'Joining' pyramid scheme is a crime
People who join pyramid schemes could find themselves in court as well as out of pocket under a new law which took effect this month.
Under Hong Kong's 30-year-old Pyramid Selling Prohibition Ordinance, only the masterminds behind pyramid selling schemes - in which participants hand over cash and must recruit more members in order to profit - could be prosecuted.
By the time a pyramid scheme has collapsed, the mastermind has usually fled with the profits, but the new Pyramid Schemes Prohibition Ordinance, which took effect on January 1, makes anyone involved liable for prosecution. The new law also closes a loophole allowing people who ran pyramid schemes that did not involve the sale of goods or services to avoid prosecution.
'As the principle behind a pyramid scheme is to exploit the naivety of the participants, it is likely that unsophisticated participants might find themselves losing their investments, as well as being prosecuted,' said Joseph Kwan, a partner in law firm Deacons. 'The fact that criminal liability is to be imposed on participants in pyramid schemes means that the public has the burden of assessing whether a scheme is legitimate.'
The new law imposes stiff penalties on anyone who tries to recruit others into a pyramid scheme. The maximum penalty has been increased from a HK$100,000 fine and three years in jail to HK$1 million and seven years. Courts will also be able to order perpetrators to compensate victims of the scheme.
Kwan said companies engaged in genuine multi-level marketing should review their strategies to avoid falling foul of the scheme. Genuine multi-level marketing involves the sale of a legitimate product or service, such as insurance. Salespeople receive a share of sales by any other salesperson they recruit.
In pyramid schemes, any reward is entirely or substantially based on the recruitment of new members. Any product or service offered will have little or no real value.
'The law seeks to prohibit multi-level marketing schemes which do not involve a genuine underlying business,' Kwan said. 'There are, of course, risks to operators of genuine multi-level marketing schemes, who might find their schemes falling within the scope of the revised definition of pyramid scheme.
'A genuine scheme should avoid a substantial link between the reward and the introduction of new participants. The link should be between the reward and the sale of genuine goods and/or services.'
But Professor Henry Fock Kwong-yin, a marketing expert at Baptist University, said the new law could help restore confidence in multi-level marketing.
And he said he hoped the stiff penalties would encourage victims of pyramid schemes to report the situation to authorities, rather than recruiting more members in an attempt to make good their losses.
'In most cases, before the scheme breaks the mastermind [behind it] will have run away.'
Records show that there were 10 complaints about suspected pyramid schemes between 2007 and September of last year, with 27 people arrested. Due to insufficient evidence, none of them were prosecuted.