Sunday, June 23, 2024

Scam but not a Scam: Amway ‘s Direct Selling Model under Scrutiny

Earlier this month, Amway, which is the world’s largest direct selling company, came under the Enforcement Directorate’s radar for allegedly running a “multi-level marketing scam”. As a result, the ED attached its assets worth over Rs 757 crore as part of a money-laundering investigation.

Direct selling business models are often accused of running a fraud business by sucking up customers’ money for their agency; this is not the first time Amway has been accused of a fraudster business.

As per its website, the US-based company has more than 15,000 employees and 1 Million business owners, earning them $ 8.5 Billion (2019) in revenue worldwide.

What is Amway?

Amway, a short form of the ‘American Way’, is a US-based multi-level marketing company that sells various products in the healthcare, cosmetics, and homecare category.

Based out of Michigan State, Amway was founded by Jay Van Andel and Richard DeVos in 1959. The founders launched its first product- a Liquid Organic Cleaner under a unique business model that stressed the ‘power of relationships’.

Scam but not a Scam: Amway 's Direct Selling Model under Scrutiny

Hence, Amway classifies its business model to be the direct selling business model that runs on relationships rather than a whole lot of supply chain mechanisms.

So what exactly is the Direct Sales Business Model?

We must all be familiar with having atleast one distant relative or a friend proposing a money-making scheme that involves a certain products. You simply need to stock up their products and sell them to the people you know or sell the dealership of the same in return for some commission. Or have you ever brought products from such salespeople?

These salespersons are actually the upline workers who are the independent business owner or independent business owners above a particular Independent Business Owner in a Placement line.

From healthcare products to cosmetics to edible products- these people offer a range of products at comparatively higher rates or would have to buy the brand’s dealership.

It is precisely what Direct Sales Business Model is, a scheme that eliminates the intermediaries and reduces the cost of engaging them. It is also called network marketing which means creating a network of sales representatives to connect to the customers directly. Yet this type of business model is often involved in running a pyramid scheme fraud as such schemes are sold with the false idea of becoming rich.

What is Pyramid Scheme?  

A pyramid scheme is an illegal investment scam built on a hierarchical structure that pays higher-ranking participants with monies raised from new members.

Is Amway India involved in Pyramid Scheme Scam?

A statement issued by the Enforcement Directorate mentioned how Amway was perpetrating a ‘scam by running a pyramid ‘fraud’  in the guise of a direct-selling MLM network.

Amway India

It said, ” The entire focus of the company is about propagating how members can become rich by becoming members. There is no focus on the products. Products are used to masquerade this MLM pyramid fraud as a direct-selling company,” the ED alleged.

As per the PTI report, the ED found out that the company collected Rs 27,562 crore from its business operations during 2002-03 to 2021-22 and “paid” a commission of Rs 7588 crore to its distributors and members in India and the US.

Moreover, Amway brought Rs 21.39 crore as share capital in India during 1996-97, and till the FY 2020-21, it remitted a “huge” amount of Rs 2,859.1 crore in the name of dividend, royalty and other payments to their investors and parent entities.

The report also talked about the involvement of companies like Britt Worldwide India Private and Network Twenty One Private Limited in promoting n promoting Amway’s pyramid scheme by conducting seminars for joining members under the guise of sale of goods by the enrolment of members in the chain system.

The ED said, “The promoters are conducting mega conventions and flaunted their lavish lifestyle and used social media to lure gullible investors,”.

In its defence, Amway India said that the ED action was regarding an investigation dating back to 2011. The company has been cooperating with the agency and has shared all the information sought by it from time to time.

The company also steered clear of all accusations saying that it’s been operating in line with the Direct Selling under the Consumer Protection Act (Direct Selling) Rules, 2021.

However, this is not the first time the company has been accused of running a fraud scheme, but it has always been on the hit list for most countries’ officials.

The US

Amway has had its presence in America since its foundation in 1959. In its domestic arena, Amway faced price-fixing charges from Federal Trade Commission. In addition, the FTC prohibited it from misrepresenting profit, earnings or sales. The company paid a $100,000 fine for violating the order in a 1986 ad campaign. It had faced similar charges of operating a pyramid scheme in 2007. However, Amway settled the class-action suit paying $56 million to the court.

The UK

Amway’s operations came to a halt when the Government pressed several charges on its various practices in the United Kingdom and Ireland in 2007. The Government accused the company of deceptive marketing, presenting inflated earnings estimates, and luring distributors into buying bogus “motivation and training” tools.

Amway UK

But the court dropped all its charges saying that saying reforms by the firm (including banning non-Amway-approved motivational events and materials) had fixed faults that favoured selling training materials over products and misrepresented earnings.

Canada

Amway faced charges for its fraudulent practices in Canada, too. Soon after its incorporation in the US, the company entered Canada in 1962. However, in the 1980s, the authorities accused the company of setting up dummy companies and creating fictitious levels of trade and a fraudulent price list to mislead Customs officials into accepting lower value for goods imported from the US.

Amway pleaded guilty to fraud of 28 Million Canadian dollars, for which it paid a fine of $ 25 Million to the Canadian Government. Apart from this, Amway was ordered to pay roughly $148 million in unpaid charges, sales tax, and penalties in a separate lawsuit, but the company only paid $45 million. In 2009, again, the company slipped away from a major class-action lawsuit.

China

In 1995, Amway entered the Chinese markets with its direct-selling scheme. However, within four years, the Chinese identified its pyramid scam, and the company had to face tough opposition resulting in riots. As a result, the company faced a blanket ban on its business model.

Amway had to mend its way to sustain itself in China for the first time. First, it began operating through retail stores against its global business model. Then, however, as the Chinese Government came up with new direct selling laws, Amway turned to its traditional marketing model.

Future of Amway in India

Amway India’s then-managing director, William Scott Pinckney, declared in 2013, weeks after being granted bail in a case of suspected cheating in Kerala, that the business aimed to reach revenues of Rs 10,000 crore in India within a decade. In 2021, Amway’s global CEO, Milind Pant, declared India one of the top three regions for growth and investment (after the United States and China), with revenue targets of Rs 20,000 crore in the long term.

Amway in India

However, with new hurdles on their way, time will say if Amway if Amway’s direct marketing model could survive in India.

For more such detailed articles on corporate news go to http://corpindianews.com/

Image Credit:
theprint.in
livemint.com
glassdoor.co.uk
scrabbl.com
amwayglobal.com

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