A race to the bot­tom

Eve­lyn Yu ex­plores the murky world of mul­ti­level mar­ket­ing and ex­plains the heavy so­cial price paid by peo­ple who get too heav­ily in­volved in it.

China Daily (USA) - - HONG KONG - Con­tact the writer at eve­lyn@chi­nadai­lyhk.com

Man­darin-speak­ing tourists can fre­quently be seen mak­ing their way through the Fri­day af­ter­noon chaos of Cause­way Bay, push­ing on to­ward Sogo de­part­ment store, trundling their lug­gage along the side­walk be­hind.

They are not shop­pers. They are peo­ple de­ter­mined to get rich, so they gather at the of­fice tower ad­ja­cent to Sogo, chat­ter­ing ex­cit­edly, ea­ger to be head­ing back home, lug­gage packed with pur­chases of scented lamps, wines, liqueurs, jew­elry and other mag­i­cal im­ple­ments ca­pa­ble of trans­form­ing base metal into gold.

Hap­pily they jos­tle their way into an el­e­va­tor for the ride that will take them to the 14th floor of­fices of Dig­i­tal Crown Hold­ings Lim­ited (DCHL), a con­tro­ver­sial Hong Kong-based mul­ti­level mar­ket­ing (MLM) com­pany.

The com­pany has made it­self the tar­get of protests that have sprung up out­side its of­fices, even out­side the Leg­isla­tive Coun­cil by an­gry main­land peo­ple de­mand­ing DCHL be put out of busi­ness.

The com­pany is not even per­mit­ted to do busi­ness on the main­land, re­jected as a pyra­mid scheme. Hun­dreds of its agents have been ar­rested by main­land po­lice. DCHL also had a brief flow­er­ing in Ma­cao, be­fore be­ing run out of town in 2008.

Fre­quently enough, dis­grun­tled for­mer as­so­ciates turn up on the streets out­side com­pany of­fices de­mand­ing their money back. Some suc­ceed. Most do not.

Mul­ti­level mar­ket­ing is al­most iden­ti­cal to old pyra­mid schemes. The per­son at the top of the sales pyra­mid re­cruits, let’s say, six prod­uct “dis­trib­u­tors” who re­turn him a per­cent­age of their prod­uct sales. Each of the six also re­cruits six more, com­pris­ing the third tier of the pyra­mid. If each per­son join­ing the scheme re­cruited six more peo­ple, by the time the pyra­mid reached its 13th tier it would com­prise over 13 bil­lion peo­ple – al­most dou­ble the world’s pop­u­la­tion. Thus the great ma­jor­ity of peo­ple who in­vest in the scheme will lose their money.

Pyra­mid schemes are out­lawed in Hong Kong and in most other places be­cause the ma­jor­ity of in­vestors re­ceive no ma­te­rial value for their in­vest­ment. A per­son who breaks the law in Hong Kong faces a HK$1 mil­lion fine and could go to jail for seven years.

Mul­ti­level mar­ket­ing closes this loop­hole. Peo­ple who join the MLM pyra­mid are re­quired to pur­chase prod­ucts from the com­pany at pre­mium prices. They are at lib­erty to re­tail the prod­ucts if they choose.

MLM’s de­fend­ers say this is a form of di­rect mar­ket­ing cut­ting out bricks and mor­tar stores. But the math­e­mat­ics of the game re­mains the same. Most are left with only a sur­feit of over­priced goods they can nei­ther sell, nor con­sume.

There are com­mis­sions and bonuses avail­able, but ex­pe­ri­ence shows only those who get in early can make an ac­tual profit.

In Hong Kong, the bound­ary be­tween per­mis­si­ble mul­ti­level mar­ket­ing and pyra­mid schemes is blurred. This cre­ates loop­holes that seem to turn many ea­ger in­vestors into dis­ap­pointed vic­tims.

Main­land vic­tims

One of those vic­tims is “Dong­fang’’, a for­mer DCHL af­fil­i­ate, who claims he was cheated out of more than 200,000 yuan (about HK$230,000). He is one of those fre­quently seen protest­ing out­side the DCHL of­fices.

Dong­fang was a tech­ni­cian at a fac­tory in Shen­zhen be­fore he joined DCHL. He was earn­ing some 2,000 yuan a month, but had big dreams. He took his first steps down the road to ruin back in 2012. His girl­friend at the time re­galed him with ac­counts of her older sis­ter earn­ing a for­tune sell­ing red wine. Dong­fang had no idea his girl­friend had just re­turned pumped from a four-day gung-ho mo­ti­va­tional ses­sion at DCHL and that she was set­ting him up.

He was weary of life as a mi­grant worker, and the al­lure of quick money set him see­ing vi­sions of find­ing buried trea­sure, so could move on to be­come the pro­pri­etor of his own busi­ness. The pic­ture she painted was too good to be true, but he still fell for it.

Then, what he thought was his big break came when he got to meet one of the “big bosses”. This is be­cause he had the good for­tune to be con­nected to his girl­friend, his girl­friend’s sis­ter and the sis­ter’s boyfriend – all as­so­ciates of DCHL

The gath­er­ing was at a pretty nice restau­rant, where a Mr Big showed up with a bag full of Hong Kong dol­lars which he flaunted as proof of the fab­u­lous earn­ings that could be ac­quired through mul­ti­level mar­ket­ing.

Dong­fang thought a prime busi­ness op­por­tu­nity had landed in his lap. Willingly, he forked out 4,000 yuan ($590) to reg­is­ter for a four­day in­vest­ment fair at DCHL’s of­fice in Cause­way Bay.

The ex­pe­ri­ence was tough. He re­called that right from the start, ev­ery­one was on his case, friends, ac­quain­tances, com­pany staff, they were all pump­ing him up with as­sur­ances he was go­ing to make it big.

Over four days, he and his fel­low acolytes were awak­ened early and herded into sem­i­nar ses­sions that would go on and on, in­tro­duc­ing com­pany prod­ucts, out­lin­ing the prom­ise of rags to riches, ex­plain­ing com­mis­sions and bonuses. They were told that in Hong Kong mul­ti­level mar­ket­ing was all above board and le­gal. They would stag­ger into the dorms af­ter grind­ing all-ay ses­sions sim­i­lar to “brain­wash­ing”. Af­ter four days, he paid an ad­di­tional HK$5,000 to be­come a DCHL as­so­ciate.

The dis­trib­u­tors of DCHL are di­vided into lev­els drawn from the ranks and pro­to­cols of her­aldry, from Fran­chisee, to Baron, Count, Mar­quis, Duke, and Arch­duke. Com­mis­sions de­pend on the num­ber of as­so­ciates below them on the pyra­mid chain. The more “lev­els” below them the higher their rank.

Back on the main­land, Dong­fang said the per­son above him on the pyra­mid was un­re­lent­ing in his ef­forts to push him to buy more prod­ucts – HK$67,000 worth so he could be­come a Count. Not to worry, his su­pe­rior told him, he could earn the money back within four months.

When money be­came short, he was taught how to prey on fam­ily and friends, ask­ing for loans. He took his par­ents, a fel­low stu­dent dur­ing col­lege years and friends to Hong Kong as in­structed by his su­pe­rior. The big dreams proved too hard to reach. The fam­ily kept buy­ing prod­ucts no one wanted to buy. Dong­fang sub­mit­ted his res­ig­na­tion and asked for a re­fund.

The head of his team was on to him right away, co­erc­ing him, mak­ing him be­lieve that if he could re­cruit more as­so­ciates, rather than take a re­fund, all would be well.

Dong­fang said he felt brain­washed as the pres­sure con­tin­ued un­til the 90-day lim­i­ta­tion on ob­tain­ing a re­fund ex­pired.

Pyra­mid or MLM

Along with other for­mer DCHL dis­trib­u­tors Dong­fang has come to Hong Kong many times to protest. He and his com­pan­ions marched on the Cen­tral Gov­ern­ment Com­plex. They de­manded DCHL be or­dered to close. They never got a re­sponse.

DCHL’s sales tac­tics have come un­der fire from both the pub­lic and the press. Since 2009, Hong Kong po­lice have re­ceived mul­ti­ple com­plaints against DCHL. But af­ter rounds of in­ves­ti­ga­tion by the Com­mer­cial Crime Bureau, the com­plaints were dis­missed due to lack of ev­i­dence.

Hong Kong po­lice re­fused to com­ment on spe­cific com­pa­nies, say­ing, “It is very hard to iden­tify a pyra­mid scheme.” The po­lice deal with them “case by case”.

DCHL was legally reg­is­tered in Hong Kong in 1998. On the main­land, both MLM and pyra­mid schemes are pro­hib­ited. Here in Hong Kong, DCHL is listed as a “trustable” com­pany on the Hong Kong Trade De­vel­op­ment Coun­cil web­site.

In re­sponse to en­quiries from China Daily, the Hong Kong Trade and In­dus­try De­part­ment re­vealed that the SAR is­sues no di­rect sales li­censes. Com­pa­nies must sign the Com­pa­nies Registry. Be­yond that, sep­a­rate li­censes may be re­quired for the sale of cer­tain types of goods, such as chem­i­cals, medicines, food, etc.

Hong Kong po­lice cau­tion res­i­dents to be aware of the dif­fer­ence be­tween MLM and out­right pyra­mid scams. Le­git­i­mate busi­nesses do not re­quire par­tic­i­pants to pay huge fees and the prod­ucts they sell are of high qual­ity.

Chen Li­wen, as­sis­tant pro­fes­sor of the Mar­ket­ing De­part­ment at City Univer­sity of Hong Kong, reck­ons the de­scrip­tions which in­volve words like “sub­stan­tially” or “huge amount” are pretty vague.

“If you pay at­ten­tion, a le­git­i­mate MLM and a pyra­mid scheme have no ma­te­rial dif­fer­ence in their op­er­at­ing mode. Le­git­i­macy de­pends on the at­ti­tude of the gov­ern­ment.

“Au­thor­i­ties tend to give per­mits to MLM com­pa­nies with a proven good rep­u­ta­tion or mar­ket per­for­mance in other re­gions,” Chen said. “A le­git­i­mate MLM com­pany in one place might be banned as a pyra­mid scheme in other mar­kets.”

Chen sup­ports the view that a clearer, more de­tailed def­i­ni­tion of a pyra­mid scheme should be in­tro­duced into Hong Kong leg­is­la­tion.

For many vic­tims like Dong­fang the last hope for re­dress lies with the leg­is­la­tion. How­ever, in the fore­see­able fu­ture, con­tro­ver­sial MLM com­pa­nies like DCHL seem to be here to stay.

Dong­fang said he and his girl­friend had a fight. He went back to his old job, work­ing in a small hard­ware fac­tory, pay­ing the money he owes as best as he can on a sub­sis­tence in­come.

He re­turns to Hong Kong from time to time, con­tin­u­ing to ar­gue with the com­pany, hop­ing to get his money back.

Some­times when he sees new peo­ple be­ing ush­ered in for ori­en­ta­tion, he se­cretly passes them notes warn­ing, “Pyra­mid scheme, be care­ful.”

He has no idea if his warn­ings will spare oth­ers the grief he ex­pe­ri­enced. The crowds, how­ever, con­tinue to march into the DCHL of­fices.

He some­times be­lieves the num­bers are grow­ing — peo­ple like him, with empty hopes that one day, through mul­ti­level mar­ket­ing, they will be­come a mil­lion­aire.

If you pay at­ten­tion, a le­git­i­mate MLM (mul­ti­level mar­ket­ing) and a pyra­mid scheme have no ma­te­rial dif­fer­ence in their op­er­at­ing mode. Le­git­i­macy de­pends on the at­ti­tude of the gov­ern­ment.” Chen Li­wen, as­sis­tant pro­fes­sor, Mar­ket­ing De­part­ment at City Univer­sity of Hong Kong

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