Marketing Fraud


On the false profits blog an article was published by Robert Fitzpatrick, founder of Pyramid Scheme Alert and co-author of the book False Profits. The main theme of the article is on why people fall for pyramid and Ponzi schemes.

The Evolution of Fraud

01/17/2010 07:21 PM

As business has grown more complex, fraud has evolved and adapted accordingly. Multi-level marketing (MLM), the most common form of pyramid/ponzi fraud, is the product of years of evolutionary adaptation in the scam and swindle field, matching the adaptation of the legitimate marketplace. Public awareness and law enforcement always lag behind new forms of fraud. The success of MLM’s and other financial Ponzi’s at duping millions of people, rich and poor, educated as well as illiterate, shows that public understanding has not caught up to this new mutation.

A study of consumer fraud’s evolution shows three stages that parallel the three levels of development in American business. America evolved from leading the world in manufacturing (now China) to becoming the financial capital of the world (now moving to Asia/Europe/Middle East), to our present status as the world leader of consumer-purchases driven by marketing.

The Three Stages of Consumer Fraud:

(1) Product-based fraud in which consumers are tricked into buying defective or even non-existent products or to pay far more for a product than is worth

(2) Financial fraud in credit, banking, insurance, mortgages, stocks and bonds.

(3) Marketing fraud, in which consumers are induced to personally identify with the fraudulent company and to help it defraud others by becoming part of the marketing program themselves with their own purchases and personal promotions.

All three are in operation today but public awareness is now quite strong in the first stage — product frauds. Regulation is also well established. “Lemon” laws, return policies, product safety rules, and trusted consumer alert publications are available now that help to protect people from the old plague of bad products and price gouging.

The second stage — financial fraud — is still rampant, but public awareness is growing. We now know about crushing credit card terms, unjust banking fees, predatory pay-day loans, and the disaster caused by “sub-prime” mortgages. In 2010, America may even get its first consumer protection law aimed at “financial” products. The new law and the growing anger at predatory lending and banking practices show that public awareness and consumer protection are starting to catch up in this area.

The third stage — marketing fraud — is the highest and newest state of fraud, the one which the public is most vulnerable to, has least awareness of, and has the least legal or governmental protection from. This is area in which Ponzis and Pyramids and multi-level marketing operate. There is not even a dedicated law against pyramid schemes in America. Many other countries also do not have anti-pyramid laws. Canada, for example, has some regulations on multi-level marketing (MLM), and it has anti-fraud laws, but it appears helpless to make the connection between the two. So “endless chain” buy/sell scams that wipe out the savings of 90-99% of participants are safe to plunder Canadians and Americans and are spreading worldwide as “free enterprise.”

Read the rest of the article here >>>

As requested by Robert here some further elaborations.

Marketing Fraud

Marketing fraud as it appears to transpire from the article is an extreme version of what we know as false advertising, whereby claims are made about a product, service or business opportunity that are actually know to be invalid, false and deceptive. In that sense the “marketing fraud” is a species of false advertisement be it a more insidious one.

The modus operandi that transpires from the article is most certainly one that is recognizable. At the same time however it seems to me that the methods used for what is classified as marketing fraud are just what marketing nowadays is all about.

Read the rest of the post at Dierckx & Associates >>>

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Multilevel Marketing (MLM), Network Marketing, Pyramid Scheme


Time and time again I see those articles about whether or not multi-level marketing or as sometimes referred to network marketing (MLM) is a pyramid scheme. We all have heard the stories about those companies that offer you a “business opportunity.” In straight terms, these companies usually offer you an opportunity to be self employed whilst building a business is all about recruiting other into doing the same.

In these hard economic times more and more of these schemes are offered in all kinds of shapes and forms to those gullible under financial pressure or in search of “freedom.”

Apparently there are some MLM’s out there that actually are legitimate, yet I have to see the first that is actually offering a real opportunity. Most of the MLM’s out there end up being a money maker for a lucky few at the top of the pyramid and at the bottom there are thousands of “independent business owners,” independent distributors making the money for the lucky few at the top with these “proven systems.”  Across the board 90-99% of the people involved in these “businesses” end up making nothing or even lose money. So, you might as well keep working for a boss or keep looking around for something that offers real potential.

PROSUMERISM & TRIPLE R
The trick in all this MLM business: as well as making money on the sales you make personally, you make money on the sales of other people that have been introduced to this business either by yourself or by someone else in your so called “downline.”

More than once I get questions in my mailbox about yet another business opportunity with the question of whether or not this is a legitimate MLM or a scam or pyramid scheme. Admittedly the difference between a legitimate MLM (if any) and an illegal pyramid is not always easy to make. Personally: I have a hard time calling anything to do with MLM a business opportunity on mathematical grounds alone. The identified loss rates therefore have nothing to do with your ability as a business person or sales person and everything with the scheme’s design and operation.

Most of the schemes end up being the same and are formed along the lines of ex-Amway giant Dexter Yager through whom I was introduced to the term “prosuming”.

What it comes down to is a Triple R system (and for those of you that have followed me over the years, I am not referring to the Recruitment Risk Reduction approach for businesses and recruiters I developed). The triple R stands for REGISTER (as a distributor), REDIRECT (your shopping), RECRUIT (teach others to do the same). And eh … oh yeah, you could of course consider actually selling the product(s) to others.

So here you are a “business owner” and you end up spending lots of dollars buying product from your own store (prosuming) often at highly inflated prices regardless of distributor discounts. Many of the MLM schemes end up making considerable bucks for the producer of the goods because the distributors are also the buyer themselves. Goods are often overpriced and in some instances one could speak of a product scam: and yes one of the product scams I am referring to is MonaVie.  MonaVie is presented, at least by its distributors,  as some sort of super juice that could cure well basically anything. However, in December 2008 Consumer Magazine reported after testing that:

  • these super juices are highly overpriced and at their recommended doses deliver no more of an antioxidant boost than a glass of ordinary fruit juice;
  • one should check the level of sales required to make a decent living before signing up to a MLM to sell these super juices.

And this is just one example.

JAMMING AND BLASTING
Finding information that could highlight the pitfalls of these schemes is a challenge in itself as these companies or others on behalf of them are using the tactic of blasting or jamming the internet with false negative reports. Typically you will find titles like “Is, … Monavie, USANA, Amway, Quixtar, A2K, Herbalife, ACN, etc… a scam?”, only to find that these articles are nothing else than promotional material for the MLM in question.

Well, keep in mind that many distributors never end up making any sales except for to themselves and that recruitment is at the center of attention most of the times. I remember well a recruitment meeting for A2K (Amway in New Zealand) where the presentation of more than one and a half hour only once mentioned the word selling/sale. It was all about building a downline and recruiting. In fact the idea of actually selling Amway products was something that cam as an “oh yes before I forget, you could of course make some money by selling the products to others with a mark up.” A mark up on an already overpriced product, that does not make too much sense does it? At least not as a business opportunity. So in most cases you end up “direct selling” to yourself as the others do in the pyramid below you (or so you wish your “sales organization”).

MLM OR PYRAMID SCHEME
I like to keep things simple and usually refer to section 24 of the Fair Trading Act here in New Zealand:

  1. No person shall promote or operate a pyramid selling scheme
  2. For the purposes of this section, the term “pyramid selling scheme” means –
    a) A scheme –
    i) that provides for the supply of goods and services or both for reward; and
    ii) that to many participants in the scheme, constitutes primarily an opportunity to buy or sell an investment opportunity, than an opportunity to buy or supply goods or services; and
    iii) that is likely to be unfair to many participants in the scheme in that –
    A) The financial rewards of many of those participants are dependent on the recruitment of additional participants
    (whether or not successively lower levels); and
    B) The number of additional participants in the scheme must be recruited to produce reasonable financial rewards to
    participants in the scheme is not attainable by many of the participants in the scheme.

As said I like to keep things simple, so for me I use the test: does this scheme have its emphasis on recruitment (pyramid scheme) or on actually selling products outside the organization to real retail clients (legitimate MLM). I guess the law and your own common sense should be enough to test the waters should one of these fantastic opportunities be offered to you.

CHECKLIST
Should you be wondering, perhaps try too answer the following questions:

  • Joining Fee? Or obligatory purchase of a substantial amount of products?
  • Promises of spectacular earnings? How are these earning presented: remember that sales revenues is not the same as profits!
    By the way taking into consideration the dubious validity of these promises, passing them on to others could mean you’d be breaking the law.
  • Where do these spectacular earning come from; Sales or recruitment?
  • What products or services are to be sold at what price levels?
  • What is your actual market; prosuming v retail sales?
  • How much inventory do I need to purchase upfront? Can I actually sell that?
  • No sales experience required.

Some other warning signs are:

  • Anonymous or untraceable references/testimonials;
  • The organization involved does not have a physical address;
  • The use  of free email addresses such as @hotmail.com, @yahoo.com, @gmail.com instead of business domains;
  • No additional training required or training is obtained from your upline against a fee (the second “tools” pyramid of for instance the Amway business). Legitimate businesses will generally have a vested interest in having you succeed and will offer training and seminars against a zero to minimal cost since it is their gain;
  • Endorsement or approval from some sort of government agency, which they will never give out.

Remember that if it sounds too good to be true it usually is. If in doubt, perhaps run the offer past your financial adviser or an organization like the Commerce Commission here in New Zealand.

REFERENCE MATERIAL/SOURCES TO HELP YOU MAKE INFORMED CHOICES

Some of the sites I recommend reading are:

Or perhaps just ring the Commerce Commission. Contact details can be found here >>>