Enforcement Directorate case against Amway and past controversies related to the company

the story So Far: The Enforcement Directorate (ED) on Monday, April 18 attached assets worth Rs 757.77 crore of direct-selling company Amway India Enterprises Pvt Ltd, accused of running a multi-level marketing scam.

attached properties Dindigul district of Tamil Nadu includes immovable and movable properties such as a parcel of land and Amway’s factory building, plant and machinery, and vehicles worth over Rs 400 crore. The ED said the remaining attached assets include bank balances and fixed deposits in 36 bank accounts identified so far, with a cumulative balance of ₹345.94 crore.

What do we know about the present case?

Amway is an American direct-selling FMCG (fast-moving consumer goods) company that started its Indian operations in 1995 as the Indian Direct Selling Association. It then started a charity called the Amway Opportunity Foundation in 1996, held seminars to enroll members, and eventually established a subsidiary in 1998. Its operations are based on direct selling and multi-level marketing (MLM) models.

Amway India faced several police complaints and court cases related to fraudulent activity and fraud in Hyderabad and Kerala between 2006 and 2014, with its former CEO William Scott Pinckney being arrested twice in 2013 and 2014.

The present action of the ED is based on a previous complaint lodged in Hyderabad. The ED said its probe into Amway revealed that the company was running a “pyramid fraud” under the guise of a direct selling multi-level marketing network.

The central agency alleged that Amway collected around Rs 27,562 crore through its business operations from 2002-03 to 2021-22, of which it paid commission of Rs 7,588 crore to its distributors and members in India and the US during the same period. gave.

The ED further said: “Amway has brought ₹21.39 crore as share capital in India in 1996-97, and by 2020-21, the company has remitted a huge amount of ₹2,859.10 crore in the name of dividend, royalty and other payments their investors and parent entities.”

What are pyramid schemes?

In a pyramid scheme, an entity promises payment or services to participants, primarily to enroll other people in the scheme, not to supply a product or service to the public. As new participants join new recruits, money continues to flow down the chain and eventually forms an ever-increasing pyramid or hierarchy. These are also called money circulation schemes.

The ED has made the same allegation in the Amway case. The agency said: “The company’s entire focus is on promoting how members can become rich by becoming members. There is no focus on products. Using products to disguise this MLM pyramid fraud as a direct selling company is done.”

A pyramid scheme becomes untenable once a large number of people are involved, as profits are reduced when the money earned is being circulated among the group, as opposed to profits made through the actual sale of products.

Amway, in response to previous cases against it, argued that the commissions earned by its distributors are not distributed across the board to every person in the company’s sales network. It denied running a pyramid scheme, saying it engages in direct selling through its members, whose hierarchical network engages in the sale of its products, and is spreading the network. Meanwhile, the ED has flagged “exorbitant” prices of Amway products.

Amway has always maintained that its business model is Multi Level Marketing (MLM).

What is the Multi Level Marketing (MLM) Model?

There is a thin line between a pyramid scheme and an MLM model. The focus on selling more products as a compensation model rather than commissions to recruit more members differentiates the MLM model from a pyramid scheme.

Unlike indirect sales companies, which use a network of wholesalers, distributors and retailers to sell their products, MLM companies involve members of the public to sell their products directly. These members, even though not employees of the company, recruit more people to join the network selling products, thus establishing a mechanism that expands this web and revenue.

Amway’s independent members are called Amway Business Owners, who, according to The Business Model Analyst website, make a difference by selling products directly to customers, receiving bonuses according to increasing sales volume, and finally, through incentives as the business grows. earn profit from. Each recruited member initially pays a registration fee.

What are the laws governing such schemes in India?

In December 2021, the Center issued new guidelines for direct selling companies such as Tupperware, Amway and Oriflame, banning them from promoting pyramid or money circulation schemes.

With the Consumer Protection (Direct Selling) Rules, 2021, direct selling companies were brought under the purview of the Consumer Protection Act for the first time. New rules were introduced to make companies like Amway liable for complaints arising out of the sale of goods or services by their direct sellers.

The rules state that direct selling entities and direct sellers shall be prohibited from promoting pyramid schemes or enrolling any person in such scheme or participating in such arrangement in any manner under the guise of carrying on direct selling business. will be banned. The ED has accused Amway of doing so.

Following the ED’s current action, Amway India said that the incorporation of direct selling companies under the Consumer Protection Act (Direct Selling) Rules, 2021 last year had “brought much-needed legal and regulatory clarity to the industry, while Amway’s revival.” was confirmed by India’s continued compliance with the spirit and letter of all laws and regulations in India”.

Apart from last year’s rules, another law banning such activities is the Prize Chits and Money Movement Scheme (Banning) Act, 1978. It prohibits “nomination or participation in prize chit and money circulation schemes or as members”.

“No person shall promote or conduct any prize chit or scheme of money circulation, or enroll as a member in, or otherwise take part in, any such chit or scheme, or any money shall be made in pursuance of such chit or scheme.” shall not receive or transmit,” reads section 3. Sections 4 and 5 of the Act outline the penal provisions and penalties for contravention of the Act.

Section 6 describes how the Act shall apply to companies committing such offence, which states that “every person who, at the time the offense was committed, was in charge of the company for the conduct of the business of the company and The company as well as the company would be deemed to be guilty of the offense and action would be taken against him and punished accordingly.”

What are the past cases associated with Amway?

In 2006, a complaint was filed against Amway by its recruiting member with the Hyderabad Crime Investigation Department (CID). In the case against Amway, the CID had invoked sections 3,4,5 and 6 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 along with sections 420 (related to fraud) of the IPC.

The CID, on the basis of investigation into a complaint by Satyanarayana, a resident of Hyderabad and recruiter of Amway, said that the company was promoting an illegal money circulation scheme and motivating and provoking the general public with the promise of huge commission, At the same time, it was harassing the members to increase the distributor network. To sell products on a large scale.

In subsequent years, several complaints flagging off similar complaints were filed by Amway distributors in undivided Andhra Pradesh. Several complaints were also registered in different parts of Kerala.

In 2013, the Economic Offenses Wing of the Crime Branch of Kerala Arrested William Scott Pinckney, former CEO and chairman of Amway India, and two directors of the company have been charged with financial irregularities and fraud. In the multi-level fraud cases registered in Wayanad district in 2011, the same penal provisions were applied to three persons as in the 2006 case.

was the CEO after being released on bail arrested again In Gurgaon, again invoking the relevant provisions, for similar cases filed by recruits in Kerala in 2013 fraud and money circulation Danger.

Responding to the present freezing of its assets by the ED, the company said in a statement: “The actions of the authorities are in connection with the 2011 investigation and since then we have been cooperating with the department and have shared all information. Asked from time to time since 2011.

It added that the company “has a rich history of upholding the highest standards of integrity, integrity, corporate governance and consumer protection, which are well ahead of time in the interest of the consumers at large”.

• The Enforcement Directorate (ED) on Monday, April 18 attached assets worth Rs 757.77 crore of direct-selling company Amway India Enterprises Pvt Ltd, accusing it of running a multi-level marketing scam.

• Amway is an American direct-selling FMCG (fast-moving consumer goods) company that started its Indian operations in 1995 as the Indian Direct Selling Association.

• In 2006, a complaint was filed against Amway by its recruiting member with the Hyderabad Crime Investigation Department (CID).