About Pyramid Scheme AlertPyramid Scheme Alert ResourcesPyramid SchemesDonate to PSAPyramid Scheme Alert Action


Pyramid Scheme Alert (PSA) provides current and historical news items that are of interest to our members and visitors. None of the reports or commentaries is intended to imply that any of the referenced companies have been charged or convicted as illegal pyramid schemes.

Peoples' Republic of China seeks to regulate direct selling practice
China Daily Updated: 2005-09-21 05:55

September 21, 2005

To ban or not to ban? The government was plagued by the old Shakespearian question as it tried to distinguish direct selling from the notorious pyramid selling phenomenon before a law could be brought in to clarify the matter.

The authorities' blanket ban on all varieties of direct selling and pyramid selling starting in April 1998 led to misunderstanding among investors.

Major domestic newspapers yesterday published the country's regulation on banning pyramid selling, which will take effect on November 1. A month ago the regulation on direct selling was released and will take effect on December 1.

The new rules will straighten out the many irregularities in the controversial sector often tainted by pyramid selling scams.

Direct selling in itself is no evil. As the World Federation of Direct Selling Associations defines it, direct selling is a process involving the marketing of products and services to consumers face-to-face, away from fixed retail locations.

It is cost effective and consumers can get a more personal service and detailed information about the promoted products. It is permitted in some countries with certain legal restrictions to ensure consumer interests are considered.

As the new marketing method has prospered since the 1990s in China, swindlers have taken advantage of legal grey areas to spread fraudulent pyramid schemes to some uninformed members of the public.

Through building a pyramid structure, organizers require every member to fork out a non-refundable start-up fee, sometimes as high as tens of thousands of yuan. To recoup their initial investment, members have to coax others to join the network and get commissions calculated on the number of new members they entice.

As the history of direct selling in other countries has shown, in its earliest days, such a selling practice often creates the type of problems that have occurred at home and the government and lawmakers have, without exception, stepped in to protect consumers and maintain social order.

Such regulations have not damaged commercial interests, but safeguarded them.

A clean environment benefits rather than ruins credible market players.

As the legal system has matured in developed economies, fraudulent direct selling has become much less frequent.

In China's case, however, the young market has seen too much of such old tricks. Due to a lack of laws to govern the industry, many companies, big and small, as well as con-artists, have pocketed huge profits at the expense of lower-level members of pyramid selling structures.

The new rules render legal direct selling activities protected by law and pyramid selling banned outright.

The clear directions will benefit consumers and direct selling operators, and ensure regulation is conducted within a legal framework.

Some international direct selling giants may feel disappointed as their lobbying for freer operation, such as multi-level selling, was turned down. But they need to understand their multi-level selling often spins out of control and evolves into pyramid schemes. Evidence abounds in this respect.

Lawmakers have adequately taken heed of their interests. The direct selling rule, for example, lifts the requirements on the number of boutiques as was stipulated in a previous draft.

Policy-makers have to strike a balance between regulation and liberalization. They are faced with a rather disorderly market that could easily victimize innocent consumers.

As market order and industrial self-discipline improve, law makers may update the rules to accelerate the development of the sector. But now is not the time for that.

(China Daily 09/21/2005 page4)
Copyright 2005 Chinadaily.com.cn

False Profits

This page last updated on 1/4/06