Multi-Level Marketing Scams

by

Bryan Burton, Michell Consulter

• LAST REVIEWED: 25 August 2021
• LAST MODIFIED: 25 August 2021
• DOI: 10.1093/obo/9780195396607-0308

Introduction

Multi-level marketing (MLM) scams encompass various criminal behaviors. MLM companies regularly pay commissions to individuals for directly selling services or products to customers. Individuals are also regularly paid commissions to recruit others to sell MLM companies’ products and services. Such a business structure provides the opportunity for fraudulent behaviors and activities to take place. These fraudulent activities often include misleading claims regarding expected financial compensation, false health claims of products or services, and purchase incentivization beyond what any one customer could reasonably consume, among others. MLM companies, specifically top management, routinely engage in white-collar offenses. Edwin Sutherland, a preeminent sociologist, first defined white-collar offenses in 1939 as crimes committed by individuals with high social status and prestige during the course of their occupations. These crimes are commonly difficult to recognize due to their hidden nature. MLM scams, similar to other white-collar crimes, have three general costs: financial, physical, and social. For example, one MLM scheme case involved a company’s nutrition-club system that recruited people to buy and then try and sell its flavored nutritional shakes. This company was accused of targeting poor, often uneducated individuals, and undocumented immigrants. Financially, more than half of the individuals recruited lost or made no money from their investments. A lawsuit against this MLM company forced them to restructure their business model and focus on selling products instead of recruiting more distributors (participants). MLM scams also have a physical cost associated with them. Such crimes can be violent, since people are maimed and killed by unsafe products and services. There have been some unfortunate instances where individuals facing financial ruin from such scams attempt or commit suicide. While the social cost of MLM frauds cannot be directly measured, social exclusion from family and friends is a common byproduct of MLM due to the high-pressure nature of selling products and services and recruiting more individuals to buy and sell them. Personal relationships regularly suffer, and victims of these scams are often left feeling lonely, depressed, and isolated. Family members may trust the victim for involving them in the scam. It also creates a loss of trust in all MLM, because fraudulent practices undermine the legitimacy of this business model. With growing economic inequality in the United States and around the world, many individuals may turn to MLM in need of a viable form of income. The financial, physical, and social costs of MLM scams are likely substantial in all advanced industrialized nations.

General Overviews

Published overviews of multi-level marketing (MLM) scams in the United States and other countries are online and accessible to the general public. Olson and Olson 2018 provides a straightforward online video on the five biggest financial scams, including Ponzi schemes, pyramid schemes, MLM scams, pump and dump scams, and phishing. This PBS Digital Studios video points out the differences and similarities between these different scams. MLM scams, for example, require distributors (also known as participants) to sell products and services, unlike pyramid schemes, which depend on finding new financial investors. This is a perfect resource for anyone new to financial frauds. Oliver 2016 provides an excellent overview of the dangers of MLM scams and how they relate to pyramid schemes. This investigative video highlights how participants are misled by MLM companies and their promises of financial success. It also showcases how scammers target and victimize low-income minority communities. FitzPatrick 2005 outlines how MLM companies recruit distributors by concealing the rate of financial failure. That is, some fraudulent MLM companies manipulate and inflate their financial compensation data by omitting the information of individuals who quit the company. Taylor 2011 provides a detailed analysis of MLM scams. The author discusses the emergence of MLM in the marketplace, the viability of the business model, fraudulent schemes, case precedents, and regulatory actions needed to protect the public. Peterson and Wotruba 1996 offers a definition of direct selling, a method of sales utilized by MLM businesses. The article provides a complete overview of the direct selling method, including different strategies and tactics used by participants. There is a thorough discussion of the appeal of the business model, characteristics of this structure, and what attracts customers to direct selling. This resource provides a greater understanding of the attraction and allure MLM offers. Bhattacharya and Mehta 2000 brings forth an advanced analysis on how some MLM companies manipulate individuals through employing cult-like techniques. Such techniques enforce close-knit circles of like-minded individuals (and business meetings resembling more of a cheering pep rally) to retain distributors, despite them making negligible amounts of money. These scholars attempt to find economic reasoning for the abundance of MLM through various calculations. This article is generally for more advanced researchers. Groß and Vriens 2019 (cited under Regulatory Enforcement Issues) investigates the differences between MLM and traditional business structures. The researchers highlight the legal and ethical issues of MLM, and how these scams continue to persist despite implemented countermeasures around the world.

• Bhattacharya, P., and K. Mehta. 2000. Socialization in network marketing organizations: Is it cult behavior? Journal of Socio-Economics 29.4: 361–374.

  DOI: 10.1016/S1053-5357(00)00079-2

  This study investigates how average distributors make little money but devote a disproportionate amount of time working for the MLM company. It utilizes economic models to calculate the economic reasoning for joining the business model. Likely suitable for more advanced researchers.

• FitzPatrick, R. 2005. The myth of “income opportunity” in multilevel marketing. Charlotte, NC: Pyramid Scheme Alert.

  This thorough report offers an in-depth overview of how the myth of viable income is maintained in MLM through confusing consumers, manipulating data, and victim blaming. A great resource to better comprehend the falsehoods of income opportunities put forth by direct selling business models.

• Oliver, J. 2016. Multilevel Marketing. Last Week Tonight with John Oliver. HBO.

  This video discusses the similarities and differences between MLM and pyramid schemes. It breaks down some of the common myths regarding MLM, including the endless amount of opportunity and return on investment fallacies. Emphasizes how these companies target low-income Latino families. John Oliver has received numerous Emmys for his investigative television program.

• Olson, J., and P. Olson. 2018. 5 Biggest Financial Scams (and How to Avoid Them). PBS Digital Studios.

  This easily accessible video concisely describes how one can avoid prominent financial scams. A useful resource for beginners to understand the key differences between legal and illegal business models. Provides a simplistic distinction between MLM and pyramid schemes. Available on YouTube.

• Peterson, R., and T. Wotruba. 1996. What is direct selling? Definitions, perspectives, and research agenda. Journal of Personal Selling and Sales Management 16.4: 1–16.

  This article offers a definition and discussion of direct selling. It investigates the direct selling business model as well as common knowledge around the topic. Outlines what types of items are sold and what types of customers are attracted to the business model. Also highlights the characteristics of the typical participant selling products in MLM. Useful for a comprehensive rundown of direct selling, its history, and pervasiveness.

• Taylor, J. 2011. The case (for and) against multi-level marketing. Bountiful, UT: Consumer Awareness Institute.

  This essential source provides a detailed analysis of MLM scams. It covers the harm, offenders, crime, and victims of MLM businesses. It is an excellent article for anyone who would like to better understand the implications of MLM scams.