Under Republic Act 7394 a.k.a. Consumer Act of the
Philippines, pyramiding schemes or chain distribution plans are defined as “sales
devices whereby a person upon condition that he makes an investment, is granted by the company or its representative a right to recruit for profit one or more additional persons
who will also be granted such right to recruit upon condition of making similar investments,
provided that the profits of the person employing such plan are derived primarily from the recruitment of other persons
into the plan rather than from the sale of consumer products, services and
credits…”
A consumer is made to believe that he is joining a networking company so that he could avail of the opportunity to
buy consumer goods and earn income by recruiting other consumers who buy the same consumer products. For example, Amy joins Company A by investing, say, P 500.00, and she is given a soap or detergent
along with a sales kit in exchange for her investment. The soap or detergent
actually costs P 50.00 in the market, but the company explains the “joining fee” as payment for the kit
(brochures and literature), processing fee,
computer access fee, membership card,
etc. The business presentation instructs Amy to recruit, at least, five other people to join the system so that she
could recover her investment and earn income right away. The Compensation Plan
presented to Amy is a 5x5 network marketing system wherein she could earn from her 5 recruits who will also recruit 5 recruits
each and so on, down to the 5th level.
In this case, when Amy’s 5 recruits invest P 500.00 each, Amy earns P 200.00 from each for a total of P 1,000.00. These 5 recruits are Amy’s 1st level downlines.
When these 5 downlines recruit 5 other persons each, Amy has twenty-five
2nd level downlines from whom she earns P 100.00 each, totaling
an earning of P 2,500.00. The presentation goes on to explain that Amy
earns P 25.00 from each of her 3rd level downlines for a total earning of P 3,125.00; P 25.00
from each of her 4th level downlines for a total earning of P 15,625.00;
and P 10.00 from each of her 5th level downlines for a total earning of P 31,250.00. Then she could start all over again from a new set of 1st level to 5th
level downlines.
Nowhere in the presentation is the word pyramiding ever mentioned. The
company masquerades as a Network Marketing company that offers income opportunities to housewives. Hence, the use of household consumer items like soap, which housewives buy anyway whether they join the company or not.
Other pyramiding companies use more sophisticated methods, becoming more
difficult to detect or pin down. They offer other products such as gold coins, jewelries and house and lots. Internet-based
pyramiding scams offer domains as the main product or service which participants are encouraged to buy, as advertised in websites, webmalls or e-business centers. Whatever form it may take, a pyramid
scam is a get-rich quick scheme that offers no legal business transaction.
How do you detect a pyramid scam?
An accurate analysis of any pyramid system would show that:
a.)
The participants’ main income is derived
from the money invested by their
recruits. There may be other incomes derived from the sale of products, but
these are insignificant additional incomes that cannot hide the illegal operation.
b.)
There is no real value-for-value exchange. The money invested does not
produce the corresponding
value of consumer products or services being
offered for sale. Consumers pay more than the real cost of goods they buy.
c.)
Majority of participants (80%) do not earn. They end up losers when this
scam is uncovered
and stopped. Even if not stopped legally,
it will have to
stop by itself when the system becomes
saturated. The tail-enders of the operation,
which compose 80% of participants (90% in other scams), end up being swindled. These are consumers who were deceived into buying grossly overpriced consumer products, believing in the opportunity to earn easy money.
Sadly, it never works out that way.
THE PYRAMID PRINCIPLE — LEGAL OR ILLEGAL?
A pyramid is a structure with a broad foundation, making the structure
stable even at great height or depth. Organizations that form their membership
into pyramids are among the most successful in the world. Governments, churches, schools and most corporations are pyramids in terms
of organizational set-up. Network Marketing companies are similarly structured. By law, all these entities are legal
pyramids.
When is a pyramid entity considered illegal? Let’s take the case
of Government, Inc. as an example. The Head of State (President) is on top of
the pyramid. The 1st level downlines are the members of the Cabinet, the justices, senators, commissioners, and national officials. The 2nd level downlines are the directors, administrators, and regional officials. So on down to
the levels of mayors, councilors, barangay
officials, and finally the citizens in general.
The pyramiding operation of the government goes this way: citizens who
are at the lower levels of the pyramid pay their taxes and vote for the people who will compose the government. These taxes and votes are the values that serve as investments of the citizens. What do the citizens get in exchange for their taxes and votes? The
expected returns for their “investments” are government services in terms of economic programs, security, infrastructure,
education, and the like. When
these services do not reach the citizens at lowest level of the pyramid, then
there is no value-for-value exchange. The citizens are then cheated of the services
they should be entitled to. This government,
therefore, is an illegal pyramid which deserves to be toppled by People
Power.
What happens when a foreign-based company runs an illegal pyramid operation?
Let’s assume the company Amy joined in the previous example is a foreign-based company. In that example, the company gets 1.8 dollar (P 90.00)
from every participant who invests P 500.00 or ten dollars. If allowed
to operate for twelve months, this company could siphon off $439.5 million from
the Philippine economy. If there were ten such foreign companies operating in
the same fashion, then we could assume a staggering $4.39 billion in a
year.
Albania, a very poor country in Europe, suffered this misfortune in the early ‘90s, which devastated their economy and triggered a revolt that toppled the ruling Communist regime. Pyramid scams are now becoming more rampant in Third World countries, as operators have improved their schemes using the Internet. It
is becoming increasingly difficult to stop them.
Pyramiding, per se, is not
illegal. In fact, this is the most
rapid way of expanding membership in any organization. It is the failure in the
reciprocal exchange of value-for-value that makes it illegal and immoral. One
basic feature of illegal pyramiding or a pyramid scam is deception. The pyramiding
company disguises its operation through legal maneuvers, sometimes with government
consent.
One business operation hiding behind legal maneuvers such as make-believe regulatory laws and contracts approved by
the government is Meralco, which, in
effect, monopolizes the distribution of electricity. Consumers regularly pay
for their acutal consumption, which is currently pegged at P 2.8845 per
kilowatt-hours (kWh) used. However, they
are also made to pay for currency adjustment, which varies from month to month, depending on the total amount of electricity lost to “electrical thieves.” Worse, consumers now have to shoulder
the Power Purchase Adjustment (PPA), which is an additional P 2.3330 per
kWh consumed. The PPA represents the electricity purchased by Meralco from its
supplier, NAPOCOR.
The net effect is obvious: consumers pay almost double the amount of
electricity that they actually consume. This is a clear case of deception
which is protected and actually legalized by regulatory laws and contracts approved by the government.
Pyramid scams and similar deceptive business operations continue to victimize Filipino consumers. The government watchdogs are either sleeping on their jobs or they are tolerating such practices for their
own vested interests. Republic Act 7394,
a law that is supposed to protect the consumers, remains impotent. Its penalty provisions are ridiculously ineffective in the deterrance and punishment
of violators. Pyramid operators need only plead guilty, pay a fine of P 500.00, and jump to the next scam operation
under a different name.
The
only solution lies in the hands of the consumers themselves. Consumers need to
come together into a unified, mass-involving,
nationwide vigilant organization to protect themselves from pyramid scams and other anti-consumer activities. In the strength of numbers, the consumer
empowers himself to pursue the road of consumer advocacy and activism.
