The "American" Scam

© 2005 Robert Lawrence FitzPatrick

There has been much information in the news and many public warnings about scams that originate in Nigeria and are promoted to people in America. Few people, however, are informed or warned about an "American" scam that is promoted to people all over the world.

The "Nigerian" scam" begins with what seems to be a private email solicitation. It offers an opportunity to gain a large sum of money that the scheme's promoters want to get out of that country or has been left over from some government or business operation. But first the person being solicited must send a small amount of money to get the process started. Then, a larger amount of money is required to complete the deal, then even more is needed to get final approval.

Eventually, the victims of the Nigerian scam discover that the promised money will never be sent. They realize the business or government program that was supposedly to provide the windfall of money did not exist. They have been defrauded. However, out of embarrassment or perhaps fear, the victims seldom report the incidents to the authorities.

The "American" scam operates similarly. There is a promise of large sums of money. A small investment is required to begin. Then, more money is sought to remain "qualified" to gain the promised money and even more to achieve the higher position in which the big payoff will supposedly be earned. Finally, still more must be paid in order to be "trained and motivated" to get to that promised payoff. In the end, the same result occurs -- lost money, shame and silence.

Government officials in Nigeria recognize that the schemes originating from their country are frauds. The victims of the Nigerian scam also come to realize they were in a fraud. The American scam, on the other hand, is generally promoted as a legitimate business and the government seldom investigates it. Consumers in America and everywhere else cannot expect protection or even education. Additionally, most victims do not understand how they lost their money. Even fewer realize they have been swindled.

The "American scam" is called multi-level marketing (MLM) or sometimes "network marketing." It promises the "opportunity of a lifetime" from owning a "home-based business." In some countries, it claims to be the purest and best example of "free market capitalism." In fact, it has caused financial loss, wasted time, ruined careers and broken families all over the world. Its actual operations and its terrible financial results are hidden from those solicited.

The largest MLM company, Amway/Quixtar, and hundreds of others, such as Nuskin, Herbalife, Melaleuca and Nikken, operate it in such a way that 99.9% of all people who invest will never earn a net profit. For this reason, MLMs such as these must be treated by consumers as financial traps, not "opportunities." Since deception is routinely employed in order to get people to join these schemes in which near all will lose their money, they should not be categorized as a real businesses, but rather understood for what they are - elaborate pyramid schemes. Far from the best that capitalism offers, these are a terrible distortion, misuse and a blight on the marketplace.

Multi-level marketing is technically legal in many countries. For other countries, MLM is allowed, under certain conditions, but these restrictions are seldom investigated or enforced. MLM causes many lawsuits, complaints and controversies. Some countries have no laws that regulate or define MLM. In this gray area of legality MLM or "direct selling" has largely become a "camouflage" for "business opportunity" fraud. Here is how it works.

The Five Ploys Used to Get Consumers into the "American Scam"

Ploy #1: You can make money selling the products to friends and neighbors!

Amway/Quixtar and most "MLM" companies say they offer the "world's greatest business opportunity" which, they say, is based on selling products. Each salesperson is told he or she will be an "independent business owner" (IBO) that can buy products at wholesale prices and then sell them at a profit on a retail basis to friends and neighbors.

This turns out to be untrue for all but a rare few of the companies. Almost no one actually earns a real profit from buying the MLM products and reselling them to the public. Why? The MLM products are too expensive. Similar or cheaper products are available in stores, by mail or on the internet. There is little real need or demand for these products. Also, MLM companies such as Amway/Quixtar authorize so many sales people that competition for retail selling is too great. The costs and time required for buying the goods, promoting the business, delivering them or working with customers outweigh the small profit allowed. Also, the requirements for purchases are greater than most people can meet. Most of the salespeople wind up with much unsold goods.

Ploy #2: You can make "bonuses" from the products purchased by all those you recruit.

So, how do the schemes continue if few people can profitably retail the products to customers? This is where the next phase of the deception in the American Scam begins. MLMs tell the new "IBOs" or "distributors" that they can actually make even more money if they will recruit other new sales people into the programs. Each sales person is promised a "bonus" from the purchases made by new recruits. Additionally, each person can earn more bonuses when their recruits get recruits of their own. Each person can make money on many "levels" of new recruits.

So, even though virtually no one is able to make any money selling the products on a retail basis, each person is urged to recruit more people into the business.

What exactly is the "business" then?

Recruits are told that the real business that earns the big money is based on recruiting other people like themselves. Then their "sales" will "multiply." If they recruit 5 people who each recruit just five others, for example, then the person at the top will now have 30 in all, and that top person will get a "bonus" on each purchase made by the newest recruits. It does not matter that almost none of these recruits will ever sell any products. Each one will purchase products. The bonuses are paid on those purchases, not on their sales (which almost never occur anyway.)

The numbers don't stop there. They can go on "forever." The 25 new people can do the same recruiting, bringing in 125 more and on and on it goes. Though no one may be able to make money selling the goods on a retail basis, they can make money if they just recruit enough others. The ones they recruit will need to do the same.

Just as the claim that selling the MLM products at a profit to friends and neighbors is untrue, the promise that everyone can recruit a large "downline" is also false. Basic arithmetic requires that for one person to be at the "top" most must be at the "bottom." Only a tiny few can ever be at the position where the bonuses are paid, while most people will be at the bottom where they will be losing money.

There is a second part to this trick. In order for the salespeople to be "qualified" to receive the bonuses on the purchases from an "endless downline" of new recruits, they must meet a quota of purchasing. So, most people will continue to buy products every month or pressure their downline to also buy products while they try to recruit others into their "organization." The initial investment now grows each month that they remain in the program, while the time and costs of recruiting also multiply. Losses mount.

Ploy #3: The higher up you are in the organization, the more you make.

Amway/Quixtar and other MLM schemes use complicated pay plans. Few people understand exactly how the "compensation plans" work. But one part of all of them is always the same. Quotas of recruits and volume levels of purchases from the group are required to reach higher "bonus" levels. The higher you move up the scale, the more you make and the only way to get "up" in the organization is to recruit others. As a result, many people buy more goods to reach the higher levels or they will buy the products in the names of others that may not have the money themselves. In his way, the quotas are met. Unfortunately, the costs have risen higher than the bonuses that are received. More losses.

Ploy #4: To be successful you need training and motivation and to listen to the people who are already successful in the program

Again, a multi-level deception is promoted. The training courses, seminars and the books and tapes are very costly and add to the mounting losses. The 99.9% loss rates do not change. But, even more misleading is the claim that the people delivering the seminars and selling the books are "successful" at the MLM business. Many are not. Most of the money they earn comes not from the business they are urging others to join or to stay in. It comes from selling books and tapes and seminars! The books and seminars do not help recruits become successful. They only reward the people doing the selling.

Now comes the final trick regarding the training and motivation ­ the recruits are told they themselves can make money by selling books, tapes and seminar registrations to new recruits.

The new IBOs start out believing the business is based on selling products to real customers. They discover this is not profitable. In fact, very little products are ever sold to real customers. All the rest are sold only to the "sales people."

They then are told that the big money is earned by recruiting other IBOs ­ who buy products ­ and getting bonuses on those purchases. Some actually pay their own money to get others into their group so they can qualify for higher "bonuses." But they soon they discover that they are starting at the bottom of someone else's "downline" and that building their own is extremely costly and may take years. They are never told that the upline/downline structure places 99.9% of all IBOs always at the bottom, but many do begin to realize that the only way they can make a profit is by enrolling others who will lose.

Then, they are told they need to invest more money into training and motivation seminars, books, and tapes. They spend large amounts traveling to the seminars. They buy books and tapes every week. Still no profit. Just more losses. Finally, they try to recoup these losses by selling the costly books, tapes and seminars themselves. They try to make up for their losses by getting money from others who are going to lose. But this too turns out to be a fruitless quest. Trying to make money off other people's losses means chasing after more and more recruits. They do not realize that more than 50% of all recruits quit within the first year. Soon, they will be among those who quit.

Ploy #5. The Ultimate Deception: If you do not succeed, it is only your own fault.

In the Nigerian scheme, the victims are led to believe that the money they are promised might have been gained illegally or at least without knowledge of the government or the tax collector. So, when they discover they fell for a scam, they are unlikely to report it to the police. That might get them in trouble. Besides, who wants to publicize falling for a scam? They could appear greedy, gullible or dishonest.

The multi-level marketing scheme ­ the "American" scam ­ achieves the same result. Each new recruit is told from the beginning that the program is the "best business opportunity in the world." The seminar leaders flashed expensive watches, jewelry and cars. They told of their luxury homes and exotic vacations, all gained, they falsely claimed, from selling MLM products. Prominent politicians and even religious leaders are paid large fees to speak at the recruitment meetings, giving the schemes the appearance of endorsements and blessings.

And so, when the recruits finally give up and quit, losing thousands of dollars, or maybe tens of thousands and months or even years of effort, most believe what they were told: it was their own fault.

Ten Plain Truths

1. 99.9% of all people who join Amway/Quixtar and other multi-level marketing schemes like it never earn a profit. The losses are so large that these schemes cannot be called a legitimate "business opportunity."

2. To get people to join a MLM scheme in which nearly all will lose requires deception. The promoters do not tell the truth.

3. The people at the top hide basic facts from recruits such as average income, actual costs of doing business, drop out rates, and how much of the total bonus money they receive. They also do not reveal the source of their money, most of which comes from selling "training" materials. Often, their income is from recruits in other countries.

4. Very little of the MLM products are ever actually sold to consumers. The people who buy these products do so as part of investing in a "business opportunity." The business is therefore not "direct selling." It is actually about promoting a bogus business opportunity.

5. More than 50% of all people who join these schemes quit in the first year. Trying to make money from recruiting is therefore a long and costly effort. When a person starts out to build a 'downline" they are already at the bottom of someone else's very large downline. Only a tiny few can ever be at the top.

6. Those few that start at the top of the scheme or who climb to the top make their money directly from the losses suffered by all the latest recruits.

7. The training and motivation seminars, books and tapes are a secret business run by the top promoters of the scheme. Buying tapes and books does not increase a person's chances for success. It only adds to the losses.

8. The people selling the books and tapes are not necessarily successful in the MLM business. Rather, they make most of their money selling the recruitment materials. Claims that they are successful and that the business is a "great opportunity" are false.

9. The schemes recruit more and more people every year, but also many quit. So the scheme can run for many years before it must find other areas with more people to recruit. The longer is operates, the more people it has harmed.

10. The main reason the government of the United States does not investigate these schemes for deception and unfair practices or for running pyramid schemes is that leaders of these schemes contribute huge amounts of money to the politicians' political campaigns. Consumers, therefore, must look out for themselves. Just because a particular MLM such as Amway/Quixtar is not prosecuted by the government does not mean it is legitimate or that you will ever make any money from it.

Contact: Robert L. FitzPatrick