Chinese are vulnerable to Utah-based pyramid schemes

Gov. Jon Huntsman Jr.'s much-heralded trip to China to promote trade with Utah businesses has a huge downside that few Utahns understand. Included in his entourage are Utah-based multilevel marketing firms Nu Skin, USANA, XanGo and Tahitian Noni Beverages. These are just a few of the 36 Utah-based "recruiting MLMs" that give Utah the highest per capita concentration of MLMs in the country. His trip also follows the recent legalization by the Utah Legislature of product-based pyramid schemes with no requirement for direct sales to legitimate customers outside the network of distributors.

The Chinese government wisely banned multilevel selling in 1998, which frustrated MLM promoters hoping to cash in on the huge Chinese market. But as China Daily reported (Sept. 21, 2005), "Through building a pyramid structure, organizers require every member to fork out a non-refundable startup fee, sometimes as high as tens of thousands of yuan. To recoup their initial investment, members have to coax others to join the network and get commissions calculated on the number of new members they entice."

I would add that most MLMs are too clever to require huge up-front investments. Instead, they bleed participants slowly of their assets through purchases on a subscription basis.

Unfortunately, Chinese authorities left the door open for reconsideration of "direct selling" rules later. Meanwhile, Nu Skin has been allowed to set up retail "boutiques," so long as no multilevel selling took place. Like a snake waiting to strike, Nu Skin has patiently awaited its opportunity to go multilevel in China. They do it in the name of "direct selling," but let no one be deceived. Recruiting MLMs are no more legitimate direct sellers than a pig is a horse. The compensation plans of these Utah schemes are so heavily weighted towards building a downline that little direct selling occurs to persons not participating in the scheme. This was proven in surveys in Utah County, which has the highest concentration of MLMs of any county nationwide. The main buyers are those entering an entrepreneurial chain of hopeful (and soon to be disappointed) participants — in a money trap. For details on this and related research, go to www.mlm-thetruth.com.

In fact, the promoters of the bill that legalized product-based pyramid schemes in Utah made it very clear in the hearings that they did not want to be held to the requirement of direct selling of products to legitimate customers outside the network of participants. They supported pyramid chain selling as legitimate so long as products were "consumable."

The Chinese market is ripe for such fraudulent schemes, whatever they are called — MLM, network marketing, product-based pyramid schemes, chain selling or direct selling. Research demonstrates that recruiting MLMs defraud 99 percent of recruits by entrapping them to purchase expensive products for their "opportunity of a lifetime" on the basis of a set of clever deceptions. The potential for losses suffered by Chinese victims is huge — billions of dollars in U.S. money. Many will invest their entire life savings in the vain hope of relief from their poverty. This is based on e-mails we have received from victims in other Asian countries. They will only be made poorer for their participation, while the MLMs and TOPPs (top of the pyramid promoters) will come away fatter than ever.

Utah's reputation as the scam capital of the world is now centered on these very schemes. And our governor is at the forefront in promoting them to the vulnerable Chinese. Few in law enforcement or in the Legislature get it. I feel like the child in the children's fable who cried out, "Look — The emperor has no clothes!"

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Jon Taylor is a retired entrepreneur and marketer. He is the author of the book "The Network Marketing Game." He lives in Bountiful.

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