#1
Bored Panda reached out to Robert FitzPatrick, president of Pyramid Scheme Alert and author of Ponzinomics: The Untold Story of Multi-Level Marketing. He is an expert in multi-level marketing schemes and pyramid sales fraud who said that millions of people get lured into MLM because they don’t know its history, origins, or financial consequences.
Trying to unmask what MLM actually is and how it differs from a pyramid scheme, we found out that the latter is, technically, illegal. "However, there is no national law that bans them. There is no national law that even uses the term, 'pyramid scheme.' Some states do have anti-pyramid scheme laws but they are seldom enforced and some have been written to exclude MLM," FitzPatrick explained.
The Federal Trade Commission (FTC) has prosecuted about 30 MLMs out of nearly a thousand over the last 25 years or so: "It was never explained why those 30 were picked or how they differed from the hundreds of others. Just selling a product does not mean that an MLM enterprise is not a pyramid scheme. All of those that have been prosecuted as pyramids sold products. Some operated for many years before finally being closed down."
#2
A pyramid scheme is basically a fraudulent system where the vast majority loses. "The loss is determined by the model itself. The basic model is the 'endless chain' and the 'money transfer.' Each investor gains money only if others can be recruited onto the chain," he explained.
"Some of the money from the recruits is transferred to the recruiters. The new recruits are told they can do the same — forever. This is obviously impossible based on expansion. Those at the bottom will lose. The majority are always at the bottom. This is by design."
#3
#4
According to the expert, the defining characteristics of all MLMs are the same as those of all pyramid schemes:
- The endless chain recruiting model;
- The requirement to pay to enroll and participate. This can be with cash or the purchase of goods;
- Necessity to recruit in order to make the money that is promised;
- Money is transferred from "last ones in" to the top recruiters.
#5
#6
Multi-level marketing companies claim to be using a direct-selling strategy but very few people actually sell goods to the general public. "Money is made by recruiting others, who must buy some product in order to participate," Robert FitzPatrick explained. "MLMs claim to be an income opportunity, but, by design, most are at the bottom of the chain and therefore always lose. In fact, only 1% a year in MLM make a real profit and that comes from the losses of the others."
#7
#8
#9
One of the biggest problems with these schemes is that so many people get involved in them. There are a couple of reasons why: "They have been deceived into believing that MLM offers are real income opportunity (not knowing that 99% never make a profit) and that it is based on direct selling (not knowing that almost no one does or could sell MLM goods door to door for a profit.)"
#10
#11
#12
He continued: "With salaries declining and costs rising, many people look for alternatives to jobs and MLM falsely promises to offer an alternative." But the sad truth is that often they end up losing money and blame themselves for their failure. This is due to the fact that they have been falsely told that this model works for everyone and the only reason anyone would fail is if they quit or did not try enough. "The lie is accepted by most people," FitzPatrick said.
#13
#14
#15
However, there are a few ways on how to avoid getting involved in such situations. The multi-level marketing industry is based on deception and once a person is enrolled, they are being told that in order to succeed, they have to blindly believe and not have any doubts.
“The key to escape MLM and to avoid MLM is clear: investigate, ask questions, ask for data, just as one would in a real business — do the due diligence. Think for yourself. Questioning, doubting, critically thinking — these are good habits and everyone’s right to do. MLM tries to seduce, deceive and persuade people not to think for themselves," he advised.
#16
#17
#18
The voices opposing MLM are growing widely and loudly all over the world. "They are demanding that law enforcement investigate MLMs for deception. They are demanding the media tell the truth about consumer losses and the methods of domination and deception that MLMs are using," the expert said. "The truth is available now. People just need to seek it out."
#19
#20
