Multilevel marketing-related fraud challenges state management
The recent arrest of leaders of a Hanoi-based company in the biggest multilevel marketing-related scam in the country so far has triggered concern about the state management of this business model.
On February 20, Le Xuan Giang, management board chairman of the Vietnam Commercial Production Joint Stock Company (Lien Ket Viet) was arrested for alleged fraud and property appropriation in a pyramid scheme reportedly involving more than 60,000 victims who were swindled out of a total VND 1.9 trillion (over USD 85 million). Deputy general director Nguyen Thi Thuy and five other employees of the company were also arrested for the same charge.
The Ministry of Public Security has ordered police in 27 cities and provinces nationwide to join investigation into the case which might involve more victims and a larger amount of money, said Colonel Tran Quang Huy, chief of the Corruption Case Investigation and Guide Division under the Investigation Police Department of Economic and Corruption Crimes (C46).
Initial police investigations revealed that the company was established in 2010 and licensed for multilevel marketing in 2014, dealing in various products, including dietary supplements and healthcare devices.
To join Lien Ket Viet’s sale network, each distributor had to pay a deposit of at least VND 8.6 million (roughly USD 390) to receive a business code for selling the company’s products. Distributors could pay more deposits and choose not to receive the products to get higher commissions, being promised a sum of around VND 449 million (over USD 20,000) including commissions, interest and bonus after five years which would be increased if they could enroll new members.
The company expanded its network by using deposits of new sellers to pay old ones and repeating that cycle. It even deceitfully advertised itself as being part of the Ministry of National Defense and forged many documents including a prime-minister certificate of merit to win the trust of customers. It held large events to pay commissions and give bonuses in kind such as autos and motorbikes to lure participants.
Within just one year from June 2014 to July 2015, Lien Ket Viet opened 21 branches nationwide, recruiting more than 60,000 people many of whom had borrowed money from relatives and friends to pay billions of dong to the company in hopes of changing their life overnight.
Since late 2015, police has received reports saying Lien Ket Viet had failed to pay commissions to clients under their agreements.
Hundreds of people who had paid deposits to Lien Ket Viet never received commissions as promised. Clients, investors and members of the company rushed to the company offices in Hanoi and Hai Phong to ask for compensation but found they were closed, the Vietnam News daily reported.
Lien Ket Viet is a typical case of fraudulent network marketing which has quickly grown in recent years with more sophisticated tricks. The most common trick played by swindling multilevel marketing firms is to call for financial investment with lucrative profits. Participants in the multilevel marketing system are promised monthly high commissions without having to do anything but inviting others to the network. Lien Ket Viet had reportedly paid as much as one trillion dong in commissions out of VND 1.9 trillion it received from clients, while spending just VND 7.1 billion buying goods and earning only VND 9 billion as sale revenue.
Only when participants do not receive money as promised and react that the system breaks.
Although victims’ greed and credulity are largely to blame, experts agree state management authorities must be held responsible for the scam.
Nguyen Van Hien from the National Assembly’s Legal Affairs Committee blamed on lax management and lack of responsibility from civil duty performance forces, saying it was unacceptable when Lien Ket Viet could swindle tens of thousands of people in 27 localities nationwide for a year without being detected, given a complete state management apparatus ranging from line ministries, sectors, local administrations to police and market control forces.
Despite a bulky apparatus, state management effectiveness remained poor, Hien told the Tien Phong(Vanguard) online, stressing Lien Ket Viet’s widespread activities were an abnormal social phenomenon and concerned authorities must early notice and step in rather than after serious consequences occurred.
Responsibilities of state management agencies for multilevel marketing scams should be clarified, said Do Manh Hung, vice chairman of the National Assembly’s Social Affairs Committee. He told the Tien Phong it was unreasonable that Lien Ket Viet had noisily launched public relation campaigns, advertising it as a unit of the Ministry of National Defense and even forging a certificate of merit of the Prime Minister without being noticed by concerned authorities.
It was impossible that specialized agencies and localities knew nothing about Lien Ket Viet raising thousands of billions of dong from tens of thousands of people over such a long time, senior lawyer Bui Quang Nghiem from Ho Chi Minh Bar Association told the Tuoi Tre online. Nghiem said inspection and market control agencies must be held answerable, given the relatively complete and specific legal system governing multilevel marketing.
Specialized authorities’ neglect had indirectly lent a hand to rampant network marketing frauds, Nghiem said, stressing inspection agencies must monitor and conduct inspection as soon as finding any unusual signs as the law had specifically defined goods allowed for multilevel marketing, commission limits and periodical reporting on revenues and so on.
Dr Ngo Tri Long, an economic expert, also pointed to responsibilities of the Ministry of Industry and Trade and the Vietnam Competition Authority – the agency licensing multilevel marketing businesses – for failing to warn the public in the Lien Ket Viet scam.
The Vietnam Competition Authority must monitor and supervise operations of multilevel marketing companies after their licensing, Long told the Tien Phong, saying this authority had failed to closely watch Lien Ket Viet even though this company’s operations had earlier been questioned in the mass media.
But Vietnam Competition Authority Director Bach Van Mung said his agency had not acted late on the case, saying the Vietnam Competition Authority inspected Lien Ket Viet only after seven months the company obtained a multilevel marketing registration certificate and fined the company VND 570 million for its several violations. After that the Authority in collaboration with the Ministry of Public Security’s C46 and Hanoi’s Cau Giay district police inspected the firm’s activities, leading to the official investigation of the case of fraud and property appropriation at Lien Ket Viet in February.
Deputy Minister of Industry and Trade Do Thang Hai also said the Ministry had strictly managed operations of Lien Ket Viet and punished its violations in accordance with Government Decree No. 42 on management of multilevel marketing business.
Early this month, the Ministry issued on its website warnings about tricks employed to take advantage of the multilevel marketing model for self-seeking or fraudulent purposes. The Competition Management Authority also said it was considering revising the current regulations on multilevel marketing, such as increasing charter capital and deposit amount and strengthening supervision and inspection in localities.
The pyramid selling model was introduced into Vietnam in the late 1990s but there was no law governing this new business until 2005 when the Competition Law and Government Decree No. 110 were issued. In 2014, the Government released Decree No. 42 in replacement of Decree No. 110 to tighten management of multilevel marketing operations, only allowing network sale of goods rather than services. By December 2015, the country had 62 multilevel marketing companies, 10-20 percent of which were foreign-owned.