Are consumers protected for Pyramid Selling Schemes?

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Table of Contents

• What is a pyramid scheme?
• Multilevel Marketing System

The Australian Consumer Law contains prohibitions against participation in or attempting to induce another person to participate in a pyramid scheme. Also known as a ‘get rich quick’ scheme, promoters of pyramid schemes make their money by having others join the scheme.

Courts can impose civil pecuniary penalties of $1.1 million for corporations and $220,000 for natural persons for running a pyramid scheme. The Australian Competition and Consumer Commission has instituted proceedings against a number of organisations and firms for operating a pyramid selling scheme and engaging in referral selling. If you are uncertain as to whether or not you have inadvertently participated or even initiated a pyramid scheme, it is a good idea to seek legal advice.

What is a pyramid scheme?

A pyramid scheme is where participants make money by recruiting other businesses or people rather than selling a real and legitimate product or service. The principal economic activity of a pyramid scheme is the recruitment of new members and any product associated with the scheme is often of secondary importance.

This ‘participation payment’ to join is often tied with a promised payment to recruit and induce other investors or new participants. The payment itself must be in relation to the introduction and it must be the predominant inducement. Evaluating ‘inducement’ requires an objective inquiry into what persuades or influences the relevant person. Notably, under Australian Consumer Law, it is also illegal to participate in a pyramid scheme in any capacity, as well as to establish or promote a pyramid scheme.

Multilevel Marketing System

Care must be taken to distinguish an illegal pyramid scheme from a legal multilevel marketing system (MLMs). Genuine MLMs are supported by genuine economic activity and their participants earn money through the sale of products that have commercial value.

An MLM business involves a central corporation creating a product and then convincing other people to pay a fee in exchange for the right to sell its product. This can be seen in cosmetics, cooking implements and fashion accessories. Thus, the distinction here is that people in legitimate MLM schemes earn money by selling genuine products to consumers and not from the recruitment process.