An in-depth comparison of a Ponzi scheme used by fraudsters and multi-level marketing used by brands
Everyone and I mean everyone, is talking about The Tinder Swindler. The Netflix documentary about Simon Leviev, an Israeli conman who swindled women for millions of dollars, has been serving as fodder for social media memes and dinner table conversations alike. The film’s popularity has not only benefited the victims, whose GoFundMe page has hit £100,000 in donations, but also the criminal, who has signed a Hollywood agent in the hopes of starring in his own dating show. The documentary’s success has baffled many after all, it’s not the first true crime film to be made about con artists. What sets The Tinder Swindler apart is the criminal’s intelligent use of a Ponzi scheme to aid him in conning innocent women. In this article, we will be diving deep into this form of fraud and comparing it with a controversial marketing strategy used by brands – multi-level marketing.
The basics of a Ponzi scheme and MLM
A Ponzi scheme, named after Charles Ponzi, who became famous for using it in the 1920s in the United States, entices new investors and uses their funding to pay off profits to previous investors. The fraudulent scheme creates an illusion of a profitable and successful business. The investors are led to believe that their earnings result from a thriving venture and are not dependent on new victims’ investments. In The Tinder Swindler, the victims believe that they are investing in a long-term future with their loving, wealthy boyfriend, when in fact, they are simply helping him maintain this façade for his future victims.
In multi-level marketing (MLM), a company relies on a non-salaried labour force to sell its products and/or services based on a pyramid-like commission system. There are two revenue streams for the participants of such a program – a sales commission from direct sales to customers and a commission based on recruitment of other participants who are required to purchase products in bulk and then sell them to consumers. MLM has often been compared to illegal pyramid schemes, where members are incentivized to recruit others into the system below them. In the end, most of the participants in the lower layers of the pyramid end up losing money, while those at the top typically earn a profit. A few popular brands that use MLM as a business model are The Body Shop, Amway, and Oriflame. These brands have faced criticism and controversy due to their MLM business models. A former Amway distributor wrote a book titled Merchants of Deception to expose the truths behind the global company’s MLM scheme.
Potato potahto or apples and oranges?
So, is it a stretch to say that a Ponzi scheme is similar to MLM? The most important similarity between the two is that new recruits or investors are lured by the promise of success and profits, which are in no way guaranteed. Lou Pearlman, the manager behind celebrated boy bands like the Backstreet Boys and ‘NSYNC, swindled investors for over 300 million dollars. He used the fame associated with these bands to get victims to invest in his other businesses, which didn’t even exist. Similarly, MLM beauty companies such as Arbonne, Forever Living, and Younique have preyed on thousands of women by creating an illusion of success. “They have you in a cultish grip,” says a former employee of one such company in an article by The Guardian. In both schemes, you are likely to lose money. Jon M. Taylor says in a report done for the Federal Trade Commission, “The loss rate for MLMs is at least 99%. This means that less than one in 100 MLM participants make a clear profit, and at least 99 out of 100 participants actually lose money.”
Having said that, there are some critical differences between a Ponzi scheme and MLM. The first is that while the former is illegal, the latter isn’t. A Ponzi scheme is recognized in law as a fraudulent scheme. Although MLM has been heavily criticized by experts and consumers alike, it’s considered a marketing strategy accepted by many. This is because, in a Ponzi scheme, participants are required to make an initial investment. In MLM, tangible investments are typically not necessary, and participants are given the opportunity to make profits by conducting sales and recruiting more people.
Is multi-level marketing ethical?
The ethical dilemma of MLM is not as simple as its legal one. In a Journal of Business Ethics report, the author argues that ethical businesses are product-centered, not recruitment-centered. Because of its dependency on network recruiting, it has a lot of potential of turning into a fraudulent pyramid scheme. Moreover, MLMs depend on salespeople to sell to their social circles, which in itself is rife with ethical peril. There are, however, many who argue that MLM programs make for great businesses. With no inventory to worry about, freedom, and low operation costs, it can seem like a tempting business model for both owners as well as participants.
Joining an MLM may seem like a profitable and exciting endeavor, but we suggest you do a thorough background investigation before considering it.
Have you spotted any recently? Let me know in the comments below!