Why aren’t MLM companies compliant BEFORE launch?
Two of the big buzzwords currently being tossed around the MLM industry are ‘compaliance‘ and ‘being compliant’. Or in other words, attempting to ensure that a company is legal and won’t be shut down for being a thinly veiled Ponzi or pyramid scheme.
Typically compliance issues are related to US-based MLM businesses (or offshore businesses who plan to do the bulk of their business in the US. The latter of course being all the more alarming because in the absence of management or a company presence, it’s the members themselves who are held responsible should regulators decide to investigate a company and take action.
In theory, compliance is a good thing. I mean, there’s no such thing as being too compliant right? Why not do everything you can to ensure your business model is compliant and as legal as possible?
This part of compliance of course I have no issues with. The problem however is that of late there’s been a few high-profile instances of companies launching obviously dubious business models, attracting large amounts of membership and only then deciding to give a crap about compliance.
Today we’re going to explore this topic in more detail. Why are MLM companies adopting this approach, what typically happens when a company decided to make compliance a priority and what it means for their members.
One of the major examples of compliance issues in MLM these last months has been Zeek Rewards. Zeek Rewards initially launched in January 2011 guaranteeing members a 125% return on investments made with the company over 90 days.
These returns were supposedly generated by Zeekler penny auctions, however a red flag existed in that Zeek Rewards refused to state what percentage of the returns paid out consisted of membership fees and investments and how much actually came from the Zeekler penny auctions.
These investments were made by purchasing VIP bids from the company. At the time, Zeek Rewards didn’t care what members did with the bids. So long as the bids were paid for, the company guaranteed members a daily ROI.
By mid 2011 and only after attracting momentum, Zeek Rewards decided that guaranteeing a 125% ROI, refusing to elaborate on the specifics of where these returns were coming from and the whole bid investment thing made them look too much like a Ponzi scheme.
As such, lawyers were called in and the company abolished the 125% ROI guarantee. Instead, they would still pay out returns, they just wouldn’t guarantee what the daily percentage of the return would be.
Additionally Zeek Rewards also introduced a company co-op, where members were able to “buy” customers from the company to dissipate their points to. Instead of just paying out members when they purchased bids from the company, Zeek Rewards announced that those bids now had to be given away.
Members could either give bids away to the company (via purchased customers) or sign up free customers themselves and give bids away.
The only prerequisite to sign up a free member was an email address, so Zeek Rewards members were free to create their own dummy accounts and continue to give their bids away.
As the VIP bid investment balances grew however along with the daily amount of points required to be given away, it became much easier for Zeek Rewards members to simply pay Zeek Rewards to take their bids off their hands.
Zeek Rewards did this under the guise of generating their own customers, despite the fact that they continued to pay out returns regardless of whether or not they’d actually given a customer’s bids away to a co-op customer or not.
In essence, Zeek Rewards didn’t change the passive investment component of Zeek Rewards, they just started charging their members a fixed amount per points they could “give away” to the company.
It was still entirely possible to join Zeek Rewards, invest $x, pay Zeek Rewards $2.50 per customer and give points away to said customers – which is as close to a passive investment scheme as Zeek believed was possible, whilst remaining compliant under US law.
Despite the changes to how members participated in the passive investment scheme, Zeek Rewards continued to refuse to detail the percentage member investments and fees made up of the daily profit share.
Fast forward to March 2012 and as Zeek Rewards continued to grow, management decided the changes they made weren’t quite enough to mask the passive investment their members were signing up for in droves.
As such more lawyers were called in and it was announced that Zeek Rewards were abolishing the fees they were charging members to dump bids back with the company.
Instead, the company would now require members to sign up 2 new members on auto-ship (with bids being the product) a month if they wished to continue to participate in the passive investment scheme.
Of course the option to sign up free customers remained, but for many members with large VIP point balances who joined early, the prospect of IP spoofing and creating dozens upon dozens of emails to generate fake accounts with to dump their daily VIP bids onto is tiresome.
Thus Zeek Reward’s passive investment scheme, which had run for just over a year had largely come to an end. I saw largely because with members being able to generate free customers it is still possible, but with VIP point balances ever-increasing not likely due to the headaches of the amount of fake accounts needed to dump points into (each customer has a fixed limit of points that can be dumped onto them).
There is also the option of creating two fake preferred customer accounts a month and paying their fees out of your generated profits, (an option only available to those who have been investing such that their monthly returns covers the monthly member fee requirement of PRCs), but with this requirement being accumulative at two additional customers a month, it too has long-term headaches for members who opt to do it.
Oh and the remember that big red flag I keep mentioning?
Despite the announced March changes and release of an income-disclosure for their US-based members, Zeek Rewards to date refuse to detail the percentage of their daily profit share that is made up of member contributions and membership fees.
The official company line is that it is a ‘competitive secret’, however that makes little sense when you consider it’s just a percentage number.
As it stands the only reason that exists to justify the secrecy of releasing the percentage number member contributions and fees make up of the profit share is that it would incriminate the owners.
And when you think about what that really means, well it’s not exactly justifiable now is it.
Especially when you consider the ongoing delays in responding to support requests from their members, excessive downtime not impacting the daily profit share returns and most recently, delays in getting payments out to members (this is on top of the 2 week waiting period Zeek imposes on their members before they send payments out).
Zeek Rewards of course blame FedEx for the delay but with the recently proposed changes having a large impact on the passive investment nature of the business largely responsible for its growth, it’s hard not to link the delays with an unprecedented amount of withdrawal requests being processed by Zeek Rewards as members look to invest elsewhere.
Along with Zeek Rewards’ ongoing compliance issues another penny auction company is getting set to launch and although not as drawn out as Zeek Rewards, it too has pulled a potential bait and switch on its members.
And it hasn’t even launched yet…
Bidify is based out Seychelles and by all accounts appears to be operated by a management team in Norway.
I recently reviewed Bidify and in comparing to Zeek Rewards, was pleased to see there was no passive investment scheme being offered (you can’t just give your bids away to the company and earn a passive ROI).
What I did note however was
that Bidify have quite a strong emphasis on the recruitment of new members and pay out sizeable commissions accordingly.
As Zeekler is to Zeek Rewards, Bidify’s penny auction offering is Bidsson. Bidsson itself hasn’t launched yet and the current scenario of Bidify is that they are only paying commissions on the recruitment of new members, with these commissions being 100% paid out of the membership fees of new members joining.
You don’t need me to tell you what that sounds like.
Despite having launched with this model, Troy Dooly over at MLM Help Desk put out an update today announcing that Bidify had retained Kevin Thompson as their attorney.
to head up the U.S. based legal team (and review) the complete business model of BidiFy to help them do everything necessary to operate legally inside the United States.
Now with all due respect to Kevin Thompson, when you’re only paying commissions on the recruitment of others and 100% of these commissions come out of membership fees, no amount of compliance is going to make you legal in the US.
Obviously we can expect some Zeek Rewards like changes being announced by Bidify in the upcoming future.
But in the meantime Bidify members have already joined up, already recruited members and are already earning commissions off their membership fees.
Nevermind the fact that with a penny auction site that hasn’t even launched yet, Bidify’s biggest marketing point is that, unlike Zeek Rewards, they don’t have to worry about US regulators knocking on their door.
Bidify is allegedly registered in Seychelles (a known tax haven with strong corporate protection laws) and should they ever go bust, there’s nothing stopping those running the scheme from simply disappearing and doing a runner.
Should the US authorities decide Bidify gets large enough to take action, it would be those promoting the company in the US that would be held responsible.
Of course in the immediate future this would appear unlikely to happen. Zeek Rewards is much, much larger than Bidify and to date they haven’t attracted the interest of US regulators (at least not publicly).
With Zeek Rewards’ US based members having to file tax returns by April 17th 2012 though, that could easily change.
As I understand it, the general consensus is that VIP bid purchases were seen as a business expense. With members earning a return on this expense though, it’s effectively an investment/return scheme and thus counts as reportable income – whether you pocketed the money or re-invested it for more points is irrelevant.
Some Zeek Rewards members aren’t happy with this and will no doubt file taxes that show abnormally large business expenses that will no doubt result in audits.
If enough of these Zeek Rewards tax returns pop up, it won’t be long before the authorities come knocking…
This issue of compliance isn’t just localised to doing business in the US either and it appears to be somewhat of a global problem. Speak Asia, a ponzi/pyramid scheme hybrid is registered in Singapore but operates in India.
Launched around May 2010, the company required members to sign up and invest 11,000 rupees ($220 USD), and by completing weekly surveys, which the company at the time alleged were commissioned by third-party corporate customers, guaranteed a return of $20 a week (this was the most common plan member’s signed up to).
Later on it was proven that no such corporate survey customers existed, meaning that the returns were simply being paid out of the membership fees of people who had joined the company.
The company also paid out recruitment commissions and this is where the bulk of money was made by its members.
In May 2011 the company was effectively shut down by the Indian authorities and as a result several lawsuits have been filed by the company and its members aiming to recover their money and prevent Indian authorities from investigation the company.
The main argument put forth is that it is acknowledged that Speak Asia ran a ponzi-pyramid hybrid for a year but that this doesn’t matter.
Because the company planned to have its members sell products at a later date. Speak Asia even went so far as to submit this planned business model, one which it had never implemented, to the Supreme Court of India, alleging it was the business model they’d been using since launch.
Like Zeek Rewards and Bidify, it’s clear that the idea is ‘well we’re compliant now, so you can’t really hold us responsible for what we’ve done in the past‘.
But does that really excuse the use of the business models these companies (and others) started out with?
If I commit a crime, it doesn’t matter what I will do or was going to do or even if I hadn’t committed any crimes since the original crime. At the end of the day I’m still responsible for what I initially did. Even if the initial crime occurred many years ago.
So too surely it must follow that when MLM companies launch with highly questionable business models, that they too are responsible for the business conducted under said models?
What appears to be a trend the authorities perhaps haven’t yet caught onto is the launch of a MLM company with obvious major flaws in terms of sustainability and legality. After management determine this model has ensured sufficient growth, they then make changes to the model and… well what happens after that doesn’t matter, they’ve already made their millions.
By and large, this behaviour appears to be nothing more than an attempt to negate criminal liability on behalf of the those running said companies.
‘Look, we knew we were running a dodgy scam and we tried to fix it’ sounds much better in court than ‘we launched an obvious scam, made millions and then you caught us’.
I guess the big question is whether or not launching with a dodgy business model and then changing it enough is truly enough to negate criminal liability.
A question that I believe, at least as far as the more recent examples of the use of ‘bait and switch’ MLM business models in the US goes, has yet to be answered.
As far as members go, apart from the credibility hit the company takes amongst its members, there’s also the impacts these changes have on how they work the business.
The basic idea appears to be to reel in members, get them to the point where they’ve made too large an amount of virtual profits to walk away from (VIP bids in Zeek Rewards, sample bid points in Bidify and reward points in Speak Asia) and then rely on this attachment and investment in the company to keep them with the company – regardless of how different the business model might look now compared to when they initially signed up.
Indeed, if you can look at the MLM company you signed up for and the business model is significantly different to when you signed up and you’ve got a lot of virtual money tied into the company – then you might just be a victim of this yourself.
We get a lot of these kind of people commenting on BehindMLM and often it’s hard to put yourselves in their position. With no investment in the companies being analysed, it’s at times quite difficult to carry on a discussion with those who have an irrational attachment to a particular opportunity based on projected profits or the amount they have invested with it.
The same attachment that allows the whole ‘bait and switch’ methodology to be carried through, no matter how drastic the changes.
What ultimately tends to happen is that these members continue to market the company based on their own experiences and the whole thing falls apart when newer members who sign up can’t duplicate the success of their uplines who joined under a completely different (and legally dubious) business model.
Ultimately business relationships sour, friendships are lost and people wind up with a bitter taste in their mouth, left permanently jaded against the concept of MLM.
Apart from the financial losses, this is the true unspoken cost of company owners launching businesses with models they know aren’t going to hold up to legal scrutiny, with the plan to sign as many people up as they can and then pull a compliance ‘bait-and-switch’ later.
To the company owners out there watching these latest compliance developments I have only this to say:
If you’re not sure about the legality of your business model, get it checked before you launch your company. This goes ditto for pre-launches, pre-pre launches beta-launches or whatever you want to call an unofficial ‘testing the waters’ launch.
And if you can’t run your MLM business without an initial legally dubious phase… then it’s probably not going to be sustainable in the long-term anyway.
Ultimately no matter how many members you sign up or how long you get away with it, legally or otherwise mark my words, sooner or later it will come back to bite you in the arse.
A fact that no amount of post-launch compliance initiatives will change.