Over­come dif­fi­cul­ties to up­root pyra­mid schemes

China Daily (Canada) - - VIEWS -

Tian­jin po­lice launched a 20-day mas­sive crack­down on pyra­mid schemes on Aug 6 af­ter Li Wenx­ing and Zhang Chao, two young men tricked into such schemes while seek­ing jobs, were found dead in the city’s Jing­hai district last month.

Pyra­mid schemes first ap­peared when Western di­rect sell­ing com­pa­nies started oper­at­ing in China in the 1980s. Di­rect sell­ing is the mar­ket­ing and sell­ing of prod­ucts di­rectly to con­sumers; it re­duces prices of prod­ucts by cut­ting the costs of trans­porta­tion and re­tail­ing.

Since Chi­nese peo­ple have tight fam­ily bonds, the tar­get cus­tomers of di­rect sell­ing in the ini­tial stages were mem­bers of the sell­ers’ fam­i­lies. Many peo­ple suc­ceeded in con­vinc­ing some of their fam­ily mem­bers to be­come “di­rect sell­ers” or “lower-level dis­trib­u­tors” of prod­ucts to earn some money. Grad­u­ally, how­ever, some di­rect sell­ing projects trans­formed into pyra­mid schemes, with “in­vest­ments” re­plac­ing the prod­ucts.

The Chi­nese gov­ern­ment banned all di­rect sell­ing com­pa­nies in 1998, al­though for­eign com­pa­nies such as Amway and Sun­rider had ob­tained li­censes to sell their prod­ucts from re­tail stores be­fore the ban was im­posed. The ban con­tin­ued un­til the State Coun­cil, China’s Cabi­net, in­tro­duced the Reg­u­la­tion on Di­rect Sell­ing Ad­min­is­tra­tion and Pro­hi­bi­tion of Pyra­mid Schemes Or­di­nance in 2005 as part of its com­mit­ment to the World Trade Or­ga­ni­za­tion. Dis­tin­guish­ing di­rect sell­ing from pyra­mid schemes, the reg­u­la­tion strictly pro­hibits such schemes. And the Crim­i­nal Law states that pyra­mid scheme sell­ers face im­pris­on­ment and heavy fines in ac­cor­dance with the sever­ity of their crimes.

Pyra­mid schemes, how­ever, have sur­vived. One rea­son for that is, the op­er­a­tors and “foot sol­diers” of pyra­mid schemes are closely knit be­cause of fam­ily re­la­tions and/or friend­ship, and hence dif­fi­cult to iden­tify. It is also very dif­fi­cult to trace the money the fraud­sters have col­lected, let alone re­cover it. And since the fraud­sters man­age to “hide” money, even af­ter be­ing im­pris­oned for their crimes, they tend to use the “hid­den” money to start an­other scheme again af­ter they are re­leased.

Many con­tinue de­fraud­ing oth­ers by sell­ing such schemes from dif­fer­ent lo­ca­tions to avoid ar­rest. Oth­ers con­tinue to do so un­der duress. Pyra­mid schemes seem to be run­ning in many parts of China, with their pro­mot­ers ex­ploit­ing the in­ter­net and us­ing fake in­vest­ment pro­grams to at­tract new “in­vestors” or re­cruits.

To com­bat pyra­mid schemes, the au­thor­i­ties have to strengthen cross-re­gional en­force­ment, and treat pyra­mid scheme fraud as a prop­erty crime so that those fraud­sters get sev­erer pun­ish­ment. Given that the bound­ary be­tween di­rect sell­ing and pyra­mid schemes has blurred, the gov­ern­ment should tighten reg­u­la­tions on di­rect sell­ing to pre­vent it from be­ing dis­torted into a scheme to de­fraud un­sus­pect­ing peo­ple.

More­over, since those run­ning pyra­mid schemes usu­ally gather in the name of fam­ily get-to­geth­ers or com­pany train­ing projects to keep col­lect­ing money, law en­force­ment agen­cies and com­mu­nity or­ga­ni­za­tions should make the best of the “grid man­age­ment sys­tem” — a digital ad­min­is­tra­tive mech­a­nism to su­per­vise and track sus­pi­cious move­ments of peo­ple and money — to nab them. In fact, strict su­per­vi­sion of money flow can be used to nip pyra­mid schemes in the bud.

The ju­di­ciary, on its part, can ask law en­force­ment of­fi­cers to

To com­bat pyra­mid schemes, the au­thor­i­ties have to ... treat pyra­mid scheme fraud as a prop­erty crime so that those fraud­sters get sev­erer pun­ish­ment.

in­ten­sify the search for miss­ing peo­ple in or­der to track pyra­mid scheme sell­ers and in­crease the sen­tences of those ar­rested for re­strict­ing peo­ple’s per­sonal free­dom and forc­ing the victims to join them in their crim­i­nal schemes.

Only through the joint ef­forts of the law en­force­ment of­fi­cers, the ju­di­ciary and the pub­lic can pyra­mid schemes be rooted out of so­ci­ety.

The au­thor is a pro­fes­sor of law at Zhong­nan Univer­sity of Eco­nom­ics and Law in Wuhan.


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