How controversy dogs the direct-selling business
Certain red flags should encourage investors to ask serious questions of those who are running the operation
When David Beckham signed for American Major League Soccer franchise LA Galaxy, its shirt sponsor Herbalife became a name associated with arguably the most famous footballer on the planet.
Allegations that the company’s business model was a pyramid scheme triggered an investigation by the US federal trade commission, a US$200 million (Dh734m) fine and demands for the nutritional supplements marketer to change its business model.
The waters surrounding similar marketing schemes offering entrepreneurship remain murky but there are clear signals to spot before signing up.
Ambareen Musa, founder and chief executive of financial experts Souqalmal.com, warned those considering signing up to do their own background checks before handing over cash.
“There are quite a few illegal pyramid schemes flying under the legal radar,” Ms Musa said.
“Investors must understand not all direct selling or multi-level marketing businesses are legal.
“If residents are approached by members of direct-selling businesses, they must first check if the company is registered with Direct Selling Association of the UAE to verify its legal status.”
A 2017 report by Euromonitor showed direct selling contributed to more than Dh500 million in sales in 2015, a figure that grew by 5 per cent last year.
Multi-level marketing is a key part of the industry, and it has proven to be a highly successful way to compensate direct sellers.
The sales force is compensated for sales personally generated and those of others they recruit, providing several levels of payment.
“If people come across a dubious direct-selling business, they should lodge a complaint with a government agency like the Dubai Economic Department or the Dubai Financial Services Authority,” Ms Musa said.
“Certain red flags should encourage investors to ask serious questions of those who are running the operation.”
Tell-tale signs of investment fraud are marketing slogans promising returns that are too good to be true, over-the-top marketing gimmicks, and no information about company ownership, registration or other verifiable details on the company website.