MLM Fraud and Pyramid Schemes

MLM fraud can be disguised as a pyramid scheme, this article will cover the main things to look for so you don't become a victim.

Not sure if a network marketing or multi-level marketing company is involved in MLM fraud?

That’s OK, I am here to help and ensure you don’t fall into one of these nasty traps!

People have lost a lot of money in these fraudulent schemes and you need to be very aware of them.

These schemes can be disguised in many different forms shapes and sizes, so you can’t always tell straight away whether it’s a legitimate business plan or not.

Generally, fraudsters who created the scheme target investors who want to make a quick dollar.

But as a home business opportunity seeker you aren’t at such a risk, but you still need to be able to know what to look for.

The MLM Fraud Pyramid Scheme

As its name suggests, a pyramid scheme is structured like a pyramid with one person right at the top (the originator/mastermind behind the whole thing) with many people underneath to form levels.

Then, under that person there will be recruits who will be required to invest maybe $1,000 which will be paid to the initial recruiter.

In order for the new recruits to make their money back, they must recruit more people into the scheme who must also pay the $1,000 each.

If a recruit gets 10 people to join, then they will make a total profit of $9,000.

This will keep going on and on and as you can see, a lot of people will lose their money. However, a handful of people will get rich but the majority loses out.

Usually you will have to recruit a large amount of people before you start seeing any kind of 'return on investment'.

The compensation plans can be very complex and sometimes you will need to have three tiers below you before you are entitled to earn anything.

The MLM Fraud in these Schemes

The thing with the compensation model is that they can never go on forever like a legitimate business plan could.

There are only a limited number of people who can join and even if everyone in the world joined, there are still going to be individuals who lose their money.

This means that the cycle of recruiting people will eventually come to an end and this is when the scheme collapses and investors become victims to a fraud scam.

Now onto the important stuff.

Where Exactly does MLM and Network Marketing Come into this?

Many people come to believe that MLM and network marketing companies are some kind of pyramid scheme or MLM fraud.

Fraudsters and scam artists have been known to create pyramid schemes that appear to be MLM or network marketing opportunities.

Legal MLM or network marketing companies involve sponsoring new product distributors into the company who have rights to sell products or services that consist of some value.

Everyone who joins also starts on a level playing field which means they all have the opportunity to out perform their up-line.

If you do decide to sponsor additional people into your team to build your business that's just fine.

You will experience the benefits of duplication where you and your team will be recognized for the volume of products that was consumed.

A legal MLM/network marketing company also won't pressure you into sponsoring others into the business if you want to just sell products or services to the consumer.

Pyramid schemes have the requirement for continuous recruitment, because this is the only way they can survive.

MLM fraud is when a company sells a product that doesn’t have any value to it at all.

The product may be some bogus report, or something that doesn’t even exist. So it pays to do background research on a company’s product prior to joining up.

This type of company will also require you to recruit new people so that it can keep on growing, until it then eventually collapses just like any other scheme does.

How to Avoid Falling Prey to MLM Fraud or a Pyramid Scheme

Here are seven points I recommend looking into if you aren’t too sure about the MLM/network marketing company’s credibility that you are interested in joining.

  • The basis for the company’s promotion should be the retail sales of the products, not just recruiting more distributors
  • Investors should be aware of promises that consist of high and quick returns
  • The company should acknowledge that it is not necessarily easy to sell or recruit and train other sales people, but it requires time, effort and commitment
  • The company should provide national and regional advertising on a regular basis including introduction and promotion of new products
  • Distributors should be assured of a continuous supply of quality products
  • The firm should set standards for advertising local business opportunity meetings and also for all sales recruitment literature
  • No more than a minimal initial inventory should be required of someone to become a distributor
If a company meets most of these points then it is probably a legitimate company to go for.

But it’s always best to do your due diligence which means doing some background research on the firm at interest.

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