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

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

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. There are many variants of pyramid schemes, such as, chain letters, Ponzi schemes and what-have-you. What is however, common to all such schemes is this. In all cases, people are enticed into making an investment of money and time by a false promise of returns that become increasingly unsustainable as more people are drawn into the scheme. Nor does the situation materially change if a product (e.g., gold shares, jewelry) is introduced to make the scheme appear more legitimate. People may be told, for example, that they can make large sums of money if they buy jewels and if they pay a fee to recruit others to buy jewels. A rather funny side of some contemporary fatawa on such unethical schemes is when these impose “additional” conditions of fiqh requiring spot settlement of the exchange! One strongly suspects that these may be based on incomplete information shared with the jurists and/or not backed by a comprehensive understanding of the nuances of the game. As long as the returns come primarily from recruiting new people to make “investments” in jewels and in fees giving them the privilege to do recruiting, the scheme should be deemed fraudulent.

Another simple justification for denying Shariah approval to such games is based on grounds of public interest (maslahah mursalah). It is certainly not in the public interest to have businesses that are recruitment-, rather than product-, centered. There are several practices or behaviors that indicate that a company and its agents are not product-centered but are rather recruitment-centered schemes – i.e., schemes promising participants easy money to be paid out of the investments of other participants instead of legitimate sales revenue. These behaviors include, but are not limited to:

• Focusing on growth through the recruitment of people instead of on sales of a non-harmful product;
• Requiring substantial upfront fees from those people who are recruited to sell the product;
• Pressuring recruits to purchase corporate products for their own consumption or to stockpile large amounts of inventory.

There is a grave possibility that recruitment-centered companies or schemes aim to make “easy money” or what is condemned by Shariah as Maysir. Therefore, they are not in the public interest and should be kept out of an Islamic market.

Sales Personnel as Main Consumers

As noted above, ethical companies are product-centered. They do not make the recruitment of people into a pyramid-like structure their main focus. These ethical companies have retail sales to end-consumers. It is perhaps not an ethical idea to have retail sales simply to one’s own sales force. When sales personnel are the main consumers of a company’s products, the suspicion grows that the uplines in the company are pressuring downlines to buy more goods in order to reach a higher level. MLMs typically identify various levels of performance – Pearl, Diamond, Manager, Supervisor, etc. Agents make greater money as they advance to higher levels because they become eligible for new types or levels of commissions. Since the uplines get bonuses, commissions, etc. on the purchases made by downlines, MLMs are quite susceptible to this kind of internal pressure.

Self-consumption is problematic not merely because it often signals a pyramid fraud but also because many of those drawn into MLM schemes are desperate for a job. Such people may not be well-educated and may have little disposable income.

Many MLM products are relatively expensive compared to generic goods on the market. Requiring the sales force to purchase pricey products in order to retain status as an active distributor begins to look like a form of coercion applied to people who are not in a strong position to resist the pressure. Many participants have spent thousands of dollars buying the products from MLMs that supposedly were providing them with lucrative business opportunities.

The element of fraud in case of “pure” Pyramids is too clear to be missed. The possibility of exploitation in case of Pyramids “adulterated” with product selling appears to revolt against a fundamental notion of Islamic ethics as enunciated in the holy Quran:

Let there be trade among you with mutual goodwill – (2:275)

Further, a charge of over-pricing and profiteering has been labeled against many MLM schemes. Studies have found a large number of cases where prices of MLM products exceed those of corresponding generic products available in a market by 100-300 percent! Such studies clearly raise the possibility of unjust enrichment (ghubn) by the seller in the Islamic market. While such findings from many empirical studies on this question cannot be generalized because of time and spatial differences, the concerns must be investigated by the market regulator or at least by the potential Muslim participant before joining the MLM bandwagon.

Right to Exit & Rescind

MLMs should commit to buy back inventory so that distributors have a viable right of exit. Participants need to be able to recoup some of the money they spent to acquire inventory that they have not been able to sell. Such a policy, like a policy of monitoring retail sales to end users, provides some protection to the MLM sales force. However, once again, simply having a policy does not suffice to make the company ethical. In the first place, a buyback policy will be meaningless unless the company makes distributors aware of the policy. Second, for the refund policy to afford true protection to distributors, the distributors must get most of their money back relatively easily. Often this is not practiced by a large number of MLMs. Islam provides an option (khiyar) to the buyer to rescind the transaction in all cases of goods sold by description. Such an option is however, hardly provided by MLM companies to their consumers who also join their sales force.

Upfront Fee

If a company is making most of its money from the upfront fees, then the suspicion arises that the company is recruitment-centered rather than a genuine retail sales organization. If a significant portion of a company’s earnings come from an upfront fee or a sales kit or from training materials that new recruits are pressured to buy, an ethical red flag should go up. But when is a fee substantial? Each case must be examined individually. If an individual is buying a franchise, then a fee in the thousands or even millions might be appropriate. Much will depend on the extent of opportunity and the amount of support, expertise, etc. provided by the company offering the franchise. In the case of MLMs, however, the distributor may receive little more than a company handbook and a few product samples when s/he joins the company.

Selling to Family Members and Friends

Some MLMs encourage participants to sell product to family members and friends and/ or to recruit them into the MLM. This marketing strategy poses certain ethical difficulties. Participants, desperate to succeed at their new MLM businesses, may feel driven to pressure relatives and friends into buying cosmetics, water filters, jewelry, etc. In other words, MLMs can alter human relationships, encouraging people to “instrumentalize” relations rooted in love and affection. Relatives may feel somewhat forced into buying goods in order to keep their sons or daughters from feeling ashamed, to show support or to avoid a big fight within the family. Such customers may not like the goods they buy, or the goods may prove defective. In normal circumstances, they would return the product to the store for a refund. But, in this case, purchasers may opt to swallow the loss, instead of confronting a beloved child or friend and demanding their money back.

The products may come with a money-back guarantee, but the guarantee may not be meaningful in this context. Will people be likely to invoke the guarantee if doing so threatens family unity or long-term friendships? To be ethical, an MLM would have to warn recruits of the dangers implicit in instrumentalizing personal relations. Yet MLMs can hardly do so, given the realities faced by recruits. These new recruits are likely to have limited sales skills or connections and probably do not know how to develop a market strategy.

To sum up, there are strong ethical issues associated with MLM. In a pure form it has always been deemed controversial or downright unethical and illegal by secular laws. At the same time, smart operators are engaged in a continuous endeavor to dilute the illegality by adding some innocent features until lawmakers catch up again to prohibit the sale of the “old wine in a new bottle”. Islam emphasizes a higher level of business ethics in the form of freedom from ghubn and maysir and provides option (khiyar) to rescind in case of goods sold by description. In the absence of regulators in Islamic markets, it is the responsibility of Islamic scholars to emphasize on ethical behavior by all market participants.