CNA Explains: What are pyramid schemes and are they legal in Singapore?

After 52 Singaporeans were arrested in China over pyramid scheme suspicions, CNA spoke to lawyers to find out more about such schemes.

A woman using a calculator. (File photo: iStock)

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SINGAPORE: Fifty-two Singaporeans have been arrested and detained in Guangxi, China, over their suspected involvement in a pyramid scheme, Singapore authorities said on Friday (Sep 4).

CNA spoke to lawyers to break down what pyramid schemes are and their legality in Singapore.

What are pyramid schemes and how do they work?

Fraudulent pyramid schemes can be distinguished from legitimate multi-level marketing (MLM) sales structures.

In an MLM, independent, non-salaried distributors earn revenue through direct sales and recruitment, said lawyer Tania Chin, partner at Lighthouse Law.

They also earn a commission from sales made by new representatives they recruit into the business.

“Individuals pay an entry fee or purchase a starter pack of goods. They are then incentivised to build a ‘downline’ by persuading friends, family and others to sign up under them,” she said.

“When the new recruits buy or sell inventory, the original distributor receives a percentage of the profit.

“This structure runs indefinitely, where we will then see the earliest participants at the top earning the most from the base of new recruits at the bottom.”

However, in a pyramid scheme, participants make money solely by recruiting new participants, according to the US Securities and Exchange Commission.

Are MLM schemes allowed in Singapore?

No. It is a criminal offence to promote or participate in an MLM scheme. Offenders can be jailed for up to five years and fined up to S$200,000.

However, there is legislation excluding certain schemes and arrangements from the MLM prohibition. These include insurance agencies and master franchises, said Ms Chin.

“In order for a scheme to be legitimate, you have to apply for it to be scrutinised and approved and excluded (from the prohibition),” said lawyer Andy Yeo, managing director of his eponymous law firm.

“Just because it is a financial or franchise label alone, it cannot be sufficient for you to be excluded.”

Are MLM schemes legal in other countries?

Around the world, MLM programmes are generally legal if participants earn their commissions mostly from actual product sales rather than recruitment fees or mandatory purchases, said Ms Chin.

In China, the MLM model is banned and only single-level direct selling is permitted, she added.

Gathering commission or bonuses based on a downline hierarchy or recruitment structure is not allowed in such businesses.

Direct selling is regulated in China and licences are issued to legitimate businesses, said Mr Edward Lehman, foreign counsel at law firm Lehman, Lee & Xu based in Beijing.

To be licensed, a business must submit a written “compensation plan” showing the income that it generates without the inclusion of any payments for recruiting members, he said.

These legal direct selling schemes (“zhixiao”) are distinct from illegal pyramid schemes (“chuanxiao”).

What are the risks of getting involved in MLM in Singapore?

Ms Chin said participants may feel pressured to buy high monthly quotas of products to maintain an “active tier status”, potentially leaving them with a large amount of unsellable stock.

“Social capital bankruptcy is also an issue when one feels pressured to recruit from your immediate social circle, which may burn bridges and strain family ties and friendships,” she said.

I am thinking of joining an MLM programme. How do I know if it is legal?

Since the MLM label carries a stigma, businesses will not advertise themselves as such to prospective joiners, said Mr Yeo.

Individuals will have to do their own checks to ensure it is not an illegal pyramid scheme.

The first step is to check the regulatory status of the business. This can be done by looking at the Direct Selling Association of Singapore Member list.

“If they are not registered or fail to meet certain criteria, they may be operating an illicit pyramid scheme,” said Ms Chin.

Investment vehicles can also be checked against the Monetary Authority of Singapore’s Investor Alert List.

The next step is to understand the MLM programme’s business model and how the organisers benefit.

A prospective participant should not delegate away their due diligence just because a “very savvy investor” or others who appear to be doing well have put their own money in, said Mr Yeo.

“That’s how we make mistakes, when we choose not to do (due diligence) and we delegate this responsibility, without even checking whether the people whom we actually trust have themselves done their homework.”

Pyramid schemes usually promise “incredible” returns to attract “get rich quick” investors, and this in itself is a red flag, he said.

Mapping out the flow of money in the business – to see who is holding the funds, what the funds are being used for and whether there is an actual product – is also important, said Mr Yeo.

“Ask yourself whether you are able to make a viable income just by selling this product to others without recruiting anyone into the company. If the answer is no, it is likely a recruitment trap,” said Ms Chin.

Want an issue or topic explained? Email us at digitalnews [at] mediacorp.com.sg ( digitalnews[at]mediacorp[dot]com[dot]sg ) . Your question might become a story on our site.

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52名新加坡人因涉嫌参与传销在中国被捕后，亚洲新闻台（CNA）采访了律师，以了解更多关于此类传销的信息。

一位女士正在使用计算器。（图片来源：iStock）

这段音频由人工智能工具生成。

新加坡：新加坡当局周五（9月4日）表示，52名新加坡人因涉嫌参与传销活动在中国广西被捕并拘留。

CNA采访了律师，解读了什么是传销以及它们在新加坡的合法性。

什么是传销？它是如何运作的？

欺诈性的传销骗局与合法的多层次营销（MLM）销售结构有明显的区别。

Lighthouse Law 律师事务所合伙人 Tania Chin 律师表示，在多层次营销 (MLM) 模式中，独立的、非固定薪资的分销商通过直接销售和招募来赚取收入。

他们还可以从他们招募的新销售代表的销售额中获得佣金。

她说：“个人需要支付入会费或购买入门套装。然后，他们会被激励去建立‘下线’，说服朋友、家人和其他人加入他们的团队。”

“当新招募的员工买卖库存时，原经销商将获得一定比例的利润。

“这种结构会无限期地运行下去，届时我们将看到最早的参与者位于顶端，从底层新招募的成员那里获得最多的收益。”

然而，根据美国证券交易委员会的说法，在金字塔骗局中，参与者赚钱的唯一途径就是招募新参与者。

在新加坡，传销模式合法吗？

不。推广或参与传销活动属于刑事犯罪。违法者最高可判处五年监禁和20万新元罚款。

然而，陈女士表示，法律规定某些计划和安排不受传销禁令的限制。这些计划和安排包括保险代理机构和总特许经营权。

“一项计划要想合法，就必须申请接受审查、批准并被排除在禁令之外，”同名律师事务所的董事总经理、律师安迪·杨说道。

“仅仅因为它是金融品牌或特许经营品牌，并不足以将你排除在外。”

在其他国家，传销模式合法吗？

秦女士表示，在世界各地，如果多层次营销（MLM）项目的参与者主要通过实际产品销售而非招募费或强制购买来赚取佣金，那么这些项目通常是合法的。

她补充说，在中国，多层次营销模式是被禁止的，只允许单层直销。

此类企业不允许根据下线层级或招募结构收取佣金或奖金。

北京雷曼律师事务所的外国律师爱德华·雷曼表示，直销在中国受到监管，许可证只颁发给合法企业。

他说，要获得营业执照，企业必须提交一份书面的“薪酬计划”，其中应列明企业产生的收入，但不包括任何招募会员的报酬。

这些合法的直销模式（“直销”）与非法的传销模式（“传销”）截然不同。

在新加坡参与传销有哪些风险？

Chin女士表示，参与者可能会感到压力，需要购买大量的月度产品配额才能保持“活跃级别”状态，这可能会导致他们积压大量卖不出去的库存。

“当一个人感到压力，不得不从自己的社交圈中招募人手时，社会资本的枯竭也是一个问题，这可能会破坏人际关系，使家庭关系和友谊紧张，”她说。

我正在考虑加入一个传销项目。我如何才能知道它是否合法？

叶先生表示，由于传销标签带有污名，企业不会向潜在的加入者宣传自己是传销。

个人需要自行核实，以确保这不是非法的传销骗局。

第一步是核实企业的监管状态。这可以通过查看新加坡直销协会的会员名单来实现。

“如果他们没有注册或未能满足某些标准，他们可能正在经营非法传销活动，”陈女士说。

还可以对照新加坡金融管理局的投资者警示名单来检查投资工具。

下一步是了解多层次营销（MLM）项目的商业模式以及组织者如何从中获利。

叶先生表示，潜在的参与者不应该仅仅因为“非常精明的投资者”或其他看起来运作良好的人投入了自己的资金，就放弃尽职调查。

“这就是我们犯错的方式，当我们选择不做（尽职调查），并将这项责任委托出去，甚至不去核实我们真正信任的人是否已经做好了功课。”

他说，金字塔骗局通常承诺“惊人的”回报来吸引“快速致富”的投资者，而这本身就是一个危险信号。

叶先生表示，绘制企业资金流动图——看看谁持有资金、资金的用途以及是否有实际产品——也很重要。

“问问自己，如果不招募任何人加入公司，仅仅通过向他人销售这款产品是否能够获得可观的收入。如果答案是否定的，那很可能就是一个招募陷阱，”陈女士说道。

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