Illegal Pyramid Schemes: A Growing Network in Kashmir


There has been a rise in illegal pyramid marketing schemes in Kashmir with companies looking to exploit the situation people are in. A lot of people are tricked into becoming a part of these networks. High unemployment rates across the country also help companies set up their operations with zero supervision. There seem to be no regulations in place to enforce laws that will mitigate these companies operations. A lot of people have fallen for these illegal network marketing schemes.

Multi-level Marketing (MLM), also know as networking marketing, consists of a web of people who voluntarily participate in selling a company’s product directly to consumers and also recruit other members willing to join the network to do the same. Generally, members, usually recruited by other members or company recruiters, are required to purchase a certain quantity of products from the company before they start selling or recruiting other members. Each member of the network is compensated either through the profits generated from reselling the products they purchased or the members are paid commissions for recruiting down line distributors or other members into the network.

If a distributors earnings come from selling products to actual customers outside of the company, it is deemed legal, but if those earnings primarily come from recruiting members and selling to the people below you, it becomes problematic. It is statistically impossible for lower tier members to reach top levels of management. MLM companies may present themselves as a great opportunity, but the chance of success is remote. Most of these schemes tell you that you can make your money back by recruiting 4 or 5 people, but if everyone in the network recruited 5 people, after 14 cycles, the population of the earth would be exceeded. Thus, pyramid schemes are termed illegal. These network marketing schemes are not legal in India under the Direct Selling Guidelines 2016 and Prize Chits & Money Circulation Schemes (Banning) Act 1978.

Forever Living Products (FLP) International, Inc. is an American privately held multi-level marketing company based in Scottsdale, Arizona, which manufactures and markets aloevera-based drinks and bee-derived cosmetics, dietary supplements, and personal care products. The company was founded in 1978 by CEO Rex Maughan.

FLP is present in major countries and has recently expanded into the Kashmiri market. Their main office is located at Anantnag and have recently shifted from Rambagh, Srinagar. A lot of people in Kashmir have joined FLP as distributors and are usually told to buy products worth at least ?30,000 to start at the company and be able to recruit more members. The recruiters at the office emphasize recruiting rather than selling. They ask potential recruits how many people they will be able to recruit rather than how many products they will be able to sell. Little information is given about the sales of the products and the market. Examples of  people at the managerial level are given and the perks given to them are used to tempt people to buy into the scheme. Profits are generated through either selling the products or recruiting other members for the company. Those other members are told to recruit members as well. The chain of members are compensated every time a new member is recruited by the down line distributors. When the new member purchases the products, every member above him in the network is compensated a certain amount of money. Incentives are put into place to recruit as many members as one can. Once a certain number of recruits are recruited by the member and his down line, the member is promoted. A member starts at assistant supervisor and is promoted to supervisor after a certain number of people are recruited in a network and then from assistant manager to manager.

However, the policy of the company states that,“FLP does not represent that member will achieve financial success without working or by relying solely on the efforts of others. Compensation in FLP is based upon the sale of its products. Each Forever Business Owner (FBO) is an independent contractor whose success or failure depends on personal effort.” The Indian Direct Selling Association (IDSA) is an autonomous, self-regulatory body for the direct selling industry in India that acts as an interface between the industry and policy-making bodies of the Government facilitating the cause of Direct Selling Industry in India. The IDSA code of ethics states that, “Remuneration paid to Direct Sellers shall be derived from sales of products or services to consumers.” But it also states that, “Earnings of Direct Sellers may be based on the sales and personal consumption by the Direct Sellers and their downlines. Direct Sellers shall not receive earnings for recruiting other Direct Sellers into a sales system; except that companies may provide Direct Sellers with minimal incentives which are in accordance with local law.” This ethics code is often manipulated to incentivize recruitment. The company and other governing organizations still need to be held accountable for allowing these activities to exist and continue without any consequences.

Arun Sharma is at a managerial post in FLP. He is from Jammu and has a network of people under him from around the world. 
“FLP is not a pyramid scheme scam. It does not form a chain. It involves time leverage and the company’s policies need to be understood. A lot of scams come and go. A pyramid scheme asks for investments and promises quick easy money. We don’t. One needs to work hard to achieve success here,” Sharma said when asked about FLP being a pyramid scheme. “Creating a network is the main thing. You cannot become rich just by selling the product. You’ll also be paid a commission for the people your downline brings into the network.”
“I’m building a network just like Ambani has with JIO. My team works from Lal Chowk.”

The U.S. Federal Trade Commission (FTC) states: “Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They’re actually illegal pyramid schemes.” Herbalife is another company that uses the MLM business model. In 2016, the FTC filed a complaint against Herbalife. The complaint stated that Herbalife incentivized recruitment, rather than sales. An overwhelming majority of people who pursued the business made little or no money and a lot of people lost money. The company later paid $200 million for a settlement with the FTC and agreed to implement significant changes.

Herbalife has expanded into India and has been available in Kashmir for some time now. One of the recruiters I met blatantly admitted that there is no money in sales but rather in recruiting members. Most of these MLM companies expand into unknown territories where people have little to no knowledge about them and their working. They exploit people who do not know about the companies history with the law and continue working illegally in these spaces.

Although people in Kashmir who have joined these marketing schemes recently do not see the drawbacks, they will feel the effects in the long run when no more people will be willing to join the networks. Others, who have not joined yet or are considering joining, must stay vigilant and not fall for these schemes.

MLM in and of itself isn’t illegal in many countries but many argue that the business model seeks to target and exploit vulnerable people. Problems arise when emphasis is laid on recruiting rather than sales. The company wouldn’t be able to make inroads into traditional markets and thus encourage their distributors to buy their products. Most of these products do not have a market in most places, mainly due to their prices, and thus companies focus on recruiting members rather than selling their products in a conventional manner to consumers. These independent distributors or recruits become the companies target audience and are their main customers.

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