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University of New South Wales Law Journal Student Series

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Newton, Laura --- "In Pursuit Of The Impossible Dream: An Analysis Of Multilevel Marking (Mlm) Schemes And The Consumer Harm Caused By Selling A Lie." [2021] UNSWLawJlStuS 10; (2021) UNSWLJ Student Series No 21-10


IN PURSUIT OF THE IMPOSSIBLE DREAM: AN ANALYSIS OF MULTILEVEL MARKING (MLM) SCHEMES AND THE CONSUMER HARM CAUSED BY SELLING A LIE.

LAURA NEWTON

Financial freedom, boss babes, and lifestyle entrepreneur are all phrases synonymous with Multi-Level Marketing (MLM) schemes and their lofty promises of a lifestyle one could only dream of. MLMs promise potential participants — known as consultants — the world, but rarely do they deliver on this promise.[1] Consultants join MLMs ‘based on untruthful promises’ of income opportunities, as well as the idea that everybody can reach the top (but only if you work hard enough).[2] However, in reality, the few who actually do earn money only do so because they were early adopters.[3] Those who join later — the bottom of the business — either do not make any money at all, or lose money.[4] There are growing concerns that current regulations are not sufficient to protect consumers from harm, and that more needs to be done to ensure MLMs operate from within the confines of the law.[5] This essay will consider and analyse the blurred lines between the MLM business model and fraudulent pyramid schemes and the consumer harm caused by these models. It will then discuss the issues with enforcement action and argue for stronger consumer regulations and other action to protect consumers from harm.

I THE HISTORY OF MULTILEVEL MARKETING

MLMs originated over 100 years ago and have been evolving ever since. They traditionally provided women with the opportunity to gain independence outside of domestic duties, hosting parties with their friends, while selling products. Issues with MLMs have been recorded with the United States Federal Trade Commission (FTC) since as early as the 1920s, and in 1970 the FTC and other US State regulators began to identify the existence of pyramid schemes that were posing as MLMs.[6] By 1973 ‘product based pyramid schemes’, a term used to describe illegitimate MLMs, became the number one consumer fraud in metropolitan New York.[7] This marked a turning point, from traditional pyramid scheme, to MLM based pyramid schemes. Modern day MLMs have developed beyond door-to-door sales and parties, utilising the growth in technology to evolve predominantly into social media.[8] Consultants are ‘turbo charging’ the reach of the schemes, with a new generation attempting to sell whatever they want, wherever they want. Arguably, the ease of access to the ‘laptop lifestyle’ will over time, increase the number of people involved, ergo the number of consumers harmed.

II PYRAMID SCHEME OR MLM?

‘Some MLM companies are pyramid schemes and some pyramid schemes consist of MLM companies.’[9]

A What is a pyramid scheme?

Section 45 of the Competition and Consumer Act 2010 (Cth)[10] defines a pyramid scheme as:

...a scheme with both of the following characteristics:

a) to take part in the scheme, some or all new participants must provide, to another participant or participants in the scheme, either of the following (a participation payment):

i) a financial or non-financial benefit to, or for the benefit of, the other participants or participants;

ii) a financial or non-financial benefit partly to, or for the benefit of, the other participants or participants and party to, or for the benefit of, the other person;

b) the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled, in relation to the introduction of the scheme of further new participants, to be provided with either of the following (a recruitment payment)

i) a financial or non-financial benefit, to or for the benefit of, new participants;

ii) a financial or non-financial benefit partly to, or for the benefit of, new participants and partly to, or for the benefit of, other persons.

Thereby, under the ACL, a pyramid scheme requires both a participation payment and a recruitment payment, which may be a financial or non-financial benefit. The Australian Competition and Consumer Commission (ACCC) notes the difference between pyramid schemes and MLMs is that the revenue from pyramid schemes is based on recovering a portion of the participants payment, with MLMs usually involving a good or service with a ‘promise of a commission for subsequent sales to other parties.’[11] The ACL further prohibits businesses persuading a consumer to buy a good or undertake a service by 'promising benefits if they help the business supply goods or services to other customers.’[12]. Whilst there is a regulatory framework in place in Australia, developed with the intention to protect consumers, the technical nuance required to analyse the difference in both business models does not appear use friendly, nor well understood. It is complex legislation to be applied to complex and often confusing business structures.

The FTC, on the other hand, characterises pyramid schemes as scams that both look and masquerade as a legitimate MLM business opportunity.[13] Consultants within a pyramid scheme may try to recruit others by using misleading income and lifestyle claims, as well as by encouraging a prospective consultant to purchase products — more than can be used or sold — to either receive bonuses or become eligible to receive an income. Pyramid schemes will often have ongoing fees, including ongoing registration fees, costs of training sessions and materials, and other forms of fees; this is simply another way for the business to profit off the consumer.[14] The FTC’s characterisation of a pyramid scheme, including behaviours of consultants, tends to mirror the operations and behaviours of those in MLMs, demonstrating how blurred the lines are between legitimate and illegitimate business models.

Pyramid schemes and MLMs are frequently used interchangeably. Both business models utilise multiple levels of recruits or consultants to continue the business, a hallmark of the names ‘multi-level’ and ‘pyramid.’[15] These consultants, who become known as the ‘up-line,’ recruit and train other consultants, the ‘downline,’ in selling their product, who in turn, recruit and train more consultants;[16] a perpetual recruitment drive.[17] Another key similarity is the enticement of consumers into making an investment of money and time in return for a false promise of a financial benefit.[18] In both models, the prospect of receiving a financial benefit becomes more unlikely as more people join the scheme; when the number of new consultants increases, the market becomes saturated, making financial benefit unsustainable.[19] In the end, a structure which utilises recruitment for financial benefit will succumb to market saturation — there are simply not enough people left to recruit into the scheme to be financially beneficial.[20] This inevitably results in consultants left with products they cannot sell due to market saturation, sinking further into debt whilst simultaneously spending more money on trainings and seminars to learn how to sell the excess product.[21] A fundamental issue with the business model that in most cases, is not disclosed, and more so, not discussed by those who fall into this pattern.

The FTC observes that for an MLM to be considered legitimate, and not a pyramid scheme, the consultant should be able to make money from selling the product alone, and not from recruitment and downlines; there should be no need to recruit to make a profit.[22] This loosely aligns with the ACL definition of pyramid schemes, with both the participation payment and recruitment payment reflected in the FTC observations. Where a drive to recruit is teamed with misleading and deceptive income claims, it points to the existence of an illegal pyramid scheme, and not a legitimate MLM.[23] However, the emphasis on recruiting and building a downline is a fundamental component of the major MLMs, including Herbalife, Doterra and Arbonne.[24] Herbalife’s income disclosure policy states that as a consultant, you can ‘participate in the business opportunity by recruiting others who want to consume or sell Herbalife.’[25] Doterra uses a concept referred to as ‘the power of 3,’[26] whereby you introduce the products and recruit 3 people, who each in turn introduce and recruit 3 people, and so on; a strong indicator of the structural similarities between MLMs and pyramid schemes.[27] Doterra describes this concept as the ‘best way to maximise your compensation plan,’ and appears to fundamentally be focusing on recruitment to make profit. Furthermore, the existence of a business structure which includes a downline suggests that there is benefit to be obtained, or at least merit to the notion, in recruiting. Without a downline, consultants simply become salespeople. It is evident that the need for, and the existence of a downline, together with a heavy focus on recruitment – and incentives to do so - in MLMs is a strong indicator that they operate as a pyramid scheme, or structurally similar enough to warrant concern.

A common misnomer of MLMs is that they cannot be a pyramid scheme because pyramid schemes do not sell products. The selling of a product or service does not automatically deem an MLM to be a legitimate business separate from a pyramid scheme, and conversely, the existence of multi-level marketing of goods and services does not automatically mean a pyramid scheme exits.[28] The key aspect, as above, is where the compensation or benefits are primarily derived from recruitment, the recruitment payment, the structure is likely to be a pyramid scheme. The blurring of the lines between pyramid schemes and MLMs and the legal and illegal dichotomy that these practices have created may be due to the ‘economic system’s reliance on free market structure,’ which allows for those who create businesses based off the MLM structure, to do so whilst also closely resembling a fraudulent business structure.[29] It is evident that there are many similarities between the two models structurally, making it very difficult for consumers to make informed decisions to avoid harm; an indicator that current regulations are not sufficient to protect consumers.

III THE IMPOSSIBLE DREAM

The American Dream fosters an overwhelmingly strong cultural ethos where the pursuit of material gain is valued over all other things”.[30]

A recurring theme amongst MLMs is the fixation on the pursuit of financial and material wealth; consultants thrive on the chase of the ‘American dream.’[31] They make lofty promises of financial freedom, encouraging prospective consultants to ‘envision themselves earning millions of dollars’[32] and being freed from the ‘constraints of the 9 to 5.’[33] However, statistically, very few will earn more than they invest, with the chances of winning the lottery higher than the likelihood of making hundreds of thousands of dollars in an MLM, let alone millions.[34] Trahan et al take this concept one step further and argue that the American Dream promotes individualism, whereby, an individual will pursue financial gain regardless of how their pursuits impact others.[35] The pursuit of wealth is a ‘constant and never ending acquisition of money by any means necessary,’ which can be used to explain the behaviour of those who commit fraud.[36] This same theory can be applied to MLM consultants; undertaking whatever it takes and by any means necessary in order to benefit financially. This corresponds with the ruthlessness that is often used to describe the tactics of consultants, who are taught to stop at nothing to recruit and sell the “boss-babe” fantasy that will statistically, be unlikely to eventuate; the selling of a lie.[37]

Whilst MLMs can provide a small percentage of consultants a livable income, the emphasis on living a life other than your own is dangerous and deceptive; it encourages investments of ‘big money in a short space of time.’[38] This is a dark side of ‘the dream’ that is rarely, or arguably never, disclosed to prospective consultants. Furthermore, most people who join an MLM will either lose money, or make very little income.[39] There are varying statistics on losses in MLMs, which is compounded by a lack of reliable data, however, the overwhelming majority of sources cite that 99% of MLM consultants lose money and do not make back their original investment.[40] Market saturation plays a role, whereby it is statistically impossible for everybody to succeed. To subvert this, consultants are encouraged to promote the successes of the 1%, as ‘even in the worst of the chain selling schemes...one can find participants who are making a lot of money at or near the top of their respective pyramids.’[41] The companies also embrace this tactic, using their top consultants to speak at conferences, sending a message that anybody can achieve the dream.[42] This tactic perpetuates a false sense of optimism without providing context or data to otherwise inform the consumer about their chances of success, thus, causing detrimental harm to the consumer in continuing to sell not only a fantasy, but a lie.[43]

In selling the concept of the dream, a common problem is the tendency for consultants to over-sell their product, or make false product claims.[44] This became evident recently, where at the height of the Covid-19 pandemic, consultants associated with 16 MLMs made false claims about both products and potential income, which compelled the FTC to send warning letters to these companies on two separate occasions. The claims made by consultants ranged in severity, but all took advantage of the fall out of the pandemic and were considered highly opportunistic. Some consultants claimed their products could prevent Covid-19 infection, while others made outlandish claims about income that could be made during the pandemic by joining their team. The FTC characterised the claims made by the consultants — which included the ‘potential to achieve a wealthy lifestyle, career-level income, or a significant income,’ — as being false or misleading.[45] The president of the Direct Selling Association of America (DSA) confirmed that whilst some people can make a lot of money, most people do not, reflecting the misleading nature of the claims.[46] Essentially, it can be argued that by encouraging consultants to pursue their individual greed through an MLM, it creates a slippery slope, whereby consultants ‘can be tempted to do whatever it takes in order to realise their dream’[47] confirming Trahan et al’s theory of individualism. The emphasis on the dream, in an industry where the lines between legitimate and illegitimate are very murky, is incredibly dangerous, as ‘greedy people are never especially thoughtful about meaning or consequences of their actions.’[48]. The fixation on the impossible dream is detrimental to consumers, and until the focus is removed from achieving grandiose financial successes, consultants involved in MLMs will continue to deceive others to gain themselves.

IV AFFINITY FRAUD AND MLMS

Affinity fraud is an investment scam which preys upon members of an identifiable group.[49] The identifiable group can be any group where the perpetrators are able to ‘take advantage of the well-known characteristic that is human nature for people to tend to trust someone who is a member of their own group.’[50] Affinity frauds, and those who perpetrate them, exploit community trust; a key characteristic of victims of financial fraud,[51] with the growth of a scheme only limited by the extent that they are able to utilise this trust within their community.[52] Trust is a key component of MLMs. A recognised problem of consultants is the misuse of trust in private social relationship in a particular intensive way. It is taught to consultants as a central marketing strategy in the pursuit of obtaining benefits.[53] The social harm caused by the misuse of trust is immeasurable, and as a consequence, unlikely to be reported by victims. It is likely that the invisibility of harm caused by MLMs have aided in their growth over time and assisted in their avoidance of large-scale criticism.

MLMs utilise and exploit existing social networks of consultants in order to recruit a ‘new network of victims’ and often, rely on the concept of affinity with a particular group such as stay at home mums or the bereaved.[54] This is a tactic that serves two purposes; the victims are less likely to feel compelled to undertake any due diligence on the company due to the existing trust of the person who is recruiting them, and further, the reliance on existing social networks allows for growth of the scheme to ‘occur rapidly and without attracting noise from outsiders.’[55] Once a victim has been recruited within an affinity group, they are more likely to remain silent, ‘increasing scheme longevity’ and furthermore, and equally problematic, providing obstacles for investigation teams. Affinity fraud within MLMs is likely to play a role in accounting for low reports from victims.

The Direct Selling Association of Australia (DSA Australia) argues that the benefits of joining an MLM include ‘increased social interaction’ and an ability to ‘improve self-confidence.’[56] Whilst these are certainly positive benefits, they are benefits strongly associated with social aspects, and align with the concept of using affinity to recruit. The use of affinity groups to sign up consultants preys on the fundamental human need for connection and belonging. If a consultant has made new friendships and increased their confidence, leaving the MLM does not become an option. Their identity becomes intrinsically linked to the business, and leaving would mean losing these connections. This highlights the far-reaching nature of the damage caused by MLMs, extending beyond financial harm, with longstanding ramifications on broader social networks and self-confidence.

V THE RISE OF THE SONGBIRD SYNDROME

The consumer harm caused by MLMs can be significant, and somewhat of a self-perpetuating issue. Trahan et al illustrates the idea that in pyramid schemes, MLM based or otherwise, there is an element of victim culpability in the fraudulent activity carried out by the consultant.[57] Whilst many could be said to be willfully blind to the harm they are causing, it is more likely that consultants are experiencing cognitive dissonance, with many genuinely believing in the company and their earning potential.[58] The consequences of participating in MLM based pyramid schemes can be magnified when the victims of the scheme contribute to the continuation and distribution of the scheme within their own affinity groups.[59] Trahan et al characterise this notion as the ‘songbird syndrome’ — where victims of fraudulent schemes enlist other victims to participate, and so forth. Importantly, they note that their analysis suggests that where the ‘songbird syndrome’ exists in a scheme, this victim-to-victim style of recruitment had a positive impact on the financial growth of the scheme and the company.[60] This could be directly related to affinity and the likelihood of a victim to trust somebody from their own affinity group, and may explain why this is a common marketing strategy utilised by MLMs. In contrast, those consultants who look to recruit outside of their affinity group are likely to not be as successful; they need to build trust and association, a process which can take time. As such, there is a direct nexus between the notion of the songbird syndrome in MLMs, and its growth through affinity groups.

Further, in MLMs, there is also an understanding that the ‘consultant himself is a good because his existence is a source of revenue for other consultants’.[61] This can be either through their sales, where their up-line will profit from what they sell, or simply through a fee or bonus for recruiting the consultant (the recruitment payment). In turn, the consultant makes money off consultants they recruit, continuing the cycle of harm, generally until there is nobody in the affinity group left to recruit. The consultant will rarely be able to see this perspective, and often if they do, they will not quit due to the sunk cost fallacy.[62] Vander Nat and Keep are of the view that the MLM business model has not only facilitated the growth of pyramid scheme fraud, but created victims, rather than customers.[63] It becomes very difficult to prevent harm to the consumer, when the consumer is unaware, or refuses to acknowledge that they are the victim.

VI ENFORCEMENT OUTCOMES AND LAW REFORM

A Australian Approach

The ACCC has made limited pursuits of illegal pyramid scheme operators since the ACL came into effect in 2011. In 2012, the ACCC was successful in their penalty proceedings against three individuals for the participation in illegal pyramid selling. Of note, one of the defendants, Ms Jutsen, provided submissions that she should be regarded not as a perpetrator, but a victim of the scheme; the songbird syndrome.[64] Justice Nicholas did not accept these submissions, finding the defendant’s conduct to be ‘serious and substantial.’[65] Whilst this does not mean the concept of the songbird syndrome is without merit, it does show that where the conduct warrants it, the idea of the perpetrator being a victim of the scheme may not be considered by the courts in considering liability and subsequent penalties. This adds another element to the kind of harm caused to the consumer, whereby, personal accountability is weighed higher than the notion of the songbird syndrome, which in effect, is an element of harm. The failure to accept this submission highlights the need for greater education in relation to these schemes so that consumers are aware of the consequences of their actions, intentional or otherwise.

In 2014, the ACCC filed penalty proceedings against Lyoness Australia Pty Ltd, claiming they contravened the pyramid and referral selling provisions of ACL. However, the Federal Court, in their judgment in 2015, found that whilst there were inducements to prospective members that they would receive financial benefits for introducing new members, these entitlements were occasioned and did not find the business operated as a pyramid scheme.[66] Justice Flick noted ‘the manner in which pyramid selling schemes operate...can be complex and elusive’ with the Lyoness scheme no exception.[67] Despite issues of procedural law which impacted the case for the ACCC, it is evident from this judgment that the law does not reflect the true nature and harm of pyramid schemes or MLM based pyramid schemes; arguably, this is by virtue of the narrow definition of pyramid scheme selling under the ACL. The ACCC stated in response to the judgment, that they would ‘continue to investigate schemes that encourage consumers to recruit new members,’ particularly those schemes ‘where the financial benefit held out to induce potential embers to join up rely substantially on the recruitment of further new members into the scheme.’[68] Despite this statement, which by definition, includes MLMs within this scope, there has been little overt action taken by the ACCC in response to such schemes since.

In 2016, a review of the ACL was undertaken, with an option included to broaden the definition of pyramid schemes in section 45(1) of the ACL to include MLMs. This option came from a submission by the Consumer Action Law Group (CALC) for the definition to be broadened to include MLMs ‘where a successful return is unrealistic,’ aiming to ensure vulnerable consumers are not harmed financially by the continued legal operation of such schemes. The CALC argued that the current definition of pyramid scheme is too narrow; it does not capture schemes that are arguably similar, or in essence, the same as pyramid schemes to ‘profit those are the top of the scheme and disadvantage those at the lower levels.’[69]

In submissions to the draft report, the CALC emphasised their view that the definition of pyramid scheme was too narrow ‘and needs to be updated to reflect similarly harmful multi-level marketing schemes,’ stating MLMs target vulnerable people through use of psychological manipulation, and lofty and misleading income claims.[70] The CALC noted that MLMs can have genuine economic activity occurring in their schemes, however, they clarified that this activity is occurring at the top of the scheme; much like a pyramid scheme, where only those at the top earn money, leaving those at the bottom financially disadvantaged.[71] Conversely, DSA Australia provided submissions on behalf of their members, noting that they were ‘ever-conscious’ of the ability for MLMs to be used as a front for pyramid schemes, however, despite this, they considered the current provisions relating to pyramid schemes to be effective.[72] The idea that the industry body acknowledges the propensity pyramid schemes to hide behind the MLM model, and the mere possibility of this occurring, shows the current definition of pyramid scheme selling is too narrow and highlights the need for greater regulatory scrutiny. For pyramid schemes to be disguised as MLMs without scrutiny implies a lack of oversight by regulators. It is evident MLMs operate within a grey area of legal loopholes and require greater transparency in order for consumers and regulators to determine their legitimacy; this grey area allows for ’an opening for pyramid schemes veiled as MLM opportunities’ to be created, causing opportunity for harm.[73]

B US Approach

Conversely, enforcement in the US has been stronger than Australia, with an apparent greater understanding of the interrelationship between pyramid schemes and MLMs. The FTC have filed cases against 30 MLMs in the last 41 years, with 28 of those cases determining that the companies were operating as pyramid schemes; some by way of court judgement, but most settling outside of court.[74] Recently, 12 out of 14 prosecuted cases were settled out of court, with no admission as to liability.[75] The wrongdoing of the companies that settle remain private, allowing the frauds to continue without true acknowledgement or recognition of the harm caused and loss suffered.

The most notable of enforcement action in the US is In re Amway Corp in 1979, in which the FTC ruled Amway Corporation Inc (Amway) was not an illegal pyramid scheme.[76] Despite this, they were found to be misrepresenting income claims and the likelihood of success to its consultants and ordered to cease misrepresenting profits, earnings and sales.[77] This decision saw Amway essentially turn the tables, and ‘avoided the abuses of pyramid schemes’ due to internal policies, including a policy known as the ’70% rule’, essentially requiring 70% of a consultants sales be sold in that month in order to receive a bonus.[78] This policy is intended to prevent what is known as ‘front loading’; the intentional over purchase of products in order to receive bonuses and promotions based on sales volume, a common tactic used in MLMs to rise up the ranks. These internal policies — in which no consideration was given to compliance with these policies in the ruling — have become to be known as the ‘Amway safeguards’ and became precedent in determining whether an MLM is legitimate or a pyramid scheme.[79] In 1986, Amway violated this ruling by again making misrepresentations about potential earning capacity, and were required to pay a $100,000 penalty, suggesting that the penalties are not strong enough to serve as a deterrent to Amway and other MLMs operating similarly.

MLMs have evolved significantly since the 1970s, by way of their operation and how their consultants operate. The continued settlement of enforcement action outside of the courts means that the Amway decision and the Amway safeguards continue to be relied upon by modern day MLMs. All the while, MLM business models continue to lure consumers into their business by way of misrepresentation. In 2016, Herbalife International Incorporated (Herbalife) were required to pay $200 million in compensation to consumers for deceiving consumers into believing they could make substantial income, as well as using a compensation structure which caused substantial economic loss to consultants.[80] Whilst this is a positive step in protecting consumers, similar to Amway, the proportion of penalty in light of both the company turnover, and loss suffered to consumers is unlikely to be significant enough to deter Herbalife from misleading consumers in the future. It is evident that more needs to be done.

C Beyond Enforcement Action

The FTC are vocal in publishing releases relating to MLMs and pyramid schemes, providing detailed guidance, including warning signs for ‘fraudulent MLM activity,’ looking at factors such as complex commission structures and promises of quick riches and passive income.[81] Furthermore, they acknowledge in their publications that even for a so called legitimate MLMs, most people make little or even no money.[82] Whilst the ACCC appears to not have the regulatory appetite to consider capturing MLMs within the remit of pyramid schemes, they should look to publishing more material, similar to that of the FTC, to inform and educate consumers, particularly in relation to the significant and likely potential for them to lose money. Prevention of further harm could be efficient and efficacious if information from previously prosecuted pyramid schemes — here or abroad — are used to inform campaigns.[83] As has been discussed, the victims of such schemes are often targeted due to their vulnerability, including lack of education. However, the difficulty remains that there is limited data on both the number of victims and exact harm caused, making educational campaigns and their impact more difficult.

Furthermore, the ability for regulatory agencies to ensure consumers are protected from the harm caused by these models has turned into an uphill battle due to the rapid evolution of the industry, with most consultants using private messages, generally via social media, to reach out to prospective consultants, as opposed to in person. The use of social media by consultants has created a ‘laboratory for deception’; the creation of essentially a platform for deception to occur without any oversight.[84] In an industry that is already difficult to oversee and regulate, the embracing of social media by MLMs has ensured that oversight is even more difficult, if not impossible. It is likely that there will be further growth of this industry, with further harm caused to consumers as a result. However, notably, in December 2020, social media company TikTok updated their community guidelines, banning the posting, uploading or streaming of content that ‘depicts or promotes Ponzi, multi-level marketing, or pyramid schemes,’ labelling these structures as ‘frauds and scams.’[85] The banning of content promoting MLMs in order to protect users from harm by a major social media platform is a significant step in the right direction in not only calling out MLMs for what they actually are – frauds and scams - but also playing a role in protecting unsuspecting consumers from financial and personal harm. It is clear social media platforms have a role to play in stemming the fraud perpetuated by MLMs, and this is a significant step in the right direction.

VII CONCLUSIONS

Whilst regulatory action has been proven generally to prevent additional consumer harm from frauds perpetrated by MLMs, data evidences that significant consumer losses could have been avoided, where there was earlier intervention; regulatory or education.[86] This, together with the knowledge that victims tend to stay silent emphasises that any consumer complaint relating to an MLM should be taken seriously, as the likelihood that the harm extends beyond what is being reported is high.[87] The data that exists, whilst limited, should not be viewed in a vacuum, but considered in light of the victim mentality and hesitation in coming forward.

However, whilst stronger regulatory action, broader application of legislation and educational campaigns would help prevent further harm, there is an argument that the MLM business model needs to fundamentally change before any significant changes to consumer harm occur.[88] The central focus needs to shift from the emphasis on recruitment, to a focus on product sales in order to reduce the inherent fraud of MLMs. Other complimentary suggestions include requirements for MLMs to make full disclosures of what they are, that being, buying clubs, rather than a genuine opportunity to earn money, as well as requirements of greater transparency of earning potential, or lack, thereof.[89] Until there are fundamental changes in the business model, legal and ethical issues will continue to exist, and whilst there has been calls for the industry to do more ‘in order to operate lawfully and prevent consumer harm’ it is evident that a lot more needs to be done.[90]

VII BIBLIOGRAPHY

A Articles/Books/Reports

Blois, Keith and Annmarie Ryan, ‘Affinity fraud and trust within financial markets’ (2013) 20(2) Journal of Financial Crime 186

Bosley, Stacie and Maggie Knorr, ‘Pyramids, Ponzis and fraud prevention: lessons from a case study’ (2018) 25, 1 Journal of Financial Crime, 81.

Bosley, Stacie and Kim McKeage ‘Multilevel marketing diffusion and the risk of pyramid scheme activity: the case of fortune hi-tech marketing in Montana’ (2015) 34(1) Journal of Public Policy and Marketing 84.

Carey, Catherine and John K. Webb, ‘Ponzi schemes and the role of trust creation and maintenance’ (2017) 24(4) Journal of Financial Crime 589.

Grob, Claudia and Dirk Vriens, ‘The Role of the Distributor Network in the Persistent Legal and Ethical Problems of Multi-Level Marketing Companies’ (2019) 156 Journal of Business Ethics 333

Koehn, Daryl ‘Ethical Issues Connected with Multi-Level Marketing Schemes’ (2001) 29 Journal of Business Ethics 153

Liu, Heidi, ‘The Behavioral Economics of Multi Level Marketing’ (2018) 14(1) Hastings Business Law Journal 110.

Trahan, Adam, James W. Marquart and Janet Mullings, ‘Fraud And The American Dream: Toward An Understanding Of Fraud Victimization' (2005) 26(6) Deviant Behavior, 601-620

Vander Nat, Peter J and William W Keep, ‘Marketing Fraud: An approach for Differentiating multilevel marketing from pyramid schemes’ (2002) Volume 21(1) Journal of Public Policy and Marketing 139.

Vander Nat, Peter J and William W Keep, ‘Multilevel marketing and pyramid schemes in the United States: An historical analysis’ (2014) 6,2 Journal of Historical Research in Marketing, 188.

B Cases

Australian Competition and Consumer Commission v Lyoness Australia [2015] FCA 1129, [25]

Australian Competition and Consumer Commission v Worldplay Services Pty Ltd [2004] FCA 1138, (2004) 210 ALR 562, 44.

In the matter of Amway Corporation Inc et al (93 FTC 618).

C Legislation

Competition and Consumer Act 2010 (Cth)

D Other

ACCC, 'Federal Court finds Lyoness Scheme not pyramid’, (Media Release MR 205/15, 23 October 2015) <https://www.accc.gov.au/media-release/federal-court-finds-lyoness-scheme-not-pyramid>

ACCC, ‘‘$200,000 penalty for TVI Express pyramid selling scam’, (Media Release NR 099/12, 21 May 2012) <https://www.accc.gov.au/media-release/200000-penalty-for-tvi-express-pyramid-selling-scam>

"Advertising And Selling Guide - Pyramid Schemes", Australian Competition And Consumer Commission (Webpage, 2020) <https://www.accc.gov.au/publications/advertising-selling/advertising-and-selling-guide/other-prohibited-sales-practices/pyramid-schemes>.

Bond, Casey, ‘MLMs are a Nightmare for Women and Everyone They Know’, (28 June 2019) Huffington Post <https://www.huffpost.com/entry/mlm-pyramid-scheme-target-women-financial-freedom_l_5d0bfd60e4b07ae90d9a6a9e?utm_campaign=share_email&ncid=other_email_o63gt2jcad4>.

Chung, Frank, ‘Multi-level marketing scheme Jeunesse Global posts record Australian sales’ news.com.au (Online, 31 Mary 2017) <https://www.news.com.au/finance/business/other-industries/multilevel-marketing-scheme-jeunesse-global-posts-record-australian-sales/news-story/eda7ddcec4910d209736a8478a7eb419>

“Community Guidelines”, Tik Tok (Webpage, 2020), <Community Guidelines”, Tik Tok, (Webpage, 2021) <https://www.tiktok.com/community-guidelines?lang=en>

Consumer Action Law Centre, Australian Consumer Law Review - Issues Paper, 30 May 2016 <https://consumerlaw.gov.au/sites/consumer/files/2016/07/Consumer_Action_Law_Centre.pdf>

Direct Selling Australia, Australian Consumer Law Review - Issues Paper, May 2016, <https://consumerlaw.gov.au/sites/consumer/files/2016/07/Direct_Selling_-Australia.pdf>

Douglas, Rebecca, ‘Multi-level marketing schemes. A good way to make money, or just another pyramid scheme?’ Choice (Blog Post, 23 November 2016) Choice <https://www.choice.com.au/shopping/packaging-labelling-and-advertising/advertising/articles/multi-level-marketing-schemes>

Federal Trade Commission, ‘Herbalife Will Restructure Its Multilevel Marketing Operations, (Press Release, 15 July 2016, <https://www.ftc.gov/news-events/press-releases/2016/07/herbalife-will-restructure-its-multi-level-marketing-operations>

"FTC Letters Target More Unproven MLM Health And Earnings Claims", Federal Trade Commission (Webpage, 2020) <https://www.consumer.ftc.gov/blog/2020/06/ftc-letters-target-more-unproven-mlm-health-and-earnings-claims>.

Gressin, Seema, “FTC says “Success by Health” is a pyramid scheme”, Federal Trade Commission, (Webpage, 2020) <https://www.consumer.ftc.gov/blog/2020/01/ftc-says-success-health-pyramid-scheme>

"Multi-Level Marketing Businesses And Pyramid Schemes", Federal Trade Commission (Webpage, 2020) <https://www.consumer.ftc.gov/articles/0065-multi-level-marketing-businesses-and-pyramid-schemes>.

Pascoe, Alley, "5 Women On The Moment They Realized They Were In A Pyramid Scheme", (28 November 2019) Marie Claire <https://www.marieclaire.com.au/multi-level-marketing-pyramid-schemes-women-survivors>.

Potaka, Elise, ‘Consumer law experts are calling for greater oversight of multi-level marketing schemes saying legislation has failed to keep pace with the rapid spread of digital MLMs’, (online at 22 February 2019) SBS https://www.sbs.com.au/news/the-feed/multi-level-marketing-or-pyramid-scheme-consumer-advocates-call-for-tighter-rules

Romanoff, Zan, ‘What we got wrong about multilevel marketing, explained by the host of the popular podcast about it’, Vox (online, 30 November 2018) <https://www.vox.com/the-goods/2018/11/30/18114919/the-dream-jane-marie-mlms>

Roos, Dave, "How Pyramid Schemes Work", How stuff works (Webpage, 2020) <https://money.howstuffworks.com/pyramid-scheme2.htm>.

Singletary, Michelle, "Be Careful. That Multilevel Marketing Side Hustle Could Be An Illegal Pyramid Scheme," Washington Post (online at 17 October 2019) <https://www.washingtonpost.com/business/2019/10/17/be-careful-that-multilevel-marketing-side-hustle-could-be-an-illegal-pyramid-scheme/>.

Vesoulis, Abby and Eliana Docketman, "Pandemic Schemes: How Multilevel Marketing Distributors Are Using The Internet—And The Coronavirus—To Grow Their Businesses", (9 July 2020) Time <https://time.com/5864712/multilevel-marketing-schemes-coronavirus/>.

Voytko, Lisette, ‘FTC Warns 16 Multi-Level Marketing Companies about Coronavirus Fraud’ 9 June 2020, Forbes, <https://www.forbes.com/sites/lisettevoytko/2020/06/09/ftc-warns-16-multi-level-marketing-companies-about-coronavirus-fraud/?sh=7dec02657b9d>


[1] Alley Pascoe, "5 Women On The Moment They Realised They Were In A Pyramid Scheme", (28 November 2019) Marie Claire <https://www.marieclaire.com.au/multi-level-marketing-pyramid-schemes-women-survivors>.

[2] Claudia Grob and Dirk Vriens, ‘The Role of the Distributor Network in the Persistent Legal and Ethical Problems of Multi-Level Marketing Companies’ (2019) 156 Journal of Business Ethics 333, 336.

[3] Ibid.

[4] "Multi-Level Marketing Businesses And Pyramid Schemes", Federal Trade Commission (Webpage, 2020) <https://www.consumer.ftc.gov/articles/0065-multi-level-marketing-businesses-and-pyramid-schemes>.

[5] Grob and Vriens (n 2) 337.

[6] Peter J Vander Nat and William W Keep, ‘Multilevel marketing and pyramid schemes in the United States: An historical analysis’ (2014) 6(2) Journal of Historical Research in Marketing 188, 194 (‘Historical Analysis’)

[7] Ibid.

[8] Ibid.

[9] Heidi Liu, ‘The Behavioral Economics of Multi Level Marketing’ (2018) 14(1) Hastings Business Law Journal 110, 115.

[10] Referred to as the Australian Consumer Law (‘ACL’)

[11] "Advertising And Selling Guide - Pyramid Schemes" Australian Competition And Consumer Commission (Webpage, 2020) <https://www.accc.gov.au/publications/advertising-selling/advertising-and-selling-guide/other-prohibited-sales-practices/pyramid-schemes>.

[12] Ibid.

[13] Seema Gressin, “FTC says “Success by Health” is a pyramid scheme”, Federal Trade Commission, (Webpage, 2020) <https://www.consumer.ftc.gov/blog/2020/01/ftc-says-success-health-pyramid-scheme>

[14] Federal Trade Commission (n 4)

[15] Dave Roos "How Pyramid Schemes Work" How Stuff Works (Webpage, 2020) <https://money.howstuffworks.com/pyramid-scheme2.htm>.

[16] Federal Trade Commission (n 4)

[17] Vander Nat and Keep, Historical Analysis (n 6) 196

[18] Daryl Koehn, ‘Ethical Issues Connected with Multi-Level Marketing Schemes’ (2001) 29 Journal of Business Ethics 153, 154

[19] Grob and Vriens (n 2) 336.

[20] Koehn (n 18) 154

[21] Abby Vesoulis and Eliana Docketman, "Pandemic Schemes: How Multilevel Marketing Distributors Are Using The Internet—And The Coronavirus—To Grow Their Businesses" (9 July 2020) Time <https://time.com/5864712/multilevel-marketing-schemes-coronavirus/>.

[22] Federal Trade Commission (n 4)

[23] Michelle Singletary, "Be Careful. That Multilevel Marketing Side Hustle Could Be An Illegal Pyramid Scheme" Washington Post (online at 17 October 2019) <https://www.washingtonpost.com/business/2019/10/17/be-careful-that-multilevel-marketing-side-hustle-could-be-an-illegal-pyramid-scheme/>. See also above n 6

[24] See, eg, Arbonne, Compensation (website, undated) <https://www.arbonne.com/discoverau/opportunity/compensation.shtml>; Doterra, Compensation Plan (website, undated) <https://media.doterra.com/au-otg/en/flyers/compensation-plan.pdf>for examples of compensation plans which include compensation on profits from a downline

[25] Herbalife, ‘What should I know about being an Herbalife Nutrition Member?’ (website, 2020) <https://edge.myherbalife.com/vmba/media/5FA0FDC0-2543-4692-9961-CF7D140F58D0/Web/General/Original/StatementOfAverageGrossCompensation_Australia.pdf>

[26] Herbalife, ‘Power of Three’ (blog post, undated) <https://www.doterra.com/AU/en_AU/blog/business/power-of-three>

[27] Peter J Vander Nat and William W Keep, ‘Marketing Fraud: An approach for Differentiating multilevel marketing from pyramid schemes’ (2002) Volume 21(1) Journal of Public Policy and Marketing 139 (‘Marketing Fraud’)

[28] Australian Competition and Consumer Commission v Worldplay Services Pty Ltd [2004] FCA 1138, (2004) 210 ALR 562, 44.

[29] Adam Trahan, James W. Marquart and Janet Mullings, ‘Fraud And The American Dream: Toward An Understanding Of Fraud Victimization' (2005) 26(6) Deviant Behavior, 601, 603.

[30] Ibid.

[31] Stacie Bosley and Maggie Knorr, ‘Pyramids, Ponzis and fraud prevention: lessons from a case study’ (2018) 25(1) Journal of Financial Crime 81, 83.

[32] Koehn (n 18) 159

[33] Herbalife, ‘Be Your Own Boss’ (website, undated) <https://www.herbalife.com.au/business-opportunity/be-your-own-boss/>

[34] Vesoulis and Docketman (n 21)

[35] Trahan, Marquart and Mullings (n 29).

[36] Ibid.

[37] Casey Bond, ‘MLMs are a Nightmare for Women and Everyone They Know’ (online at 28 June 2019) Huffington Post <https://www.huffpost.com/entry/mlm-pyramid-scheme-target-women-financial-freedom_l_5d0bfd60e4b07ae90d9a6a9e?utm_campaign=share_email&ncid=other_email_o63gt2jcad4>.

[38] Elise Potaka, ‘Consumer law experts are calling for greater oversight of multi-level marketing schemes saying legislation has failed to keep pace with the rapid spread of digital MLMs’, (online at 22 February 2019) SBS https://www.sbs.com.au/news/the-feed/multi-level-marketing-or-pyramid-scheme-consumer-advocates-call-for-tighter-rules

[39] Vander Nat and Keep, Marketing Fraud (n 27) 149.

[40] Potaka (n 38); See also Herbalife (n 25).

[41] Liu (n 9), 124.

[42] Bond (n 37).

[43] Liu (n 9) 125.

[44] Vander Nat and Keep, Historical Analysis (n 6) 193.

[45] Lisette Voytko, ‘FTC Warns 16 Multi-Level Marketing Companies about Coronavirus Fraud’ 9 June 2020, Forbes, <https://www.forbes.com/sites/lisettevoytko/2020/06/09/ftc-warns-16-multi-level-marketing-companies-about-coronavirus-fraud/?sh=7dec02657b9d>

[46] Bond (n 37).

[47] Koehn (n 18) 160

[48] Ibid

[49] Keith Blois and Annmarie Ryan, ‘Affinity fraud and trust within financial markets’ (2013) 20(2) Journal of Financial Crime 186.

[50] Ibid.

[51] Catherine Carey and John K. Webb, ‘Ponzi schemes and the role of trust creation and maintenance’ (2017) 24(4) Journal of Financial Crime 589.

[52] Blois and Ryan (n 49).

[53] Grob and Vriens (n 2) 339.

[54] Bosley and Knorr (n 31) 82.

[55] Ibid.

[56] Rebecca Douglas, ‘Multi-level marketing schemes. A good way to make money, or just another pyramid scheme?’ Choice (Blog Post, 23 November 2016) Choice <https://www.choice.com.au/shopping/packaging-labelling-and-advertising/advertising/articles/multi-level-marketing-schemes>

[57] Trahan, Marquart and Mullings (n 29) 604.

[58] Zan Romanoff, ‘What we got wrong about multilevel marketing, explained by the host of the popular podcast about it’, Vox (online, 30 November 2018) <https://www.vox.com/the-goods/2018/11/30/18114919/the-dream-jane-marie-mlms>

[59] Bosley and Knorr (n 31) 83.

[60] Trahan, Marquart and Mullings (n 29) 610.

[61] Liu (n 9) 118.

[62] Ibid.

[63] Vander Nat and Keep, Historical Analysis (n 6) 194.

[64] ACCC, ‘‘$200,000 penalty for TVI Express pyramid selling scam’, (Media Release NR 099/12, 21 May 2012) <https://www.accc.gov.au/media-release/200000-penalty-for-tvi-express-pyramid-selling-scam>

[65] Ibid.

[66] Australian Competition and Consumer Commission v Lyoness Australia [2015] FCA 112

[67] Ibid [25]

[68] ACCC, 'Federal Court finds Lyoness Scheme not pyramid’, (Media Release MR 205/15, 23 October 2015) <https://www.accc.gov.au/media-release/federal-court-finds-lyoness-scheme-not-pyramid>

[69] Frank Chung, ‘Multi-level marketing scheme Jeunesse Global posts record Australian sales’ news.com.au (Online, 31 Mary 2017) <https://www.news.com.au/finance/business/other-industries/multilevel-marketing-scheme-jeunesse-global-posts-record-australian-sales/news-story/eda7ddcec4910d209736a8478a7eb419>

[70] Consumer Action Law Centre, Australian Consumer Law Review - Issues Paper, 30 May 2016 <https://consumerlaw.gov.au/sites/consumer/files/2016/07/Consumer_Action_Law_Centre.pdf>

[71] Ibid.

[72] Direct Selling Australia, Australian Consumer Law Review - Issues Paper, May 2016, <https://consumerlaw.gov.au/sites/consumer/files/2016/07/Direct_Selling_-Australia.pdf>

[73] Stacie Bosley and Kim McKeage ‘Multilevel marketing diffusion and the risk of pyramid scheme activity: the case of fortune hi-tech marketing in Montana’ (2015) 34(1) Journal of Public Policy and Marketing 84.

[74] Vesoulis and Docketman (n 21).

[75] Bosley and McKeage (n 73) 88.

[76] In the matter of Amway Corporation Inc et al (93 FTC 618).

[77] Ibid 735

[78] Liu (n 9) 117.

[79] Ibid.

[80] Federal Trade Commission, ‘Herbalife Will Restructure Its Multilevel Marketing Operations, (Press Release, 15 July 2016, <https://www.ftc.gov/news-events/press-releases/2016/07/herbalife-will-restructure-its-multi-level-marketing-operations>

[81] Federal Trade Commission (n 4).

[82] Ibid.

[83] Bosley and Knorr (n 31) 92.

[84] Vesoulis and Docketman (n 21).

[85] “Community Guidelines”, Tik Tok, (Webpage, 2020) <https://www.tiktok.com/community-guidelines?lang=en>

[86] Bosley and McKeage (n 73) 96.

[87] Ibid.

[88] Grob and Vriens (n 2) 347.

[89] Ibid.

[90] Ibid 337.


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