Wednesday, 18 July 2012

Trapped to ‘get rich’

Mainlanders are flooding into Hong Kong to sign up for a multilevel marketing scheme that is banned in several countries. To many critics, it looks like pyramid selling


Guanyu 道 said...

Trapped to ‘get rich’

Mainlanders are flooding into Hong Kong to sign up for a multilevel marketing scheme that is banned in several countries. To many critics, it looks like pyramid selling

Minnie Chan
11 July 2012

A magic lamp promising health and wealth has captured the hearts of tens of thousands of mainland visitors flocking to Hong Kong on “business inspection trips”.

But lurking inside the six Causeway Bay sales centres of Digital Crown Holdings (HK), known as DCHL, is not an Aladdin’s genie but rather a multilevel marketing (MLM) strategy - illegal on the mainland but allowed in Hong Kong under a loophole in a law that forbids pyramid selling.

The lamps, made in France, burn essential oil and it’s claimed that they sterilise the air and release ozone. They cost from HK$500 to more than HK$10,000, depending on how elaborately decorated they are, with members of the scheme enjoying different discounts and kickbacks linked to their seniority and how many members they recruit.

“Do you want to be a millionaire owning deluxe villas and luxury cars like BMWs and Audis while you are still young?” an instructor nicknamed “Muscle Man” asks a room filled with at least 100 people aged from their late teens to their 60s. “Is your current salary too little for you to afford a home amid today’s soaring property prices?”

Several loud voices quickly answer affirmatively, swelling into a chorus.

Muscle Man tells them he was earning more than HK$60,000 a month just a few months after signing up as a distributor three years ago. Some of the mainlanders look shocked, sitting with mouths agape. Some whisper that they earn just 3,000 yuan (HK$3,650) a year back home.

DCHL was founded in Taiwan 12 years ago by Kim Huynh, a businessman from Zhongshan, Guangdong. Distributors are divided into seven levels of seniority that grow exponentially, with distributors encouraged to build up networks where each level is at least five times bigger than the one below it.

Besides the lamps and its supplies, the company also sells French beauty products, red wine and health supplements.

Its website says its sales centres have spread to Hong Kong, Japan, Malaysia, Singapore, Thailand, the Philippines, Indonesia and Australia. But Australia banned the company and all pyramid schemes in 2010, and the European Union has also prohibited them.

DCHL also closed down its sales centre in Macau after a bill prohibiting pyramid schemes was passed by the special administrative region’s legislature in 2008.

In Hong Kong, Democratic Party chairman and lawmaker Albert Ho Chun-yan says his party has received hundreds of complaints from people who claim they were cheated by DCHL, but no one has ever been charged.

Last December, the Legislative Council passed a bill prohibiting pyramid schemes. The Pyramid Schemes Prohibition Ordinance came into effect in January and has stiff penalties for anyone who tries to recruit others into such a scheme. Courts will also be able to order perpetrators to compensate victims.

However, the law still allows MLM operations under clauses that allow direct marketing.

In terms of the new law, genuine multilevel marketing involves the sale of a legitimate product or service, such as insurance. Salespeople receive a share of sales by any other salesman recruited. 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.

“I believe [distributors of] DCHL are running a pyramid scheme even though they always try to deny it,” said Ho. “My argument is that, first of all, the income of the distributors just depends on the number of people they recruit ... most of the products they buy are just kept in a warehouse.”

Federation of Trade Unions lawmaker Wong Kwok-hing says he has received dozens of complaints from victims of DCHL over the years, with many from the mainland.

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He said that he and other lawmakers had urged officials to learn from the European Union and Macau and introduce a strict ban on pyramid schemes and MLM operations.

“We hope that in the future, any kind of disguised, deceitful operations like those of DCHL will be stopped in Hong Kong,” Wong said.

Over several months, DCHL has failed to reply to repeated requests by the South China Morning Post for comment.

Professor Henry Fock Kwong-yin, a marketing expert at Baptist University, said a company selling overvalued products through kickbacks linked to seniority and the number of down-the-line members could be defined as a pyramid scheme.

“But if the company sells products that have ‘credence attributes’, the value and effects of which cannot be assessed by the consumer, it’s very difficult to conclude it is operating a pyramid scheme,” he said.

“None of the products DCHL sells have a reasonable value. It just depends on how much they claim they are worth. Victims could only accuse them of intentionally cheating them if they can collect enough evidence.”

Hong Kong police said they would not comment on individual cases, but that multilevel marketing was a legal marketing strategy. A spokesman said the new Pyramid Schemes Prohibition Ordinance was designed to plug a loophole in the repealed Pyramid Selling Prohibition Ordinance by making it a criminal offence to use a multilevel marketing scheme “as a scam to induce others to participate in a scheme that involves no genuine economic activities”.

The Post has learned that police have been closely monitoring DCHL but have found no evidence that it has breached any law.

DCHL distributors stress that their MLM strategy is different from a pyramid scheme, known as chuanxiao (people-to-people sales scheme) in Putonghua. Pyramid schemes were banned by the State Council in 1998 and a mainland regulation prohibiting then was passed in 2005.

Back in the sales promotion meeting, Muscle Man assured his group, saying: “We are not running chuanxiao, but a modified MLM model tailor-made for Chinese.”

In another room, Muscle Man’s upper-level “referrer”, known as “Big Brother Tong”, is talking to another group.

“I have never found such a perfect, profitable and sustainable business as that set up by DCHL,” says Tong, who claims to have been a successful entrepreneur in Zhongshan.

“If you start your business here, you will become Hong Kong-based businesspeople, enjoying the lowest tax rate in the world.”

He and Muscle Man say they are now “marquis-level” distributors, earning at least HK$1 million a year.

They are senior distributors for the THY team, a DCHL subsidiary founded by Macau-based senior distributors Huang Jinti and Ye Huichu, and Zhuhai-based partner Yang Yang last year.

“Hong Kong is a legal city. Some people tried to call the police and reported that we were operating chuanxiao, but the police refused to deal with the complaints because MLM is legal here,” Tong tells new participants.

“When there are too many members coming here and forming long queues outside our sales centres, Hong Kong police even send their men to help us maintain order. So do you guys still think that we are illegal?”

Senior distributors show off the trappings of their luxury lifestyle, with one “duke” claiming to own a luxury car worth at least HK$1 million and several deluxe villas in Zhuhai.

They brag about their successes to encourage newcomers to sign up as quickly as possible, saying the company has an efficient franchise system similar to McDonald’s.

“But if you want to know how effective and powerful our system is, you should pay a HK$62,608 franchise fee to become a ‘count’ first,” Tong tells one newcomer.

A new member must pay a membership fee of HK$360, followed by an annual fee of HK$210 after the first year of membership. A member who buys goods valued at HK$5,000 becomes a distributor, enjoying a 20 per cent discount on products.

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A distributor will then be promoted to “baron” after purchasing more than HK$24,000 or recruiting at least five new members - who are also keen on developing their own networks.

Senior distributors encourage new participants to make purchases totalling HK$62,608 - enough to become a “count”, saying the “big investment” is the first step towards earning your first million.

Distributor leaders refuse to reveal how many go on to reach “marquis” or more senior grades, but some admit that the secret of success for a top distributor lies more in their personal networks in undeveloped rural areas on the mainland, or in undeveloped parts of Asia, than in the allure of the company’s products.

DCHL claims to have more than one million distributors in Asia, but everyone is independent and in its partnership regulations it says it will not take any legal responsibility for illegal business deals.

Many mainland-based distributors say they realise that MLM operations are illegal on the mainland and so bring potential targets to Hong Kong in order to make their deals in the city.

Senior DCHL distributors say Huynh has told them that Beijing will soon allow the company to develop on the mainland because it has made many charitable donations.

In video footage posted on the company’s website, Huynh claimed in 2009 that DCHL aimed to expand to the mainland and India, as well as the European market and even make inroads into the home of MLM - the United States.

“All negative information was either made up by our competitors or the media … journalists don’t like us because we never give media outlets advertisements,” Tong tells mainlanders at a training conference.

“Our system is a perfect system to help the poor out of poverty, so the mainland authorities will soon lift the ban and allow DCHL to enter the huge mainland market.

“Our business model is different from other inferior pyramid schemes that are banned on the mainland because we have products, while others are just aimed at raising funds without selling any products.”

A spokesman for the legal department at the Industrial and Commercial Bureau in Zhuhai - the home base of many senior distributors - denied that pyramid selling or multilevel marketing would ever be allowed on the mainland.

“It’s impossible for our government to allow pyramid schemes or other network-selling models, no matter whether they are involved in pure fund-raising or product trading. They are illegal and strictly prohibited,” the spokesman said.

“It’s because none of the MLM companies have legal business licences issued by the relevant authorities, resulting in tax offices failing to collect tax from their deals.”