EVERY time I read about Malaysians – from housewives to Datuks – losing large sums of money through multi-level marketing (MLM) scams, I’m reminded why CompareHero.my is dedicated to increasing financial literacy.

Although MLM can be a legitimate business practice, for example for Tupperware, many times it is just a cover-up for a pyramid scheme.

When you see an ad say something like: “this housewife made RM10,000 in her first month, working from her house – no degree required”, it is a tell-tale sign of a scam. If you could really earn that much money that easily, you wouldn’t need to advertise it!

Here are some other signs that you are dealing with a scam that will prevent you from ruining your finances, and relationships with friends & family.

Registration. At the very least, check whether the company is registered with DSAM, the Direct Selling Association of Malaysia and check if they are registered with the Companies Commission of Malaysia or Suruhanjaya Syarikat Malaysia.

Recruiting. If you can only make a profit by recruiting new members instead of selling the product, the MLM basically confesses it is about finding new victims and not about product sales. If you cannot make a decent revenue through product sales, the pyramid will implode once it is impossible to recruit more members.

Products. Be aware if the MLM sells cosmetics, health & beauty products, such as perfumes and creams, jewellery, air & water purifiers, alternative medicines such as animal placenta pills, aroma therapy or other expensive sounding but essentially worthless products, such as fake gold, overseas land or property). Sellers typically make bold claims about the benefits, which are dressed up with pseudo-scientific evidence. The product is there simply to hide the fact that you are investing in a pyramid scheme.

Secrecy. If the MLM cannot explain the source of profits or give details about the technology of the products, or do not permit you to show your contract to outsiders, they are hiding the fact that their product is useless and the profits come from new recruits and not from product sales. Be wary when you are asked to buy a large inventory of the product. Don’t fall for “patented” or alleged “US technology” or secret recipes. It’s all smoke and mirrors.

Distribution. It’s a major red flag if the product is not sold through the regular channels that have served societies for millennia, such as stores and (online) market places. If it is such a great product, why can it not be sold through other channels? Perhaps because those channels don’t allow you to recruit new members and they want to protect their reputation against fake or low quality products?

Money for nothing. A legit MLM, such as Tupperware, requires a lot of hard work to make a decent living. There are no Tupperware housewives driving Ferraris. Legal and legit ways to earn money require hard work and there simply is no short cut.

Unstable. Pyramid schemes are unstable because every new level (the downline) requires more recruits in an exponential manner. This means you will very soon run out of people who fall for the scam, at which time the payments stop and The Star will report on the number of people who have lost thousands of Ringgit.

Assume the founder (level one) has five recruits (level two), which are also each asked to recruit five other people. If you come in at level seven, you will already have 15,625 peers and together you will need to find 78,125 new recruits, who will have to find 390,625 new recruits!

Bling bling. If the MLM recruiters are ostentatiously surrounding themselves with luxury items, they are trying to appeal to your greed and jealousy in hopes of preventing you from thinking clearly.

Encouraging recruiting your friends & family. The easiest sale is to someone you know and trust. If you are asked to sign up your friends and family, it’s a huge red flag and one that can tear families and couples apart.

Who pays who? Isn’t it weird that you are asked to pay, instead of getting paid? The MLM was supposed to make you rich, right? Not take your money. Whenever you need to pay a membership fee, training fee, administration fee, or buy a huge inventory, it’s a red flag. Your fee will simply go to the top of the pyramid and you will never see it back. Also, be wary when your full commission goes to your recruiter if you fail to make your quota. A real MLM will invest in its members, not the other way around!

These are “get-poor-quick” schemes. If they sound too good to be true, it’s because they probably are.

About the Author:
Mark Reijman is co-founder and managing director of http://www.comparehero.my/, dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.

Source: http://www.thestar.com.my/business/business-news/2016/08/21/signs-of-a-mlm-scam/