THE Department of Trade and Industry (DTI) is intensifying its campaign against the billion-dollar sector of illegitimate multilevel marketing (MLM) by tightening its rules and regulations on the conduct of such business activity.
Trade Secretary Ramon M. Lopez said he is issuing a
department administrative order putting up
an accreditation system that will certify the operations of legitimate MLM
firms and direct sellers. Primarily geared toward protecting consumers, the DAO
also intends to expose pyramiding schemes posing as MLM programs.
Lopez said the DAO has a list of indicators the public can use in determining whether they are dealing with pyramiding schemes.
“To protect consumers and aspiring direct sellers, we are establishing an accreditation system that will give due recognition to legitimate multilevel marketing and direct sellers so that the public will be guided. We are also giving indication of and alarm signals for illegitimate MLMs, procedure for filing of complaints and enforcement,” Lopez told the BusinessMirror.
The issuance of the order will come at a time the value of consumer goods sold through MLM has reached billions of dollars: $1.4 billion for legitimate, $1 billion for underground, according to Trade Undersecretary Ruth B. Castelo.
“Global sales [through MLM programs] in 2018 is $193 billion, while sales in the Philippines is about $1.4 billion. Alleged illegal MLM revenues in the Philippines could reach an additional $1 billion,” Castelo told the BusinessMirror.
Crucial order
The DAO is crucial, Castelo explained, because it recognizes there are legitimate MLM firms, and sets up alarm signals for illegitimate MLMs, procedures for lodging of formal charges and enforcement of the rules and regulations.
Under the draft DAO posted on the DTI’s web site, a mandatory recognition process is created wherein a person who intends to establish, operate or advertise a legitimate direct selling, MLM or networking company shall go through before actual operation. The applicant is required to accomplish the DTI prescribed application form and submit it to the agency.
The DTI shall then evaluate the application and documents submitted within the day of receipt.
If the applicant meets the qualifications set by DTI, he/she shall pay the prescribed fees. The recognition certificate will then be issued within seven working days from receipt of the application.
The DAO lists indicators in determining whether there is basis to conduct an investigation and, consequently, file a complaint against a pyramiding scheme masking as an MLM program.
One indicator: when profit or commission is conditioned upon the recruitment of participants and the recruits are required to pay a fee. Another indicator: the unusual high returns on investment in the form of profit or commission over a short period.
Also, an MLM could be a pyramiding scheme when a consumer item is involved and its price is set so unreasonably high that a buyer would not normally purchase it at such price; therefore, forcing the participant to recruit, the draft DAO read.
The proposed order says a pyramiding scheme has no policy on return, refund, exchange or warranty. If any of these indicators show up in a business, then a party can file a complaint before the DTI’s Fair Trade Enforcement Bureau, which the DTI will investigate.
If proven guilty, the illegitimate MLM firm will be sanctioned in accordance with DTI rules and regulations, and its certificate of registration will be terminated.
In 2013 the Securities and Exchange Commission of the United States issued an investor alert warning individual investors about pyramiding schemes. It described the illegal activity as an “investment scam that fraudsters often pitch as a legitimate business opportunity in the form of multilevel marketing programs.”
The agency said pyramiding schemes often go against the federal securities laws, such as laws prohibiting fraud and requiring the registration of security offerings and broker dealers.
Under a pyramiding scheme, money obtained from new participants is used to pay recruiting commissions to earlier participants. This is identical to the infamous Ponzi schemes, wherein money secured from new investors is used to pay fake profits to earlier investors.