Massive numbers involved in schemes show how vulnerable mainlanders are
In the latest pyramid scheme case to come to public notice, more than 170,000 people invested at least 1.36 billion yuan in a 'Swiss cash' fund.
The online scheme ended up luring the most victims and cheating them out of the largest amount of cash of any scheme so far, according to state media reports.
Two people were prosecuted at the end of August by the Taishan District People's Procuratorate in Taian , Shandong , for running the scheme, which lured people into the network and distributed new participants' contributions among senior members.
Calling it the world's largest mutual fund and promising a 300 per cent return in 15 months, the founders created an aura of wealth and success. Their website boasts the fund was set up in 1948, has its headquarters in Berne, Switzerland, holds US$9 billion for international investors and has partnerships with the London Stock Exchange and JP Morgan Chase.
However, the Taishan District Industry and Commerce Bureau found the scheme was not registered with mainland securities and banking regulators. Moreover, whatever its claims, the scheme was illegal because its mode of making profits only through a multilevel hierarchy of salespeople fits the definition of a pyramid scheme.
Under the scheme, each participant invested at least US$1,000, of which 10 per cent went to the person who inducted him or her into the network as a commission.
The participants received 10 per cent of their principal as a monthly return for the first three months, with the proportion increasing by five percentage points every three months to a ceiling of 30 per cent in month 15, when the investment matured.
Their superiors also took a 10 per cent cut of the members' monthly return. Such schemes rely on a constantly increasing flow of new members. Otherwise, they collapse.
Inspired by the promise of large returns in a short period, and without investigating the logic of the investment structure, more than 170,000 people across the nation registered their personal information on the fund's website and paid their investments into appointed accounts.
The scheme was exposed during a crackdown on pyramid sales between July 16 and August 15. More than 6,600 organisational bases were blitzed by police and 3,300 primary participants were arrested. Last year, authorities broke up schemes involving nearly 250,000 participants.
Pyramid sales schemes first found popularity on the mainland with the arrival of cosmetics provider Avon in 1990, followed by the entry of the household and health care products organisation Amway in 1992.
Their sales methods were copied quickly and applied to a wide range of products, from everyday consumer items to forest planting projects. A State Council directive banned pyramid schemes in 1998, and a prohibition regulation was passed in 2005.
However, Avon and Amway survived the ban by being licensed as 'direct sales companies'.
Despite the law prohibiting them, pyramid schemes still have no trouble luring followers, and there's a cultural reason for that.
'It's easier for pyramid sales organisations to develop on the mainland than in western countries,' said Hu Xingdou of the Beijing Institute of Technology.
'Mainlanders usually give face to relatives and friends. No matter what they think of the programme recommended, they will not say no immediately. This results in the rapid development of networks.'
Poor living standards, the widening wealth gap and a flawed social security system have stimulated many urban and rural residents to reach for opportunity. The schemes seem like a dream come true to disadvantaged groups, offering a quick fortune regardless of participants' age, education and work experience.
Some members even develop strong emotional attachments to the organisations because they promote a feeling of community and mutual concern among members. As many mainlanders have no religion or belief system, they often find such an environment provides a kind of spiritual happiness, Professor Hu said.
'Quite a few people have distorted financial values and heavy speculative intentions,' said Zhang Hui , State Administration of Industry and Commerce direct sales supervision director. 'The large number of laid-off workers and other unemployed people find it hard to find a job in the short term. The strong physical, financial and spiritual controls of the organisations make them hard to leave.'
The schemes' damage to the family and social stability is huge, according to Ministry of Public Security official Gao Feng.
Professor Hu said: 'I've been to classes of pyramid sales organisations on the topic of the art of success. The people were fanatical. The leaders have strong spiritual control over the followers, as in Falun Gong. That's why the central government is very concerned. It is an issue involving political and social stability.'
Beijing lawyer Hu Aijun said few people sue pyramid sales organisations for compensation because the leaders usually cannot be found and no receipts had been received from product makers to prove members' purchases.
When action is actually taken, penalties are relatively lenient compared with the profits for the principals. An organiser can be fined up to 2 million yuan and participants up to 500,000 yuan. In major cases, the organiser can be sentenced to jail, Mr Hu said.
Anti-pyramid sales activist Li Xu said local governments lack the motivation to crack down on schemes because they usually don't hurt the local economy.
In most cases, the schemes attract migrants, and their consumption actually boosts the local economy.
'If an organisation has 20 hierarchies and every participant develops two members, the whole 1.3 billion mainland population would soon be included,' Mr Li said. 'I don't want it to happen. Seeing so many people being drawn into these schemes and living on lies and fake hopes would be such a sad thing.'
The number of pyramid schemes smashed in a nationwide crackdown between July 16 and August 15: 600
The amount of yuan involved: 1.7b