I am a corporate lawyer in Mumbai, I mostly work in private equity, venture capital and M&A deals right now. However, my passion is education and making business law more accessible. I believe that a lot to be done in the law biz since it is a vertical which is yet to be touched by the internet and software revolution and is practiced and accessed as if we are still living in the 1950s. I plan to change this through education, blogging and software. Here’s my first write up for the rodinhoods.
The MLM Bug
What is MLM? According to wikipedia, Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. Other terms for MLM include pyramid selling, network marketing,and referral marketing.
You probably would have heard about companies like amway, oriflame and speakasia which engaged in network marketing. In this line of business, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing.
I once read an article by a rodinhood who described how his startup failed because it partnered with a MLM company – which is when the seed of writing this article germinated in my head. About one year back, I did some work on the legal side of the MLM business, and figured out the laws that apply to this business. I met people who run networking businesses. I spoke to RBI officials. I read up hundreds of RBI circulars and browsed through MLM networking forums. I tracked judgments in cases like Amway and some others that have been rendered by some High Courts.
Are all MLM businesses illegal?
I concluded that while almost all MLM businesses in India are illegal, being quick money making and money circulation rackets prohibited by statutes. I also concluded that there is a way to run a legal MLM business in India, which does not attract any prohibitions. Noticeably, while the legal position is not crystallized in India due to lack of court rulings on specific issues, in USA where courts have dealt with almost all aspects of MLM business, this is the established position. If the money is not being made from admission fee but from an underlying goods or services which is being sold through the network (the only utility of network marketing being incentivizing existing users to help such product or service to spread virally), and there is no misleading promise of quick money making, especially by causing other people to join the network, a business model is likely to withstand legal scrutiny. To sum up, in a legal MLM business the value is generated by selling goods and services using the network, not by admitting people and charging them money for joining the network.
However, we have seen that almost all network marketers claim to be making money from selling goods and services, whereas in reality things can be very different (think of the most infamous network pyramid that snowballed last year: Speakasia – they claimed to be selling precision surveys to MNC companies).
You have got mail
Since I started blogging about MLM laws over here: www.madlaw.in, I started getting a lot of emails from people. There were promoters of MLM companies who wanted to find out how to run a MLM company without falling fown with the law. Others wanted to figure out legal loopholes. Finally, recently I got an email from someone who was approached by a company called QNet, suspected that she is being sold an illegal ponzy scheme. So she did some online research, came across me and emailed me asking how these companies can be stopped. I told her what I knew. Despite being very lazy, I therefore had written down some useful information.
Existential tears of a corporate lawyer
As corporate lawyers we find out legally efficient structures all the time – which is a nice and acceptable way of saying that we help corporate do what law makers doesn’t want them to do. When we are on the side of a lawmaker and we are drafting a statute, we figure out ways to make it bulletproof. The point is, human ingenuity is boundless – and people, especially good lawyers will always find ways to hack the system, to subvert the intention behind a statute.
It is profitable to subvert the system in favour of corporates, and money-making individuals – but it’s a different kind of a thrill for a lawyer to do something to protect the victim, to make the system work for those suffering with the help of law. At some level, almost all of us went to the law school to pursue that dream – that we shall get justice for people.
How can MLM companies exist if everyone knows they are fraudsters?
Fraudster MLM companies have been the scourge of the business world. I believe that if not misused network marketing has a lot of potential – no, everyone in the network can not get rich – but maybe they can earn a few extra bucks through referral selling. It’s viral marketing at its best – consumers who understand the product markets it to the potential customers, who they understand well (their family / friend / acquaintance). However, in India, MLM companies have been all about get rich quick schemes. They ruined the whole industry, cheated thousands of people of their hard earned money, sometimes even borrowed money. It appears that like the creativity of fraudsters, stupidity of people can also be boundless.
People more or less know it now – that MLM companies are fraud. Still, when a network enters your friend circle, or your neighborhood – what do you do? If you are not happy with just steering clear, if you want to take action, I am going to tell you how to do it. I know I am accessing a very influential group of people here – and if you know what exactly can be done to stop a MLM company, and if there’s some monitoring by citizens, things could be quite different.
What legal steps can you take – power to the rodinhoods
The networking biz in India is a booming money making racket – and its success depends on finding fresh victims so far unaware of problems of network marketing. It is difficult to counter at the company level – if you take action against one company, the promoters will just abandon it and start another. That hardly helps!
The best thing to do is to find out who are the directors of the company, and top management (may not be easy to find). Even if you can get the name of the private limited company in whose name the network is receiving payment (i.e. running bank accounts), that will be enough. Details of directors of a public company can be found on public records just as long as you know the name of the company – check MCA 21 website (it will cost you Rs. 50 to do that search – and remember to use Internet Explorer – the government site is not compatible with other browsers). Thereafter, you can file criminal complaints for money circulation and fraud against the directors. You do not need to be a victim to be able to file an FIR. If police refuses to register an FIR, just send it through registered post (with acknowledgment) to the SP of your district. You can always look his address up on internet.
Apart from lodging a complaint with police, you can also write to the economic offences wing, and shoot off letters to top IPS officers in the state. You can also write to registrar of companies complaining that the purpose of registering the company was illegal and it should be cancelled. However, it is likely that the promoters will find out that you have been making their life miserable – so be careful.
Another way to go is to find out which bank account they use (just find out how they pay the people in the network – cheques of which bank) and then write a letter to the bank manager saying they should not allow an defrauding MLM company to operate – send copy of the letter/ email to RBI also. An MLM company can not operate without a bank account and the bank is unlikely to divulge any details about whistle blowers as they will be under substantial pressure themselves for failing in they KYC duties. Check out this link for contact address of various RBI departments: https://www.rbi.org.in/content/helpdesk.aspx
You can write to: email@example.com and firstname.lastname@example.org. You can even consider these executives mentioned here in this link: https://www.rbi.org.in/commonman/English/scripts/departments.aspx
If you want to maintain anonymity, you can do all of these through a lawyer.
I know despite the promise of my title, all the steps can not be taken without leaving the computer – sorry about that. Maybe you guys can figure out how to do that too…I just thought that if you think it would be difficult to kill MLM companies you would not read the post!