Recently an obscure and controversial business sector became a focus of the presidential race. It was reported that two Republican candidates, Donald Trump and Dr. Ben Carson, received significant payments for speeches and other support to companies known as “multi-level marketing” (MLM).

MLMs recruit armies of consumers to buy and sell their products away from retail stores. MLM prototypes are Amway and Herbalife , but hundreds more solicit over 15 million American households for investments of more than $20 billion annually. Their promise of “unlimited” income potential is not from personal selling but from recruiting an ever-expanding sales chain, recruits recruiting recruits, etc. Costs for participants range from hundreds of dollars to tens of thousands. Some consumers become obsessive, cult-like followers, believing MLM is their last hope. Students, single parents, immigrants and military spouses are high value targets.

Research, disclosures, court data and federal prosecutions confirm the inevitable outcome of mathematically impossible “endless chain” promises: Virtually all consumers lured in lose money. Most then drop out only to be replaced by fresh victims.

Identifying “illegal” MLMs is difficult

The Federal Trade Commission (FTC), Securities and Exchange Commission (SEC) and Postal Inspector have all warned the public about these disguised pyramid schemes but also admit that identifying “illegal” MLMs is difficult. Despite the damage and an increase in pyramid selling, the FTC has not enacted a guiding “rule” to distinguish direct selling from pyramid recruiting. Regulators, instead, use a whack-a-mole approach. Every few years, the FTC prosecutes a few MLMs, leaving the public otherwise to fend for itself.

Getting Trump’s and Carson’s famous names attached to MLM not only lends credibility for recruiting but also may keep away regulators.

Trump disclosed payments of $450,000 for a speech for an MLM called ACN, which uses distributors to sell phone and satellite services. ACN had been prosecuted, unsuccessfully, by regulators in Montana, Canada and Australia for the characteristic commonly tied to MLM–compensation tied to recruiting and not actual sales.

Dr. Carson’s support of another MLM, Mannatech, reveals a glaring need for regulation to address another version of the scam–false health claims. Miracle cures are everywhere among MLMs. Carson received major remuneration for speeches appearing to endorse Mannatech, which promotes a non-FDA-approved, non-therapeutic “supplement,” and publicly implied it halted the spread of his prostate cancer. The Texas Attorney General prosecuted Mannatech for illegal marketing claims including cures for cancer, autism and Down Syndrome. Mannatech paid a $7 million fine without admitting guilt.

Implement a strict, predictable framework

It is time to end the ad hoc approach and implement a strict, predictable framework for responsible consumer protection from the pyramiding epidemic. Regulation, on par with that of governing franchising–where FTC rules prevent falsely portrayed “business opportunities”–is essential. Such rule-making would protect consumers from losses in the billions annually. In 2013, International Coalition of Consumer Advocates (ICCA), delivered a petition to the FTC for regulation, signed by attorneys, authors, doctors, bloggers and victims from more than 10 countries and supported by 1,000 other signatures.

At the same time we have to ensure that influence-buying by MLMs won’t get in the way of tougher FTC action. In 2012, for example, the FTC sought to address MLM abuse. A “business opportunity” rule was proposed to require financial disclosures in solicitations. MLM’s trade group, the Direct Selling Association (DSA), blocked the effort by lobbying Congress to “exempt” MLMs. The DSA claimed its “code of ethics” adequately protects consumers. MLMs are currently not required to disclose losses, costs, failure rates or numbers of recruits.

Stop the scams

Notably, the largest FTC prosecution of an MLM since the exemption was of a DSA member called Vemma. The FTC said Vemma victimized hundreds of thousands, mostly students, camouflaging the pyramid scheme with sales of an “energy drink.” A conflict between hedge fund managers over the legality of Herbalife, which is a public company, has drawn attention to its business practices. The FTC and SEC are reportedly investigating possible pyramiding.

Perhaps feeling the heat, the DSA has just organized a 31-member “Direct Selling Caucus” in the House of Representatives, led by Marsha Blackburn (R-TN) and Marc Veasey (D-TX).

These events would seem to indicate long needed consumer protections could and should come. The millions of people suffering from these scams cannot wait any longer.

Mr. FitzPatrick is also the ad hoc chairman of the Steering Committee of the International Coalition of Consumer Advocates.

Source | Via