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Pyramid sales harm sellers, customers
By Qin Jize (China Daily)
Updated: 2004-08-17 22:31

The State Administration of Industry and Commerce Tuesday exposed 10 typical illegal pyramid sales cases, warning the public to be vigilant against the easy-money traps.

Blinded by promises of high profits, tens of thousands of people are lured onto the pyramid-selling bandwagon, the cases showed.

Over 200 college students from 13 colleges all over the country, the largest number of students ever involved, were rescued from a pyramid sales scheme in Southwest China's Chongqing Municipality in March.

The company called Oliman, which claimed to be representing a French cosmetic brand, asked each student for a 3,350 yuan (US$403) membership fee, telling them that they could make up to six times as much in three to five months by attracting more members.

Police later found that neither the company nor its cosmetic products had been legally registered.

Defrauding people through the Internet is another feature of the pyramid sale cases.

In 2003, the administration investigated and dealt with 2,253 pyramid sales cases, smashing 16,078 sales schemes involving more than 100,000 people, among which 234 cases were turned over to the judicial authorities.

Liu Jian, spokesman for the Beijing Industry and Commercial Bureau, Tuesday restated that the victims of pyramid selling are not protected by law and they are responsible for all of their losses.

Pyramid selling is a method of selling a product through a multi-level hierarchy of salespeople. It is deceptive because participants who are on a certain level in the scheme must pay money for the chance to receive the promised bonuses when the pyramid grows to another level. And the organization is most likely to sell counterfeit goods or something that does not even exist.

The pyramid will eventually reach a point where it is impossible to add new participants, causing a crash of the entire sales chain. All involved lose their investment, except the crook -- the pyramid scheme initiator and his cohorts.

"Pyramid selling is a variation of direct selling," said Ren Xinzhou, an direct-selling researcher at the State Council Development Research Centre.

Born in the United States, direct selling is the sale of a consumer product or service, person-to-person, away from a fixed retail location. These products and services are marketed to customers by independent salespeople.

But due to its natural flaws and the immaturity of China's market and its consumers, direct selling was exploited by swindlers, resulting in illegal pyramid selling when it was introduced to China in the late 1980s and early 1990s.

China imposed a ban on direct sales in 1998, saying it was hard to differentiate direct sales from so-called "pyramid sales," which had led to widespread fraud, consumer losses and social disorder.

"China is trying to clearly distinguish between valid direct selling and pyramid sales by setting down rules for direct selling," said Ren.

Under the regulations, which is drafted jointly by the Ministry of Commerce and the State Administration for Industry and Commerce, direct selling is to be strictly distinguished from the notorious pyramid selling schemes.

The draft regulation is being drawn up to fulfil China's pledge on its entry to the World Trade Organization and promote the growth of regulated direct selling, with the public being able to comment on it in September, according to Ministry of Commerce officials.

However, since 1998 when pyramid selling was prohibited in China, 10 foreign-funded direct selling companies have came to China, but had to sell their goods through retail outlets.


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