China doesn't allow Multi-Level Marketing (MLM) schemes or pyramid schemes, period. The government allows single level direct sales if a company has a proper license. But no recruiting is allowed and no multi-level structure is allowed.
While we often think of China as being behind the times compared to the United States, those of us who study the ill effects of MLM wish that our government took such a hard line against this abusive business structure. Despite the laws against MLMs in China, there are people and organizations who do businesses there anyway. Companies have discovered that it is impossible to make money with the single level selling that the government allows, but that the MLM structure thrives with over a billion people available to be recruited. Usana Health Sciences and Herbalife are just two MLMs that have been found doing business illegally in China by undercover investigators.
And now a promoter of an Ant Farm pyramid has left thousands of Chinese consumers penniless. Liaoning province is fast becoming the hub for illegal pyramid schemes and illegal MLM activities in China. It was there that the Yilishen Tianxi Group offered an "opportunity" to purchase a box of ants for the equivalent of U.S.$1,375.
Purchasers were to feed and water the ants until they died, which is about 90 days after they're born. A Yilishen representative was then supposed to pick up the dead ant and take them to a factory that would use them to produce products that the Chinese believe cure many ailments. "Investors" were offered an annual rate of return upwards of 32% on their investment, and many bit. They believe strongly in the healing power of dead ants, and therefore were convinced this was a legitimate opportunity.
Thousands of people lost all their money, and the organizer of the scheme is in jail. But the scheme lasted for eight years and affected many people. An identical scheme which ran from 2002 to 2004 in the same area collected an estimated U.S. $390 million from people.
China is making some attempts to crack down, but the rampant cheating among business promoters is proving to be a huge problem. Last year, 600 fraudulent schemes in 14 provinces and cities were busted. And that represents only a fraction of the business opportunity schemes.
These schemes are growing -- in part due to the large population in China, and in part due to the corruption of government officials. The future of pyramid schemes in MLMs in China is uncertain in the long-term, but the schemes are likely to grow in the short-term.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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