Ponzi Vs Direct Marketing: The Amway Case

Amway Boss: William Pinckney

As a high level inter-ministry group set up by the government was mulling its way through India’s legal maze to decide which kind of multi-level marketing schemes were nothing but disguised ponzi schemes and which legal, the Kerala police arrested the heads of the best-known direct selling MNC in India – Amway.
In a classic case of strange policing, Kerala’s Wayanad district police arrested William S Pinckney, managing director of Amway India and two of his Indian directors, Anshu Budhraja and Sanjay Malhotra on a complaint by three former Amway distributors who claimed they had lost some Rs 27,000 by taking up work for the US-based giant’s business in 2002.
Pinckney and his colleagues were arrested for fraud under Section 420 of the Indian penal code as well as violation of the Prize, chits, money circulation scheme (banning) act, which bans any illegal money circulation scheme of the kind which the infamous Calcutta-based Saradha group was running. Funnily, the CEO and his two directors who were released Tuesday evening on bail, had flown down to Kerala to answer police summons on another case for which they had taken anticipatory bail, when they were arrested for an older case in which the Wayanad police had seemed uninterested after initial enquiry.
A high powered committee has been holding a series of meetings to hammer out exactly what is allowed in multi-level marketing schemes and what is not ever since the Speak Asia scam broke last year. Its meetings ended last month and its report as well as a report prepared by Dr Bibek Debroy for Ficci on direct selling which calls for defining direct selling properly to allow firms like Amway to function while tackling frauds, are currently being mulled over by another committee within the department of financial services in the ministry of finance.
Amway says it runs a direct selling business through a chain of distributors. Amway appoints a distributor who sells its products directly to those who want to buy it. The distributor in turn can appoint other distributors with permission and training from Amway who could also sell Amway goods. Any commissions the first distributor makes is his. Out of commissions the next level of distributors make, they have to pass on a small amount to the man who roped them in. Commissions vary according to what is sold and in what quantities but range from 6-21 per cent.
“What the Wayanad  police are contending is that this is a disguised money circulation scheme … which it is not. It’s direct selling through a chain of distributors. Something which is perfectly legal in India as in the rest of the world,” pointed out Sudip Sengupta, spokesperson for Amway India. Ironically, the Indian Direct Selling Association, of which Amway, Avon, Oriflame and Tuuperware along with Hindustan Lever, Max Life Insurance and Modicare are members have been warning that their members may be harassed with such punitive arrests arising from mis-reading of the law, ever since a rash of ponzi schemes were reported by the media.  
The PCMC (banning) act was promulgated to stop firms from running illegal money circulation schemes including `disguised money circulation schemes’ which mis-use marketing of products to run illegal fund flows. The test of whether a pyramid marketing scheme is legal or not, say legal experts are two basic premises – that the scheme should not “rob Paul to pay Peter” and it should not allure people with promises of abnormally high returns. “These principals were established by the Supreme Court  in the Kuriachan Chacko vs State of Kerala case in 2008, and implies to be legal a scheme should not depend on recruiting new members to pay older members but on actual selling of products and that this should not involve promising abnormally high returns which are unsustainable,” said Parijat Sinha, Senior Supreme Court advocate.

Ponzi Wizards !
 

Saradha and Speak Asia failed on both count – they depended solely on earnings paid by new members to pay older members and they promised extraordinarily high returns of upto 500 per cent. They were in essence scams designed to be scams.
Amway, Tuperware, Avon etc., have for some time been contending that they are not in the same league as Speak Asia or Saradha and demanding that the law differentiate between frauds and real marketers. The IDSA has been particularly anxious that this be done through a proper legislation and by the police cracking down on fraudulent schemes.
Said Chavi Hemanth, Secretary General of the IDSA  “There is a crying need for a proper regulatory framework to facilitate direct selling which will also prevent unscrupulous elements operating under the garb of direct selling business … this would protect public at large.”