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By Max de Leon, Researcher
Last of three parts
If Rep. Harry Angping (3rd District, Manila)
would have his way, pyramiding will soon be a heinous crime.
“We want the extreme punishment for this
crime. It should be either death or life imprisonment,” Angping
told The Manila Times after the House of Representatives adopted
House Bill 5601 before the Holy Week.
The bill, “Pyramid Sales Ban Act,” seeks to
amend several portions of RA 7394, or the Consumer Act of the
Philippines, because Angping said, it is now obsolete.
From the penalty of a mere P500 to P10,000 and
one-year imprisonment for involvement in pyramiding scheme under
Section 60 of RA 7394, the bill would make the offense—if
committed against three or more individuals—an automatic “act of
economic sabotage and shall be considered a nonbailable offense.”
Angping said several billions of pesos are being
lost to pyramiding schemes, which could have been used to fuel the
economy if put in a bank and circulated through legitimate lending.
The crime, he said, should be made a non-bailable
offense because pyramiding operators can easily change company names
and restart an illegal business if allowed provisional liberty.
Also, Angping said, it is but appropriate to
make pyramiding a heinous crime because victims here are often
gypped of their lifetime savings.
“You rob a person of his lifetime savings.
That is as good as killing him,” Angping said.
Broader definition
Besides the provisions on the penalty, House
Bill 5601 also seeks to amend the definition of “pyramid sales
scheme” under the Consumer Act to make it broader and clearer.
Article 2(K) of The Consumer Act defines
pyramiding sales scheme as sales devices whereby a person, on the
condition that he makes an investment, is granted by the
manufacturer or his representative a right to recruit for profit one
or more additional persons who will also be granted such right to
recruit on condition of making a similar investment.
In this definition, the profits of the persons
using such a plan are derived primarily from the recruitment of
other persons into the plan rather than from the sale of consumer
products, services and credit.
House Bill 5601 adopted the definition but added
that pyramiding could also mean that a “substantial amount” is
derived as profits from recruitment rather than from the sale of the
product.
The bill also adopted the detailed definition of
pyramid sales scheme under the Department of Trade and Industry
Administrative Order 08, the rules enforcing Article 53 of the
Consumer Act.
Article 53, the existing law that bans pyramid
sales schemes, forbids the use of chain distribution plans or
pyramid sales schemes in the sale of consumer products.
Although the department’s administrative order
broadens the definition of the pyramid scheme, its
punishment—because of its administrative nature—is limited only
to the issuance of a cease and desist order against operators of a
pyramid scheme and penalties of P500 to P300,000 fine and additional
P1,000 for each day of continuing violation.
The criminal proceedings that can be taken under
the administrative order also fall under Section 6 of the Consumer
Act.
But the administrative order made good in giving
a detailed definition of the pyramid scheme that Angping adopted in
his bill.
Pyramiding defined
Section 2.2 of the department’s administrative
order says that without limiting the coverage of the term “chain
distribution plan or pyramid sales scheme,” business sales or
marketing plan or scheme is considered a chain distribution plan or
pyramid sales scheme if it has two major features.
First, a promoter persuades recruits to buy
products, services, credit, title or rank whereby the recruits can
receive income primarily from the mere introduction, recruitment or
sponsorship of other participants into the scheme rather than from
the marketing and sale of products.
And second, it is pyramiding when the profits of
the persons using them are derived primarily from the recruitment of
other persons into the plan or scheme rather than from the sale of
consumer products and services. Its attributes include the
following:
1. Revenues or income are derived from
participants’ entry fees.
2. In order to earn income, participants must
sponsor a fixed number of other participants, each of whom must in
turn sponsor a fixed number of participants as in a plan
compensating participants balancing the number of recruits that the
number of sales volume.
3. A participant’s income is derived primarily
from his slot or position within the organization as determined by
the time, date and order of participation.
4. Participants are not allowed to return
marketable and unused products for refund within a reasonable period
of time or the conditions for such product return are contrary to
the provisions of the Consumer Act and/or its implementing rules
(DAO No. 2 s. of 1993).
5. There is no fair market value for the goods
received (fair market value is a price determined by an open market
system. An indicator would be that consumers would still be willing
to buy a product at its quoted price without participating in the
compensation plan).
Networking covered
But what made Angping’s bill more important is
that it included the definitions of a legitimate multilevel
marketing (MLM) plan that are not present in both the Consumer Act
and the DTI administrative order.
Section 4 of HB 5601 clearly defines
“permissible sales practices” for MLM, including:
1. A low entry barrier such as minimal
processing fee or reasonable sales kit demonstration materials, sold
at cost as prospects sign up as distributor.
2. A low exit barrier by way of a “buy-back”
policy (at a reasonable rate of the price paid) whereby the firm
will rebuy within 90 days from last purchase, the unsold, unopened,
unused, unexpired, undamaged and salable inventory held by
distributors resigning from or terminating their contracts with the
company.
3. An indispensable need for regular retail
requirements for the distributor to earn continuously. There is no
offer in income by simply recruiting and products are sold at fair
market value.
4. An obligation for distributors to sell at
least 70 percent of their previously acquired inventory before they
are allowed to make a repurchase. There is absolutely no inducement
for inventory loading.
Senate takes the cue
Senators Robert Jaworski and Noli de Castro also
filed separate bills on the matter, which are also consistent with
the definitions of administrative order of the pyramid sales scheme.
The two bills also defined a legitimate MLM
plan.
Angping and the cosponsors of HB 5601 are hoping
that the Senate would just adopt the bill and add some provisions of
the bills of Jaworski and de Castro to make sure there would be no
loopholes in the new law that will be passed.
The important part of the two Senate bills is
their preventive aspect.
De Castro and Jaworski stated in their bills
that the marketing plans of MLMs should be filed first with the DTI
for review if they are legitimate before the actual operation or
implementation.
The two senators also tasked the DTI to guard
against the following factors in an MLM plan that give the
presumption of a pyramid scheme: prohibitive entry requirements of
headhunting fees, undisclosed drawback policies, front inventory
loading, profits primarily derived from recruitment, unjustified
claims of unusually large returns on investments or get-rich-quick
promises, absence of a real market for a product and other similar
pyramiding schemes as hereinafter defined by law.
The DTI was also given jurisdiction over charges
of the use of pyramid sales schemes.
But in the version of de Castro, the penalty was
increased to P1 million to P5 million fine and imprisonment of 12 to
20 years without the benefit of bail.
In the two bills, pyramiding entities are also
ordered to return participants’ “any and all considerations
given, with interest charges at a rate to be computed from the time
such payments were made.”
Mediation proceedings
Just recently, the DTI invited 27 MLM firms
suspected of engaging in the pyramid sales scheme.
Right now, Powerhomes Unlimited Corp., Lifelink
Multi-Card, Inc. and Tie-With-Us Enterprise are mediating with
the DTI.
Evidence of pyramiding was not substantially
established against the following companies, which presented their
plan: Phil. Rich Int’l. Marketing Co., ADL Marketing Phils., Inc.,
Inosphil Corp., CPY Loan and Credit Corp., PriManila Plans, Inc.,
Sophi Martin Phils. and Kabuhi Int’l. Marketing Network, Inc.
Also, the DTI said the following companies are
still under evaluation after their business plan presentation: Grand
Post Int’l., Inc., Net Taipan Corp., First Quadrant and Dream Team
Pre-Paid Club.
The summons sent to the following companies for
marketing presentation were returned due to change in business
address: Ikingkong, Capitol Int’l Services, GEJOBACO Assoc., Inc.,
Rainbow Technologies, Inc., Sure Car, LGY Lending/Network and
Financial Assistance, Ugnayan Phils. Marketing Systems,
Entrepreneurs Club Int’l Marketing Corp., Cymbionic Inc. and Rise
E-Commerce.
DTI Assistant Director Jaime Olmos said there
has been no case law in the country yet where an MLM firm was found
guilty of using the pyramid sales scheme, although the department is
hoping there would be one soon.
He said Forever Living Products Phils., Inc. was
not invited for business plan presentation, because it is a member
of the Direct Selling Association of the Philippines (DSAP).
But DSAP President Joey Sarmiento made it clear
that being a member of the organization does not shield a company
from any investigation.
He admitted, however, that the DTI recognizes
the organization because it is a resource group of the department in
pyramiding investigations.
This is why, Sarmiento said, the DSAP came up
with an eight-point framework, which it uses in screening applicants
for membership in the group.
Sarmiento said the framework is consistent with
the DTI administrative order on definitions of a pyramiding scheme
and serves as the test in evaluating an applicant’s marketing
plan.
Guarding against naiveté and greed
Besides this, Sarmiento said DSAP is embarking
on a campaign to rid the industry of companies using MLM as a front
for pyramiding. It includes a massive information drive and consumer
education.
“We want to make sure that we are weeding out
pyramiding scams because it gives the industry a bad name,”
Sarmiento said.
On the government’s side, de Castro said
recourses must be taken to avert “such instances of fraud which
victimize not only our unsuspecting consumers but the reputation and
integrity of our marketplaces as well.”
But even on their own, Chingkee Tan of the
Millionaires in Business said consumers could easily avoid being
victimized by pyramiding schemes by simply guarding themselves
against two things— naiveté and greed.
Part 1
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