and lured into making monthly purchases to qualify for advancement or commissions.

There is seldom a significant base of customers outside the network of participants, since the compensation plans are stacked in favor of building a "downline." And participants find it easier to sell overpriced products to recruits than to non-participants. In a recent randomized survey in Utah County, we found four MLM distributors for every one non-participating customer.

Recent research, including tax studies, shows that when ALL recruits are counted and minimal expenses are subtracted, approximately 99 percent of participants lose money.

As infinite recruitment programs in finite markets, MLMs are inherently flawed, uneconomic and fraudulent. To succeed, promoters must use a complex web of deceptions to sell their programs. At least 30 typical misrepresentations and associated research on MLM are posted on the Web site -- mlmthetruth.com.

Most MLM participants buy a few products, lose a little money and drop out. Those who invest the most, lose the most -- except for the "winners" who (along with founders and managers) profit hugely at the expense of the thousands beneath them in the pyramid of participants.

With extremely high dropout rates, MLMs are in a state of continuous collapse, requiring a revolving door of new recruits to replace dropouts. Markets quickly become saturated and new markets must be found to keep the chain of recruitment going.

Regulatory action against these schemes has been weak for many years. Officials from the Division of Consumer Protection claim they don't get enough complaints to justify action. But victims of chain- selling schemes almost never file complaints -- since every major victim must be a perpetrator in order to recover ongoing expenses. If they file complaints, they risk ruining relationships with close friends and family they recruited (or who recruited them).

Consumer protection against chain selling was further weakened by the 2006 Utah Legislature. Through devious legislative maneuvers and deceptive lobbying by the Direct Selling Association (recently taken over by MLMs), a bill was passed exempting MLMs from prosecution as pyramid schemes. This strengthens Utah's reputation as the scam capital of the world. Most victims of Utah-based MLMs are out-of- state. MLM fraud is one of our leading exports.

This is part of a recent pattern of reduced regulatory protection -- to "get government out of our lives." Consumers can expect little protection against MLM scams.

Jon M. Taylor, MBA, Ph.D., is president of the Consumer Awareness Institute.