Amy was looking to make some extra cash. She came across a cosmetics company that offered a personal discount to those willing to sell their products as a distributor.
“I wasn’t trying to make a whole business. It was very much a casual thing for me,” Amy said. “But I was tracking my expenses, and realized I was spending way more than I was making.”
The distributor groups began to feel “culty” to Amy, who chooses not to use her last name for fear of retaliation from a former employer. She decided to sell off the product she had, which took more than a year.
“I had been in a religious cult in my younger days, so I recognize the signs,” she said. “I didn’t make a loss, but that’s not a typical tale.”
The cosmetics company was a multi-level marketing company, one that uses non-salaried workers to sell its products and recruit more participants. While some MLMs are legitimate business opportunities, some are illegal scams designed to steal your money.
What is multi-level marketing & how does it work?
Individuals can join an MLM as contract workers. They buy products or services at a discount rate, which they then resell for a profit, said Ron Cresswell, research specialist for the Association of Certified Fraud Examiners.
But the “big money” is in recruiting new members to the business, Cresswell said. Participants sign up with someone who’s “up the chain,” and then sign up people under them “down the chain.” Participants often earn bonuses for each person they enlist and for sales they make.
This business model can easily become corrupt.
“There’s a very fine legal line between a perfectly legal MLM and a pyramid scheme,” said Amy, who’s now a member of the Anti-MLM Coalition. The group educates the public on the dangers of MLMs and supports those who have fallen victim to pyramid schemes.
Multi-level marketing vs. pyramid schemes
The main difference between MLMs and pyramid schemes? MLMs sell legitimate products and services while pyramid schemes typically do not, said Cresswell.
The main purpose of a pyramid scheme is to get you to pay money upfront, and then use you to recruit others. MLMs, on the other hand, focus primarily on selling the given product or service.
MLMs are legal in the U.S. Pyramid schemes are not.
“If there are promises of certain levels of earnings and rewards, like trips and cars, held out to prospective recruits, which are impossible to achieve, that is a scam,” said Amy. “People are being tricked with these promises, and losing money, damaging relationships and friendships, and ending up worse than before.”
How common are MLMs?
“MLMs are very common, and growing in number, popularity and prevalence,” said Amy. “As soon as one crashes and burns, it seems like two more pop up.”
The growing wealth gap, deteriorating job security, rising unemployment, higher costs of living — Amy believes they all contribute to the popularity of MLMs. The initial appeal of these companies, like fewer hours and the ability to work from home, is enticing to workers.
“The American dream of ‘be your own boss’ and get rich also play into it,” she said. “People are often desperate for work, more money to make ends meet.”
How to spot a scam
The Anti-MLM Coalition maintains a list of past and present MLM schemes. If you’re approached by a company and aren’t sure if they are legit, Amy offered some tips:
- Do your research. Look up reviews of the company online. Talk to others who have worked for the company about their experience (especially ex-employees). Ask for written copies of the company’s business plan. Check with the Better Business Bureau to learn about any complaints.
- Ask questions. Are you required to “invest” a huge sum of money upfront? Do you have to pay for inventory? Is there an emphasis on recruiting new members?
- Be skeptical. Easy money made sitting on your couch is often not realistic. If it sounds too good to be true, it probably is. A legitimate job opportunity should require some experience and include an interview. It shouldn’t allow workers to sign up instantly or pay to join.
“If the company promises a high return on investment in a short period of time, or if they commission structure is complex and difficult to understand, that’s a common flag of an illegal pyramid scheme,” said Cresswell. “You should avoid these at all costs.”
Want to learn more? Frank Abagnale, a former con man, shares his tips on how to avoid scams.
Image: Phillip Blackowl