Multi-Level Marketing (MLM): Is it an Ethical Game? – I

From our archives: IBF Review, Vol 1, No.16-17 September 2004

If you haven’t been approached so far by someone from Amway or Gold Quest or Herbalife or Biznas, you have reasons to feel bad. This perhaps means that you still have a long way to go before you are perceived as someone with good purchasing power. What have the above companies in common? They are the new age MLM companies that use “friendship and acquaintance” as effective tools of marketing.

MLM or multi-level marketing, also known as network marketing, refers to the practice of distributing, selling or supplying products or services through various levels of independent agents (contractors, distributors, etc.). These agents are paid commissions, bonuses, discounts, dividends or other forms of consideration in return for selling products or services and/or for recruiting other agents. The party which recruits another participant is the “upline” of the recruit. The recruited party is the “downline” of the recruiter. In MLMs, up lines are paid bonuses or commissions on the sales made by their direct downlines and by those who are downline of these direct downlines. Are such rewards legitimate and desirable in the eyes of Shariah? Do MLMs have a place in an Islamic economy?

Contemporary Fatawa

To find an answer let us begin with some actual cases of MLM and the fatawa of some contemporary jusrists. Recently a concerned Muslim brother addressed the following question on the popular portal Islamonline.Net.

A company located in British Virgin Island named Gold Quest International has its head office in Hong Kong. This company manufactures numismatic gold coins, gold jewelry etc. The company has come up with a business plan for individuals. According to the business plan, an individual has to buy a single product from this company. After purchasing the product, the company gives the person a specific identification number called TCO (Tracking Center Ownership). The TCO has to introduce/refer the same business to minimum ten people. According to the business plan, after bringing ten people to the business, the company pays USD four hundred as remuneration. Further, when these ten referred people refer the business to others, the upline individual keeps on getting credit to his account and the individual becomes eligible to get remuneration from the company, as long as the new business is introduced by himself or any of the other individuals. In the light of Islamic principles, will the income generated through such means be halal or haram?

Responding to this question a well-known Islamic jurist on the portal replies, “The practice of chain pyramidal commission is permissible provided there is full disclosure, i.e., all TCOs down the line know the structure of commission and know that the prices they are charged including all commissions up to the top of the pyramid. There is nothing in the Shari’ah that prevents giving commission to solicitors of business, as long as it is known to the person on the other side of the transaction. If there is no full disclosure it may become similar to bribes or at least cheating. (However, the) sale of gold and golden jewelry must always be in cash (hand to hand) as the Prophet, peace and blessings be upon him, instructed.”

Addressing another question relating to the multinational company based in Oman named Biznas selling online interactive basic computer courses, the jurist states: “The pyramidic network marketing is permissible provided the following three conditions are fulfilled:

• Commodities sold or traded in are themselves permissible such as selling real goods. Hence, selling phony and prohibited goods makes the process prohibited.
• The commission structure must be disclosed with full transparency to all new customers/members when they are invited, so they know when they join that the person who invites them has a stake in this invitation.
• General contract requirements are observed, such as aptitude to contract, full description of the goods, clear delivery and payment process, etc. and if they sell goods that require special additional conditions such as gold that requires delivery and full payment at the time of contract, such additional conditions must also be satisfied.

The fatwa however, invites further questions and comments on the portal. An anonymous questioner notes as follows: “At the outset, the person who asked the question did not disclose the value of the product and its real market value. What I understand is that the product, Gold Quest International’s Numismatic Gold Coins, is higher priced than its actual market value. Since the company offers charismatic returns, the solicitors normally do not care about the value of the product in anticipation of the potential benefit in the future. Since the actual product on sale is not the product but the charisma of the anticipatory returns for each individual who joins the chain, I feel that there is a violation of fundamental norms of Shariah for business. Secondly, it is quite clear that one who buys the product would not at all be doing it for its use but for engaging in the business with anticipation that he would get someone to join him, thus registering his returns. It is common knowledge that many people who join in this chain would lose their money due to the simple fact that all the solicitors would not be able to book ten people to ensure their returns. If the product with them is worth the money they spent, there would be no loss for them. The commission received by the upper link-man would definitely involve the part of the loss that is sustained by the lower links. Is it permissible in Shariah? Thirdly, it is a business that exploits friendship. A person who is not familiar in the business would not have the confidence and credibility to approach a stranger to join him. Instead, he would depend on his friendship to implant the seed of his business. Since the product is not an essential consumer item, the exploitation of friendship would be considered unacceptable to Shariah. He further notes that Allah will question us if we buy unnecessary products.

To the above the jurist’s response is as follows: The issue of commission has only one bearing on the fatwa, and that relates to transparency. Once the conditions and commissions are completely transparent to new customers so that they donot think of themselves as lured by honest un-benefitting friends, there must be no problem. Also, sale at a price that is a little higher than the market price is not a big deal as long as the difference is not substantial (one-third or more, as one-third makes it in the level of ghubn (according to some schools of fiqh). Also, the social activities of the company are a different matter. That does not affect the Shari`ah ruling unless they support aggressors against human rights of Muslims and others, such as giving financial support to the aggressors and occupiers in Palestine.

Let us now turn to what contemporary secular laws have to state regarding MLM.

Contemporary Secular Regulations

MLMs may be legal or illegal. MLMs become both illegal and unethical if they operate as “pyramid” or “endless-chain” schemes. What are pyramids and endless-chain schemes and why are they unethical?

Pyramid or endless-chain distributor schemes ask people to make an investment and, in return, grant them a license to recruit others who, in turn, recruit still others into the scheme. In essence, the investor pays for the opportunity to receive compensation when his or her recruit brings others into the scheme. The opportunity to recruit is the product.

Such schemes are illegal because they are unethical in two respects. They are (1) fraudulent, and they are (2) recruitment-, rather than product-, centered businesses. Pyramid schemes are fraudulent because they typically promise a large return in return for a small investment. Those who join a pyramid scheme early often do make a great deal of money. Those who come in later, however, make little or even lose money because there simply are not enough remaining people left to recruit into the network.

Consider chain letters, a version of an endless-chain scheme, Chain letters contain a list of people. Upon receipt of a chain letter, the recipient is to send something (money, postcard, an email message) to the person at the top of the list. The recipient then removes the top person and puts his own name at the bottom of the list. But how many people would need to be involved before a participant would receive any money? The numbers multiply exponentially and can quickly exhaust an entire population.

Insofar as endless-chain or pyramid schemes entice persons to participate by promising them that they can make large sums of money or gain some other consideration by joining and by getting other people to join, the schemes are frauds. Those who devise the schemes do not disclose how few people will make money. Instead, they play on the fact that many people do not understand geometric progressions. This is how the US Postal Inspection Service describes MLM.

“there are many multi-level distributorship schemes that are nothing more than sophisticated chain letters. They operate as a pyramid, claiming participants can earn lots of money by concentrating most, if not all, of their efforts on recruiting distributors rather than selling a product.”

Fraudulent pyramid schemes typically violate the Postal Lottery Statute (Title 18, United States Code, Section 1302). They contain all three elements of a lottery: prize (expectation of monetary or other gains from participation in the pyramid); chance (the monetary return you may receive from your participation is entirely up to chance, that is, dependent on the efforts of those below you in the pyramid), and consideration (the fee you pay to become a distributor). Frequently, the entrance fee into the pyramid is very high. In many cases, the money spent for such an entrance fee can often be considered lost, the moment you pay.

Indeed, there is no easy and ethical way to amass wealth. An MLM scheme is no exception. It creates wealth only perhaps for the promoter and the early birds who receive the large fees from unsuspecting victims. While this is true, the fact remains that there are many variants of the MLM that may or may not contain specific objectionable elements. In the next part of this article we would focus on these specific unethical elements and evaluate the same from an Islamic perspective. It is quite possible that a scheme may be legal, yet unethical.

To be continued