Top 10 Things I Learned

“Multi-level marketing” (a.k.a., “MLM,” or “network marketing”) programs have great appeal to vulnerable consumers seeking to improve their lot in life. Some people are drawn to MLM's by their apparent low cost of initial participation, by the need to be part of a group dedicated to a common purpose, by the appeal of products with magical properties, and by the promise of "residual" second income or early retirement. MLM is often insidious in its apparent innocence – and at the same time pernicious in its inevitable impoverishment of nearly all participants to the degree of their investments in time and money. While losses (mostly from unused product purchases) are minimal for many participants, harm to some can be great, including heavy debt, home foreclosures, career disruptions, and bankruptcy. Other harmful effects often include inordinate focus on materialism, exploitation of valued friendships, obsessive focus on MLM contributing to divorce, and damage to self-esteem.

Most MLM participants are not seeking an “opportunity,” but are recruited by someone close to them. It is sold as a legitimate home business to “earn a little extra money,” to pay bills or college costs, to donate to worthy causes, etc. The reality is far different. By promoting infinite (endless chain) recruitment in finite markets, they mathematically doom the vast majority of participants to financial loss. The loss rate for “recruiting MLM’s” (See #2 below) is approximately 99.9%; i.e., about 999 out of 1,000 participants lose money! Such odds are far worse than for no-product pyramid schemes and even worse than for many games of chance in gambling centers like Las Vegas. World wide, millions of MLM participants lose an aggregate total of tens of billions of dollars annually. (See "Which Does the Greater Harm?" (PDF), See also "Who Profits from Multi-Level Marketing*? Preparers of Utah Tax Returns Have the Answer.")

It is also important to note that many recruiters for MLM companies insist that they are NOT "MLM" (or "multi-level marketing"), etc. Instead, they are doing "network marketing," "consumer direct marketing," or "direct selling." This should tell you something. Their efforts to distance themselves from MLM suggests that much of the public has figured out that they are not legitimate.

To be more specific, I can recall when, over 30 years ago, MLM promoters sensed that "multi-level marketing" sounded too much like a pyramid scheme, so they loudly trumpeted their new moniker – "network marketing." They claimed they were merely making use of a powerful word-of-mouth form of advertising. Sounded innocent enough. Even some regulators bought it.

In its published financial statement, Nu Skin now describes itself as a "global direct selling company." And Melaleuca promoters will tell you they are not "network marketing" but "consumer direct marketing" – apparently trying to further distance themselves from appearing to be a pyramid scheme.

Read #2 and #10 below for the criteria I use, based on solid research, to make a clear distinction between an MLM which is merely a product-based pyramid scheme ("recruiting MLM") and a legitimate direct sales programs. Keep in mind that it is generally not the names, the products, or the program's leaders that cause the problems, but the compensation plan itself. Psychologists discovered a century ago that you get the behavior you reward.

2. Almost all MLM’s are “recruiting MLM’s,” or product-based pyramid schemes.

Nearly all MLM programs can be considered “product-based pyramid schemes,” or “recruiting MLM’s” – because they thrive on recruitment of new “distributors” – who are the actual customers. Here the term “recruiting MLM” – or “MLM” for short – refers to schemes that are characterized by multi-level endless chain recruitment of distributors as their primary customers.

Recruiting MLM’s incorporate these “Five Red Flags” in their compensation plans:

1. Recruiting of participants is unlimited in an endless chain of empowered and motivated recruiters recruiting recruiters.

2. Advancement in a hierarchy of multiple levels of “distributors” is achieved by recruitment, rather than by appointment.

3. Ongoing purchases (products, sales “tools,” etc.) by “distributors” are encouraged in order for them to be eligible for commissions and to advance in the business ("pay to play").

4. The company pays commissions and/or bonuses to more than four levels of “distributors.”

5. For each sale, company payout for the total of all upline participants equals or exceeds that for the person actually selling the product, creating an inadequate incentive to sell products directly and an excessive incentive to recruit new participants.

WARNING: Where data has become available for MLM companies with these 5 red flags in their compensation plans (which is most MLM’s), approximately 99.9% of participants lose money – after subtracting purchases from the company. You would be wise to avoid participating —regardless of how great the products, how many "respectable" people manage it or endorse it, and whether or not law enforcement has taken any action against them. Your odds of profiting from gambling in Las Vegas are far better. (See “Which Does the Greater Harm,” posted at www.mlm-thetruth.com)

For more complete information on these "5 Red Flags," which were derived and validated by several years of research as listed above, click here [PDF – also mentioned in "Consumer Guides" and "Research" sections on web site], which is an excellent condensation of all my research on this topic.

3. A fair and profitable “retail MLM” would not look at all like the typical MLM.

At least two MLM's have been created which are both fair and legitimate. The emphasis is on direct sales (to customers who are not connected with the MLM) at retail prices, as is reflected in compensation plans in which: (1) Only minimal purchases (e.g., no more than $100 per quarter) are required or “incentivized” to qualify for commissions or advancement, (2) Override commissions are paid on no more than five levels in one’s upline, each of whom would receive a very small override (1-5%) from the sales of front-line participants doing the selling, and (3) Most of the commissions (over 50%) paid by the company are paid to distributors selling the product, I call such programs “retail MLM's.” Out of compensation plans of hundreds of MLM's I have reviewed, I have found only three programs that could qualify as retail MLM's, based on these criteria.

In short, retail MLM’s that might be considered legitimate are acceptable only to the degree that they are NOT like typical MLM’s, as characterized by the “5 Red Flags” above.

4. Properly understood, even leading MLM’s are likely to be fraudulent and technically illegal.

Nearly all MLM’s are inherently fraudulent endless chain recruitment schemes, promising substantial ongoing income, but leading to losses for the vast majority of participants. However, a few at the top profit hugely from product purchases of downline participants who stock up on products to “play the game.” As such, it could be considered theft by misrepresentation.

And investors in publicly traded MLM companies would be upset if they learned that in their MLM, there are few if any bone fide customers (see # 10) and that the MLM is dependent for its success on a network of distributors, 99.9% of whom lose money.

These schemes are technically illegal in almost all jurisdictions because they violate statutes against pyramid schemes and deceptive sales practices – or simple fraud. Based on available data, the vast majority of MLM’s are not income opportunities, but loss opportunities instead – and not legitimate businesses by any reasonable measure.

In law enforcement, the squeaky wheel gets the grease. So a primary reason for lack of enforcement against fraudulent MLM's is the lack of public outcry. Even victims suffering huge losses from MLM participation seldom file complaints with law enforcement, having been conditioned to blame themselves for their “failure.” They often avoid filing complaints because they fear consequences from or to their upline and/or downline, which are likely to be close friends or relatives. They may also fear the consequences of reporting fraud, when they themselves were at one time defrauding others, albeit unwittingly.

In fact, (with the exception of those profiting hugely at the top of their respective pyramids) those who have lost the most money are themselves most likely (out of a desire to recoup their own investment) to have defrauded others. So – as in any endless chain promotional scheme – they don't dare file a complaint against the company for fear they themselves may be prosecuted; i.e., self-incrimination.

In short, recruiting MLM's are scams ladened with deception and self-deception – and ultimately fear and denial. Rare is the person who, like the child in the "Emperor's New Clothes," shouts for all to hear, "He's stark naked!" Those of us who have had personal experience with MLM, have unmasked the deceptions, and have mustered the courage to speak out, feel like that child.

So with few if any complaints, there is little pressure for regulators to act against MLM's. And when law enforcement agencies fail to act against a fraudulent MLM company, prospects assume it must be legal. And the game goes on.

6. Law enforcement officials generally lack both the will and the resources to protect consumers by enforcing laws applying to MLM’s.

Except in rare instances, law enforcement at both federal and state levels is not likely to act on the innumerable violations of state and federal laws by MLM firms. These officials are often overwhelmed with cases, few of them as complicated as MLM. Agency officials often work long, hard hours; but they simply lack the resources to stand up to these schemes – which one important law enforcement official told me would take 20 times the resources as the typical case brought before them.

Also, few regulators understand the fraud inherent in complex MLM compensation plans that are obfuscated by their complexity. MLM companies merely put on the façade of complying with the “Amway rules,” which were initiated by the FTC to assure that some legitimate selling to non-distributors is taking place. These rules are typically ignored, since it would be impractical to enforce them. So law enforcement is not likely to act without a significant number of complaints filed by consumers – which seldom happens, especially with established MLM's.

State legislation is often weak and inconsistent over jurisdictions; since MLM’s rapidly transcend jurisdictional boundaries, they quickly become unmanageable by local authorities. And the legislatures of some states are being lobbied by the Direct Selling Association (DSA, which has become an arm of the MLM industry) to pass "improved" legislation against pyramid schemes, but that would exempt product-based pyramid schemes from prosecution. And such legislation has been accepted in several states by unwitting legislators. In these states, the most damaging pyramid schemes of all (those with the highest loss rates) are exempt from prosecution, and the least damaging carry criminal penalties. (See The NUMBERS – the Odds of Success. More on the perverse legislation promoted by the DSA can be found in #10 below and on the web site —www.pyramidschemealert.org)

Federal agencies, particularly the FTC, find other classes of consumer abuse much easier to deal with and more publicly acceptable to prosecute.

There are the occasional exceptions. A handful of MLM's (product-based pyramid schemes) have been stopped by authorities, but this is but a drop in the bucket, compared to the hundreds of MLM's which defraud new recruits every day – with new ones cropping up regularly to replace those which collapse.

Unfortunately, many of the larger MLM's are compensating for a decline in market acceptance in the U.S. by finding populations in Asia and other parts of the world who are highly vulnerable to their recruitment. In this respect, "recruiting MLM's" evolve into Ponzi schemes in order to survive and grow – recruiting in new countries or with new divisions to repay earlier investors in its "opportunity."

Officials from foreign countries are no more savvy on this issue than are U.S. officials, and in fact U.S. trade representatives have yielded to lobbying pressure from the DSA (see below) to accept MLM (in the guise of "direct selling") overseas. As a result, millions of unsuspecting victims overseas are suffering billions of dollars in losses from these US-based companies. This type of plundering of countries whose good will we have been trying to cultivate is bound to have adverse consequences to our foreign relations down the road.

7. MLM promoters are very clever at rationalizing MLM fraud, even to themselves.

I have seen MLM company officials come up with very clever rationalizations for what they do. Those with whom I have communicated have shown extreme denial of the harm done by their MLM’s. They interact primarily with those at the top of recruiting pyramids and are oblivious to the extent of the damages to those lower in the hierarchy, the vast majority of whom lose money and drop out, never to be heard from.

MLM promoters misrepresent because they MUST in order to survive and grow. Deception, including self-deception, becomes a way of life. If the truth were known about their abysmal odds of success, these programs would collapse like a house of cards. Who would join up if they knew that only one out of 1,000 participants earned a profit – after subtracting expenses, including sales helps and purchases from the company to qualify for commissions and for advancement in the scheme? In fact, the deceptions in MLM provide fodder for much humor and satire on MLM.

Informed law enforcement officials and concerned consumer activists have observed religious overtones and even cult-like behavior of the "true believers" in MLM's or product-based pyramid schemes. For example: Cult expert, founder of “Resource Center for Freedom of Mind,” counselor and author Steven Hassan looks at MLM/network marketing, such as Amway/Quixtar, as exhibiting many of the destructive traits of a cult. – http://www.freedomofmind.com/resourcecenter/groups/a/amway/index.htm.
Also, check out “Amway world wide dream builders and 'the things they will say' to profit from your dreams.” Potential Amway recruits will be inoculated against their program after reading “the things they will say.” – http://www.angelfire.com/or/amwaydreamers/index.html

I have written on the impact of MLM on members of the Church of Jesus Christ of Latter-day Saints, who seem particularly vulnerable to these schemes, due at least in part to very trusting relationships cultivated in their ranks. My book The Network Marketing Game: Gospel Perspectives in Multi-level Marketing addresses the ethics of MLM for Latter-day Saints, and in fact for all persons with a Judeo-Christian code of ethics.

8. The villain in MLM abuse is the compensation and recruitment system – or “system fraud.”

It would be difficult to point to individuals as villains. The primary cause of MLM fraud is neither the leaders nor the products they sell, but a compensation and recruitment system which rewards multi-level endless chain recruitment of “distributors” as primary customers. Thus, it could be termed “system fraud.” The primary beneficiaries are the participants at the top of their respective pyramids and their sponsoring MLM companies.

MLM is the perfect con game. Many of the very persons who are out promoting the scheme are themselves victims – eventually running out of money and dropping out. They just absorb their losses – often substantial. And since they seldom complain to authorities, the game goes on!

9. Though most are scams, MLM’s can display remarkable endurance – often expanding Ponzi-style to foreign countries to keep the chain of recruitment going.

One would think that if almost all MLM’s were merely disguised pyramid schemes or endless chain recruitment schemes, they would collapse on their own. However, recruiting MLM’s are the most durable of all types of pyramid schemes. Complex compensation plans obfuscate the fraud so that only the most sophisticated of analysts can see through the maze of deceptions, making it possible for the programs to defraud on a massive scale without being recognized or stopped by authorities. (For more on MLM durability, see the aforementioned "5 Red Flags" report.

As explained in #6 above, when recruitment in a given area dries up, top recruiters in an MLM move on to other areas. Recruits in each area are told that the real opportunity lies in ___ (the next fresh market, often a 2^nd world country). When the market world-wide peaks and begins to slide, the company opens a new product division and begins the same cycle all over again, as Amway has done with Quixtar and Nu Skin with its Big Planet and Pharmanex divisions. Thus, durable MLM”s evolve into Ponzi schemes, with earlier investors profiting from the investments of new recruits.

As endless chain recruitment schemes, powerful incentives are in place to continue MLM recruiting – even when the “opportunity” is proven unprofitable. And since so few complaints are received by enforcement agencies, this class of fraud continues virtually unchecked.

10. MLM compensation plans reward recruiting over direct selling, and are therefore not legitimate direct sales programs, as they claim to be.

The Direct Selling Association (DSA), which is now dominated by the MLM industry and therefore promotes MLM’s agenda, defines direct selling as “the sale of a consumer product or service, person-to-person, away from a fixed retail location.” On the bases of this definition, MLM’s claim to be direct sales programs. But the definition fails to specify what legitimate direct sales programs are NOT.

(1) recruit participants in an endless chain of recruiters recruiting recruiters,

(3) require or use powerful incentives for ongoing purchases in order to qualify for commissions and to advance in the scheme,

(4) pay overrides on more levels of managers than are functionally justified (most corporations have found the entire country can be covered in four levels of sales managers),

and (5) offer excessive incentive to recruit, combined with inadequate incentive to sell products to bona fide customers. In nearly all MLM’s, there are few legitimate customers outside the network of “distributors.”

As an example of how MLM's try to position themselves as direct sellers, in its published financial statement, Nu Skin now describes itself as a "global direct selling company." However, anyone who understands the above – and reads with an open mind my "REPORT OF VIOLATIONS" of the FTC's Order for Nu Skin to stop misrepresenting the earnings of its distributors – will see that Nu Skin is no more a direct selling company than a pig is a horse.

A “recruiting MLM” is a multi-level (or network) marketing system that depends upon recruitment of new distributors to replace a continuously collapsing base of new participants in a pyramid of recruits. As such, it constitutes an endless chain scheme of marketing by recruitment of distributors as primary customers. It is a pseudo-business with no significant customer base and is dependent on a large network of distributors, approximately 99% of whom lose money from investing in products and services (including “success tools”) offered by the sponsoring MLM company. The extremely high loss rate and aggregate losses make recruiting MLM’s, or product-based pyramid schemes, the worst of all types of pyramid schemes.

Thus, recruiting MLM’s are inherently flawed systems that promise ongoing residual income, but deliver very little except financial loss at the least, and loss of treasured relationships and values of honesty and integrity at the worst. They maintain themselves by continuous recruitment of new recruits, as investing participants give up or run out of funds and leave the system, seldom understanding what happened to them – even blaming themselves for their “failure.” Victims of MLM programs are seldom aware enough to file complaints with authorities, so law enforcement rarely takes action.

So – to be successful in a recruiting MLM, one must first be deceived, then maintain a high level of self-deception, and finally go about deceiving others. Some would label this "theft by deception," except that few of those doing the deceiving are aware that they are deceiving and defrauding those they are recruiting. They may even put on a display of being "successful" by buying expensive cars and homes and inviting others to be like them.

I am confident that any qualified person willing to examine the evidence with an open mind will agree with the above conclusions. For the serious researcher, reports expanding on this research are available from the author.

Ten years have gone into these reports. As a result of reading this information, you may be spared losses of hundreds or even thousands of dollars. Please show your appreciation by sharing this information with five people. Then ask each of them to share it with five more, and each of them with five more, etc. Use the "Bulletin from Someone Who Cares" and Conversatin Cards to get the word out (Actions you can take #8 and #9). You can thereby participate in an endless chain of truth-telling.

NOTE: Permission is given to copy this article if reproduced in full, including credits.

1. MLM promoters work hard to make their programs appear innocent, but most MLM’s result in loss rates exceeding 99%.

4. Properly understood, even leading MLM’s are likely to be fraudulent and technically illegal.

9. Though most are scams, MLM’s can display remarkable endurance – often expanding Ponzi-style to foreign countries to keep the chain of recruitment going.

10. MLM compensation plans reward recruiting over direct selling, and are therefore not legitimate direct sales programs, as they claim to be.