Multi-level Marketing in Singapore
The Current Legislative Approach
The multi-level marketing industry has become increasingly prominent in Singapore. This article looks at the current multi-level marketing and pyramid selling legislation in Singapore in light of the changes to the law that have taken place in recent times.
Multi-level marketing’ is, in essence, a marketing or sales structure whereby person X may recruit a second person Y, and thereafter X receives commissions based on the sales made by Y or by other persons recruited by Y.
‘Pyramid selling’, by contrast, is conventionally understood to be an illegal multi-level marketing scheme whereby person X pays a certain membership fee in order to participate in the scheme, and thereafter is paid a commission for recruiting additional participants in the scheme.
Background — The previous legislation
The original Multi-Level Marketing and Pyramid Selling (Prohibition) Act (Cap 190) (the ‘Original Act’) was first enacted in 1973. Notwithstanding the conventional definitions of ‘multi-level marketing’ and ‘pyramid selling’, there was, as the title of the Original Act implies, no distinction drawn between the two phrases in the Original Act.
The leading local case in relation to the Original Act was Tan Un Tian v PP [1994] 3 SLR 33, in which the Singapore High Court held, inter alia, that there were three principal elements in a multi-level marketing or pyramid selling scheme:
- a person (X) gives valuable consideration to join a scheme;
- X receives a payment for recruiting an additional participant (Y) or receives a commission from sales made by that additional participant (Y); and
- X shares this payment or commission with a third person (Z).
However, the Original Act was amended effective 1 June 2000 with the introduction of the Multi-Level Marketing and Pyramid Selling (Prohibition) Act (Revised Edition 2000) (Cap 190) (the ‘Revised Act’). With the introduction of the Revised Act, the definition of a multi-level marketing or pyramid selling scheme was radically altered, and as such, the decision in Tan Un Tian is no longer an applicable precedent in Singapore.
The Revised Act
Although the Original Act had previously been under the auspices of the Ministry of Finance, the Revised Act signified a change in ministerial responsibility — multi-level marketing legislation is now under the ambit of the Ministry of Trade and Industry (‘MTI’). It is to be noted, however, that the policing of the Revised Act is carried out by the Commercial Affairs Department and not by the MTI itself.
Similar to the Original Act, there is no distinction drawn between multi-level marketing and pyramid selling in the Revised Act. Section 2(1) of the Revised Act states that the phrase ‘multi-level marketing scheme or arrangement’ has the same meaning as ‘pyramid selling scheme or arrangement’.
The Revised Act simplifies the definition of ‘pyramid selling scheme or arrangement’ by indicating two conditions which must be fulfilled before a scheme or arrangement is captured as such:
- a person (X) receives a ‘benefit’ either for recruiting an additional participant (Y), or earns a commission from sales made by such an additional participant (Y); and
- as a result, a further promoter or participant (Z), receives a ‘benefit’ under the scheme or arrangement.
A ‘benefit’ arising as a result of condition (2) above, if monetary, is commonly known as an ‘overriding commission’. In this regard, however, the definition of ‘benefit’ in the Revised Act extends beyond just monetary compensation but includes ‘gratuities, commissions, cross commissions, bonuses, refunds, discounts, dividends and any other payments, services or advantages of whatever description ...’.
This ‘driftnet’ approach to the definition of ‘pyramid selling scheme or arrangement’ is a very wide one which appears to capture nearly all schemes which incorporate an element of overriding commission, or indeed schemes where any person benefits in any way as a result of the actions of other participants.
Offences
Section 3 of the Revised Act states:
It shall be unlawful for any person to promote or participate in a multi-level marketing scheme or arrangement or a pyramid selling scheme or arrangement or to hold out that he is promoting or participating in such a scheme or arrangement.
The word ‘promote’ is defined in the Revised Act to include ‘manage, form, operate, carry on, engage in or otherwise to organise’. Pursuant to this definition, a ‘promoter’ or person ‘promoting’ a scheme would include both persons ‘participating’ in a scheme as well as the company or people who may be managing or operating such a scheme.
Section 4 of the Revised Act makes it an offence for a business designed to promote a multi-level marketing scheme to be registered as a business, and s 5 of the Revised Act states that no company proposing to promote a multi-level marketing scheme shall be incorporated or registered under the Companies Act (Cap 50).
Offences under ss 3, 4 and 5 of the Revised Act may incur fines not exceeding S$200,000, or imprisonment for up to five years, or both.
Section 6(1) of the Revised Act provides that if it is a company that commits an offence, every individual who at the time of the offence was a director, general manager, manager, secretary or other officer concerned with the management of the company, shall also be deemed guilty of such an offence.
However, s 6(2) of the Revised Act indicates that it would be a defence for that individual if he can prove that ‘the offence was committed without his consent or connivance and that he exercised such diligence to prevent the commission of the offence as he ought to have exercised having regard to the nature of his functions and to all other circumstances’.
Rationale for Revised Act
It was stated during the Parliamentary Debate on the Revised Act on 9 May 2000 that the purpose of the Revised Act was to prohibit schemes where participants were required to pay a lump sum upfront to join, but the driving force to recoup their upfront payment was not the sale of goods and services, but rather the recruitment of additional members.
An example was given of the S888 scheme in which participants paid S$27,000 for a membership which entitled them to the right to receive a commission of S$3,000 for every additional member they recruited, or any subsequent additional member in turn recruited by such additional members, the right subsisting down to five levels of recruits for each participant. This scheme would be prohibited under the Revised Act.
It was also stated that the Revised Act was intended to make the local legislation more responsive in acting against pyramid schemes, while at the same time give assurance to legitimate businesses that they would not be unwittingly caught by the law.
Exemption from Definition of ‘Pyramid Selling Scheme or Arrangement’
Section 2(2) of the Revised Act states that the definition of a ‘pyramid selling scheme or arrangement’ shall not include ‘such schemes or arrangements for the sale, lease, licence or other distribution of a commodity, or any class of such schemes or arrangements, as the Minister may by order prescribe, subject to such terms or conditions as may be specified in the order’.
The effect of s 2(2) of the Revised Act is that a scheme or arrangement that prima facie has the characteristics of a multi-level marketing or pyramid selling scheme or arrangement as set out in s 2(1) of the Revised Act, would nevertheless not be prohibited in Singapore if it falls within a class of schemes which the Minister may by order prescribe. This means that the Minister of Trade and Industry may by way of subsidiary legislation carve out specific exceptions from the wide ‘driftnet’ prohibition contained in the Revised Act. This allows the authorities to be quicker and more flexible in responding to developments in the multi-level marketing industry by creating new exceptions or modifying the scope of the existing exceptions without having to amend the primary legislation.
The first exceptions prescribed by the Minister of Trade and Industry were set out in the Multi-Level and Pyramid Selling (Excluded Schemes and Arrangements) Order 2000 (the ‘Order 2000’) which came into effect concurrently with the Revised Act on 1 June 2000. The Order 2000 was subsequently amended by the Multi-Level and Pyramid Selling (Excluded Schemes and Arrangements) (Amendment) Order 2001 (the ‘Order 2001’), which came into effect on 1 January 2002.
Conditions to be Satisfied in Order to be Exempted from the Revised Act
The Order 2001 first indicates, inter alia, that insurance schemes and franchise schemes that satisfy certain conditions would be exempted from the definition of ‘pyramid selling scheme or arrangement’ as set out in the Revised Act, and thus not be prohibited in Singapore. We shall not be discussing insurance schemes and franchise schemes further in this article.
Paragraph 2(1)(c) of the Order 2001 then sets out eight conjunctive conditions (ie all eight conditions must be met at the same time) in order that any other scheme be exempted from the said definition of ‘pyramid selling scheme or arrangement’ and similarly not be prohibited in Singapore. The eight conditions are analysed below.
No payment in order to participate
Sub-paragraph 2(1)(c)(i) states that no person should be required to provide any benefit or acquire any commodity in order to participate in a scheme, other than the ‘purchase of sales demonstration equipment or materials at a price not exceeding their cost which are not for resale’. Furthermore, no commissions or other benefits should accrue to any person out of payment for these sales demonstration equipment or materials.
This condition is intended to prohibit schemes that contain an element of upfront or inventory loading, where an expensive purchase of goods or services is required as a pre-requisite to participation, in order to protect new participants from potential losses should these items prove not to be saleable or to have had artificially inflated pricetags.
As an example, a hypothetical scheme which requires every person to first purchase goods valued at S$5,000 in order to participate would fall foul of this condition unless it could be proven that the goods were actually sales demonstration materials, sold at cost price and not for resale, and that no benefits accrue to any other person out of the payment for these goods.
Method by which benefits accrue
Sub-paragraph 2(1)(c)(ii) of the Order 2001 reads:
any benefit received —(A) by any promoter of, or participant in, the scheme or arrangement [must accrue] as a result of the sale, lease, licence or other distribution of a commodity to any other person; or(B) by any promoter of the scheme or arrangement [must accrue] as a result of the performance of one or more participants in relation to the sale, lease, licence or other distribution of a commodity to any other person.
To illustrate the workings of this sub-para, in a typical multi-level marketing scheme as set out in diagram 1 below, persons B and C have been recruited by person A and are thus considered to be part of person A’s down-line. Persons D and E have similarly been recruited by person B and are considered to be part of person B’s (as well as person A’s) down-line. Should person D sell a commodity for S$100 to an end-consumer, person D may earn a direct commission of S$15 (as permitted by limb (A) above), person B an overriding commission of S$10 and person A an additional overriding commission of S$5 (as permitted by limb (B) above). This would not contravene sub-para 2(1)(c)(ii) of the Order 2001.
No benefits to be paid for recruitment
Sub-paragraph 2(1)(c)(iii) of the Order 2001 states that ‘subject to sub-para (ii), no benefit shall be received by any person as a result of the introduction or recruitment of one or more persons to be participants in the scheme or arrangement’.
This sub-para aims to prohibit schemes under which a participant receives a payment as a result of his recruiting a certain number of people. In Diagram 1, for example, a scheme where A receives a payment for every two persons he recruits directly (in this case B and C) or indirectly (persons D and E) would not be permitted.
However, there may be some doubt whether sub-para 2(1)(c)(iii) of the Order 2001 captures a scheme where, for example (with reference again to Diagram 1), A would only receive payment for his product sales, should he have recruited a certain number of people (say B and C). Notwithstanding that no actual payment is made for recruitment per se, it could possibly be argued that some recruitment activity would be a pre-requisite to receiving benefits under such a scheme. It is not entirely clear whether the legislative intent is to treat this benefit as being received ‘as a result of’ recruitment and thus contravene the Order 2001.
No representations on accrual of benefits
Sub-paragraph 2(1)(c)(iv) of the Order 2001 indicates that no promoter may make, or cause to be made, any representation that benefits will accrue other than as a result of a sale or some other distribution of a commodity to another person, or the performance of one or more participants in relation to the sale or some other distribution of a commodity to another person.
For example, no promoter is allowed to represent to potential participants that they can earn benefits merely by recruiting as many persons as possible to join the scheme or that there is no necessity to sell any products in order to accrue benefits.
No income claims
It is a requirement under sub-para 2(1)(c)(v) of the Order 2001 that a promoter, in respect of representations as to actual or potential accrual of benefits under the scheme, must maintain records of the maximum, minimum, average, median and mode benefits accruing to both promoters and participants of the scheme, duly audited by an auditor for each financial year. In this regard, the median benefits would be a reference to the amount earned by, for example, the 50th highest earner in a scheme of 99 people, while mode benefits are the amount or range of amounts which occur most frequently in the scheme.
As these obligations could be fairly onerous, it would appear the intention of the authorities is to discourage the making of income claims per se, unless such detailed records are indeed kept. It is to be noted that the legislation is silent on who has the right of access to such detailed records — it is not clear whether the records are required to be made available to the authorities, participants and/or consumers.
Nevertheless, there does not appear to be any prohibition on using examples or calculations to illustrate the mechanics of a scheme, as long as they are clearly stated as such. For example, a promoter would be prohibited from stating that ‘a participant will definitely make S$10,000 a month within a year’, but may be at liberty to explain hypothetically that ‘if a participant sells S$10,000 worth of products in a month, he would earn S$2,000 commission from such sales’.
No false or misleading representations or material omissions
Sub-paragraph 2(1)(c)(vi) of the Order 2001 places the onus on a promoter to ensure that the information given out during promotions, seminars, sales or marketing talks is completely true and accurate. A promoter should refrain from making any claims that he knows may be untrue or misleading. What is ‘misleading’ is not defined in the legislation and would presumably depend on the facts of each particular situation.
Similarly, a promoter is prohibited from knowingly omitting, or causing or permitting to be omitted, a material particular relating to the scheme or commodity. He is not allowed to omit or disregard information that may be material. The promoter may also not knowingly engage in, or cause or permit, any conduct that is misleading or likely to mislead as to any material particular relating to the scheme or commodity.
In addition, promoters must generally not use, or cause or permit to be used, fraud, coercion, harassment, or unconscionable or unlawful means to promote the scheme or the commodity. The use of the term ‘unconscionable’ suggests that this may include not just illegal means but also any actions that, though not illegal, may be morally reprehensible. This requirement serves to extend some protection to potential participants as well as consumers, as it would mean that ‘hard-selling’ or ‘pressure-cooker’ tactics, for example a constant barrage of phone calls at unearthly hours, may not be used to promote the scheme or the commodity. This would also ensure that participants and consumers are given the requisite information necessary for them to make informed decisions in relation to a scheme or a commodity.
Promoters also have a responsibility to take ‘reasonable steps’ to ensure that participants comply with the above requirements. As the definition of ‘promoter’ in the legislation is wide enough to cover ‘participants’ in general, this may lead to the incongruous situation of each participant having a responsibility to ensure that every other participant complies with the requirements contained in this condition.
Sixty-day compulsory refund period
Sub-paragraph 2(1)(c)(vii) of the Order 2001 requires a commodity to be distributed with a full refund guarantee exercisable on ‘reasonable commercial terms and within a period of at least 60 days from the date of distribution of the commodity to the participant’.
The imposition of a compulsory 60 day ‘cooling-off’ period may create potential problems under certain circumstances — a company selling perishables, for instance, would be severely disadvantaged if it were required to give full refunds for products returned on the 59th day. However, as ‘reasonable commercial terms’ can be imposed, it is arguable that products could be required to be sealed, undamaged, resaleable or the like, depending on the situation.
It is to be noted that these conditions do not impose any guidelines as to ‘cooling-off’ periods for consumers who are not themselves participants or promoters of the scheme. There would not appear to be any statutory protection extended to such persons in this regard under the current multi-level marketing legislation.
Compulsory information in writing
Finally, sub-para 2(1)(c)(viii) of the Order 2001 requires that the existence of the refund and the manner in which it can be exercised must be indicated in writing to participants at the time of distribution of the commodity. This would presumably be satisfied by including such details on every sales order form or invoice enclosed on the delivery of a commodity. Again, there is no mention of, nor does the protection appear to extend to, end-consumers.
Conclusion
It is the stated intention of the new Order 2001 to clarify the types of multi-level marketing schemes permissible in Singapore, while the Revised Act increases the power of the authorities to take action against errant persons and companies that fall foul of the new legislation.
What is also apparent is that the new multi-level marketing legislation is aimed more towards the protection of participants in multi-level marketing schemes, as opposed to consumers who purchase products but are not themselves participants in such schemes. Such consumer concerns may go some way to being addressed once proposed legislation protecting the rights of consumers comes into effect in Singapore.
At present, the Direct Selling Association of Singapore requires its member companies to adhere to a Code of Ethics and Conduct (which is supported by the MTI). This Code sets out certain principles and practices governing business activities of members, which serve to look after the interests of both consumers and participants. The Consumers Association of Singapore has also taken an active interest in educating the public and protecting the rights of consumers on multi-level marketing related issues.
At the time of writing of this article, there have been no prosecutions under the Revised Act nor any judicial clarification on the new legislation. As pointed out, there remain some uncertainties relating to the scope and interpretation of the current legislation. The interpretation of the Revised Act and Order 2001 will thus be a matter of some conjecture and is likely to remain as such until proceedings are brought to the attention of, and decided by, the Singapore courts.
Nevertheless, the MTI has shown, in its willingness to consider feedback from the multi-level marketing industry and consumers alike, and the swift promulgation of the Order 2001 so soon after the Order 2000 in response to such feedback, that it is prepared to take into account the opinions of persons affected by the legislation. This approach is to be welcomed and, it is to be hoped, will also be adopted in ushering in future consumer legislation in Singapore.
Adrian Chan & Lim Kean Hao
Lee & Lee
Ref:http://www.lawgazette.com.sg/2002-11/Nov02-focus2.htm
Multi-Level Marketing & Pyramid Selling Scheme
In 1973, the Multi-Level Marketing and Pyramid Selling (Prohibition) Act was enacted to prohibit objectionable features of pyramid selling. These are schemes whereby participants are required to pay a fixed sum upfront to join, and to recruit new members in order to recoup their upfront payment. Usually the typical pyramid selling scheme does not involve the transfer of physical goods or services as the marketers would mostly emphasize on the recruitment of new members instead of the sale of goods. Such schemes may eventually collapse due to the limited supply of willing recruits. When that happens, many participants will lose their upfront payments.
In June 2000, the Act was amended, with changes made to the definition of pyramid selling schemes. In addition, the Act exempted certain classes of schemes, such as insurance-related schemes, master franchises and schemes that adopt direct selling and network marketing methods, provided they satisfy certain conditions. The exempted schemes and the conditions are set out in the Multi-Level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order. The Exemption Order was amended in 2001 and came into effect on 1 January 2002.
The Ministry of Trade (MTI) administers the Multi-Level Marketing and Pyramid Selling (Prohibition) Act while the Commercial Affairs Department ("CAD") of the Singapore Police Force investigates into offences under the said Act. Both MTI and the Singapore Police Force do not grant endorsement to companies or businesses operating as exempted schemes. The Singapore Police Force also does not advise on the legality of such business schemes.
Members of the public who wish to operate or participate in any marketing schemes are advised to acquaint themselves with the relevant laws and to seek proper legal advice, where necessary. The definition of illegal pyramid selling schemes and the conditions for exempted schemes can be found in the Multi-Level Marketing and Pyramid Selling (Prohibition) Act.
Members of the public and consumers should not succumb to high-pressure sales tactics that call for immediate payment or execution of an agreement. Insist on taking your time to think over your decision. Talk it over with a family member, friend or lawyer. Ask the promoter to substantiate any claims or representations he/she has made in respect of the product and the purported earnings.
For more information, you can visit the FAQs section in MTI website at www.mti.gov.sg.
Ref:http://www.mti.gov.sg/legislation/Pages/Multi-level%20Marketing%20and%20Pyramid%20Selling.aspx
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Multi-level Marketing and Pyramid Selling (Prohibition) Act (Chapter 190)
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Ref:http://www.mti.gov.sg/legislation/Pages/Multi-level%20Marketing%20and%20Pyramid%20Selling.aspx
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