MLMs undeterred by stricter laws

MLM systems are growing even as regulations are becoming more stringent

Recently, the dossier of the Lien Ket Viet Company case, a multi-level company masquerading as a firm under the Ministry of Defence, has been sent to the People’s Supreme Court.

This company was pretending to be a corporation managed by the Ministry of Defence to do business and conducted illegal activities, such as collecting a fee worth VND8.6 million ($374) from each person who wants to join its system, as well as holding conferences and presentations to disseminate false information.

According to local media, Lien Ket Viet leaders always wore military outfits and boasted of relations with military generals, as well as forged documents and governmental merits. Accordingly, the company lured in over 66,000 members and collected VND2 trillion ($87 million).

Numerous heads of offices and multi-level agencies will be subject to legal proceedings, with seven defendants being prosecuted and 34 heads investigated to clarify their responsibilities.

A multi-level marketing (MLM) business, in fact, has many advantages for its members. Their work can be flexible, which is good for those who want to earn some extra money on the side of their nine-to-five job. They can start small, while their potential earnings are a function of their efforts and effectiveness and are thus unlimited.

However, many of MLM companies engage in fraudulent activities to further their business. The most popular model of fraud is a pyramid scheme. Notably, such schemes generate no real product sales, and participants depend solely on recruitment to make money from new members, while the distributors of a MLM company will earn money from the direct sales of the company’s products, plus commissions from sales from their downline (distributors recruited by them).

However, their performance shows that different MLM companies in Vietnam show different levels of disregard to honest business practices.

Lax compliance

Oriflame (specialising in cosmetic products), and Greenlife have found themselves on the receiving end of hefty fines, while Amway (specialising in home appliances, cosmetics and functional products) has been warned, for several counts of mismanagement and a lack of co-operation with local authorities, according to the Vietnam Competition Authority (VCA). They are all major MLM companies in Vietnam.

The VCA said on its website the companies have failed to amend their licences to conduct multi-level sales activities, as well as to issue and revoke membership cards to their sales agents. Additionally, all three companies have been reported to fail in training their agents to proper standards.

For example, the VCA said, “The company [Amway] has conducted online training courses to provide basic knowledge for its distributors, but it has yet to have solutions to ensure the distributors have had a good command of all the content of the courses.”

Greenlife Corporation previously became infamous after its members had led students to take up usury loans to become distributors. As a result of the scandal and its various counts of mismanagement, the VCA decided to revoke Greenlife Corporation’s business registration certificate, in addition to a hefty VND510 million ($22,200) fine, while Stella Ivy Cosmetic Co., Ltd. (Oriflame) was fined to VND170 million ($7,400).

Unethical money-makers

Some of the more dishonest MLMs include International Trading, Technology Development and Investment JSC (IDT), and Thien Ngoc Minh Uy that has been violating business ethics far more flamboyantly.

Most recently, Thien Ngoc Minh Uy was ordered to halt operations after swindling around 26,700 people. However, only 8,723 victims have liquidated their contracts with the firm. Moreover, several agents of this company continue multi-level marketing activities under various forms.

In May 2018, IDT was found to cheat people via organising enrichment training programmes to acquire illegal profit. Accordingly, instead of imparting skills to trainees, IDT introduced real estate projects and mahogany plantations to call for investment, promising interest rates of 30-60 per cent.

According to Lai Ngoc Thanh, lawyer of Banking-Securities-Investment Law Co., Ltd. (Basico), this activity does not violate regulations if it only constitutes of marketing activity to sell and introduce the product. However, it will become a breach of law as soon as sales agents begin to act like trained health professionals, because medical examination and prescription are the domain of individuals and organisations who possess medical and pharmaceutical practice certificates.

“If they intentionally commit violations, they need to be penalised in line with the law,” Thanh said.

Tightened policies

The Ministry of Industry and Trade reported that, as of March 2018, the number of operating MLM companies was 33. Meanwhile, according to statistics from the VCA, by late 2017, there were 707,330 people involved in MLM networks, up 69,693 people or 11 per cent compared to the end of 2016. Of whom, 371,547 are part of the network of Oriflame, making up 52.53 per cent, while Amway accounts for 11.18 per cent, and Herbalife Vietnam for 6.21 per cent.

According to Thanh from Basico, the law managing MLM activities is quite strict and consistent, with stipulations in all areas from the management of licensing conditions to dealing with violations. However, modified MLM companies still have leeway to manoeuvre because their tricks are subtle and target human greed by promising huge commissions.

“Furthermore, the lack of management staff and the lax oversight by certain local authorities also allow MLMs to flourish,” Thanh added.

According to Trinh Anh Tuan, deputy director general of the VCA, after Decree No.40/2018/ND-CP came into effect in May 2018, MLM activities have been tightened even further. If MLM companies cannot submit dossiers fulfilling the new conditions introduced by the decree to the VCA before January 2019, they will have to halt operations.

Accordingly, MLM companies have to deposit VND10 billion ($434,800) at a bank instead of the previous VND5 billion ($217,400), as well as develop a website providing information about the business, its goods, as well as corporate news.

“In order to manage MLM companies, all transactions have to be paid via bank transfer instead of cash,” emphasised Tuan.

Moreover, local authorities are now more capable of punishing violators. “Local authorities now have the right to revoke the business registration if a corporation violates MLM regulations,” confirmed Tuan.

The increasing number of people in MLM networks will make it difficult for local authorities to control the operation of these companies as well as distinguish true ones from illegal money-making schemes, while even those MLM companies which are considered true ones still show signs of violations.

According to lawyer Thanh, clarifying the quality of products is one way to determinate whether an MLM company is a true business or not. If an MLM company acquires profit from distributing high-quality products, it is a true MLM company. In case a company distributes low-quality products (or no products at all), while simultaneously enticing people to pay to join the network to acquire massive profits, they may be illegal.