Decoding Ponzi Traps

Crackdown on firms running pyramid schemes to save innocent investors from mind boggling losses

Greater Kashmir/April 26, 2022

By Sajjad Bazaz

Last week, the Indian unit of US-based company, Amway, received a jolt when the Enforcement Directorate (ED) accused the company of running a “multi-level marketing (MLM) scam” in the country and attached its assets worth Rs 757.77 crore.

This is not the first time that Amway India has been accused of running a ‘pyramid scheme’. In fact, in 2013, Kerala police arrested then Amway India Chief William Scott Pinckney and its directors, accusing them of running a pyramid scheme.

Notably, Amway is a household name in India and has found the country fertile for garnering business. It has a chain of over 5.5 lakh ‘direct sellers’ in the country.

Now the action against Amway, which the company claims to impact the livelihood of its half a million agents, indicates that the law enforcing agencies in India have put the direct selling industry under the scanner.

Basically incidents of fraud committed by unscrupulous elements through fake direct selling mode over the years duping consumers of their hard earned money have mushroomed.

To be precise, Amway India is accused of running a multi-level-marketing (MLM) scheme or pyramid scheme under the garb of direct selling, which “induces the common gullible public to join as members of the company and purchase products at exorbitant prices”.

The ED probe has found the prices of most Amway products “exorbitant” as compared to the alternative popular products of reputed manufacturers available in the open market.

Direct selling mode is totally different from the pyramid and MLM scheme. In a direct selling mechanism a firm engages agents who buy products from the company and then directly reach out and sell to consumers at their doorsteps.

The firm and its agent share the profits made through the sale of products. Notably, industry estimates reveal that the number of direct selling is about 60 lakh in the country and most of them pursue direct selling as a means of earning additional income.

Today, the direct selling industry is pegged at Rs 10,000 crore in India with annual growth recorded at 12-13 percent over the last five years.

A pyramid scheme is not part of the direct selling industry. The structure of the pyramid scheme is to build a continuous chain of investors and is a deceptive way of ‘duping’ investors of their hard earned money.

Instead of delivering a product or service to the investors, a pyramid scheme guarantees returns to its participants in exchange for getting others to join the investment chain.

Money continues to flow up the chain as new investors bring in more people on board to form an ever-increasing pyramid. The promoters of such schemes are constantly on the lookout for new investors.

Then there is the multi-level marketing (MLM) model, which has the same modus operandi in its operations as that of the pyramid scheme.

But the only difference is that it focuses on the sale of more goods as a compensation model instead of incentives for acquiring more members.

The promoters of this model offer their goods directly to members of the general public. These members solicit new people to join the product selling system, thereby establishing a structure that increases the chain.

In order to curb the menace of pyramid and MLM schemes, which are in other words Ponzi schemes, the government in December 2021 notified the stringent Consumer Protection Rules, 2021.

Under these rules, direct-selling companies are required to comply with them in 90 days. These rules prohibit companies from operating MLMs, or money-circulation schemes, in the garb of direct selling.

It’s envisaged that the sale of products cannot be linked to commission income earned by referring prospective customers. The direct-selling agents have to have a verified identity, physical address and a fair and equitable, documented agreement with the company. The direct-selling company would also have to take responsibility for redressing customer grievances against its agents.

These fresh regulations among other things make it illegal for direct sales firms to charge their agents registration fees or to charge them for the cost of demonstrating to potential buyers.

Besides, under the rules, direct selling businesses and direct salespeople would be barred from advertising a pyramid scheme, enlisting anyone in such a system, or engaging in such a structure in any way under the guise of undertaking direct selling business.

Notably, the earlier law governing such activities, Prize Chit and Money Circulation (Banning) Act 1978 (PCMCA), was considered weak and toothless to book the culprits.

It’s here the enforcement directorate (ED) picked the operations of Amway in line with pyramid or MLM pattern by describing the whole thrust of the company around promoting how members may get wealthy by being members. The agency added: “The emphasis is not on the products. This MLM Pyramid fraud is disguised as a direct selling firm by using commodities.”

It’s worth mentioning that Amway entered India in 1996-97 with a share capital of just Rs21.39 crore. So far, as per the reports, it has remitted Rs2,859.10 crore as dividend, royalty and other payments to its investors and its parent entities.

Meanwhile, it has been observed that financial frauds become the order of the day when there is a downturn in the economy as it puts pressure on peoples’ incomes. It’s here fraudsters leverage the depressing situation to their advantage and lure people through fraudulent financial benefit schemes. In other words a Ponzi trap is laid to rob gullible people of their monies.

To understand the modus operandi of a Ponzi Scheme, ask yourself a simple question: Is somebody promising you extraordinary returns on your investment in a scheme which is outside the formal financial system? If so, beware! It could be a Ponzi trap.

Here the promoters of the scheme would be promising high rates of return at little to no risk to investors. The scheme generates returns for early investors by acquiring new investors. These schemes usually collapse on themselves when the chain of investors breaks and new investments stop.

As far as saving yourself from Ponzi traps is concerned, the responsibility lies on your shoulders. We have seen most of the investors want their money to grow in leaps and bounds in a short period of time. It’s this greed and urge for easy money which makes people fall for it.

So don’t be greedy. Before investing in a pyramid or MLM scheme, investors should at least ask two questions to its promoters. How the scheme plans to generate high returns? What’s the underlying business model?

Lastly, crackdown on Amway India is not an end to the menace. Unregulated and Ponzi schemes continue to be the biggest money-trap for gullible savers and play on their greed and ignorance.

There is a mushroom growth of these schemes which their promoters use to swindle gullible peoples’ money. Robert L FitzPatrick, founder of the International Association to Expose, Study and Prevent Pyramid Schemes ( says the modus operandi of this menace stands extended to the cryptocurrency businesses as they have also adopted similar tactics and strategies which often include mind control and financial abuse.

As the new law is in place now, there is a need to widen the crackdown on such entities (firms running pyramid, MLM and other ponzi schemes) and save the innocent savers/investors from the mind-blogging losses.

(The views are of the author & not the Institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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