Pyramid schemes promise consumers large profits based primarily on recruiting others to join their program, not based on profits from any real sale of goods to the public in violation of the Consumer Act of the Philippines.
Pyramiding is prohibited because plans that pay commission for recruiting new distributors eventually collapse when no new distributors can be recruited. When such a scheme collapses, people especially those at the base or lower levels of the pyramid, lose their money.
SEC Chairperson Lilia R. Bautista had blamed the lack of laws against pyramiding for the proliferation of deceptive and unfair sales acts and practices of chain distribution operations.
Bautista said although the SEC can file criminal cases against perpetrators of investment scams, the agency is helpless in preventing pyramiding operations.
The economic slowdown makes middle to low income consumers vulnerable to the promise of getting rich quickly and easily, particularly in rural areas.
"We can’t prevent entities from engaging in pyramiding operations unless somebody complains. Maybe there’s a need for a law on pyramiding or Ponzi scheme," Bautista said.
A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting, but in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new "members." Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment.
In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.
Unlike pyramid or Ponzi schemes, a legitimate multilevel marketing (MLM) schemes has a real product to sell. MLMs actually sell their products to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system.
A bill seeking to ban pyramid schemes outright is pending at the Lower House. It seeks to amend the Consumer Act by amending the definition of "chain distribution plan or pyramid sales scheme," and clarifying activities and operations that would identify an entity as pyramiding operator.
The proposed measure also defines permissible sales practices of multiple level marketing operations and grants the Department of Trade and Industry and the SEC motu propio powers to cancel registration of erring entities.
The SEC can motu propio cancel the registration of a company found to be engaged in pyramiding, only if there is a prior finding from the DTI that indeed the company is engaged in pyramiding.
The bill likewise increases the penalty range to P1 million and establishes the offense as an act of economic sabotage.
The bill, which has already been cleared by the House committee on trade and industry, is expected to be approved by the House of Representatives in the next few weeks.
Based on the draft bill, pyramid schemes are defined as "devices whereby a person, upon condition that he makes an investment is granted by the manufacturers, producers, importers, operators or their representatives a right to recruit for profit one or more additional persons who will also be granted such right to recruit upon the condition of making similar investments..."
The bill requires a business entity engaged in MLM to register with the DTI before its actual operation. The DTI will determine if the business uses any of the following schemes, which give rise to the presumption of a pyramiding scheme:
• prohibitive entry requirements or head-hunting fees, as well as undisclosed claw-back policies and front inventory loading;
• absence of a real market for a product and profits that are primarily derived from recruitment;
• and unjustified claims of unusually large return on investment or "get-rich-quick" promises.
The presence of any of these will be a ground for the denial of the application for business registration. Existing business using MLM, meanwhile, must be registered with the DTI within a year from the effectivity of the law.
A person or firm found to be engaged in pyramiding schemes will be fined P20,000 to P200,000. Pyramid firms must also return the investment made by clients, together with interest.