7 red flags that signal an MLM scam: Internet Scambusters #1,015
They're not usually illegal but multi-level marketing (MLM) programs can cross the legal line by misleading participants and pushing them into recruiting more potential victims.
But crooks have gone one step worse by targeting scam victims a second time by dishonestly offering to help them get their money back.
In this week's issue, we'll tell you the warning signs of an MLM scam and what to do, and not do, if you get caught out.
Let's get started…
MLM Scammers Hit Victims For Second Time
Hundreds of firms are in trouble for making outlandish claims about money-making opportunities through multi-level marketing (MLM), a $35 billion industry in the US.
MLM, sometimes known as network marketing, is one of those gray areas of business activity where it's sometimes unclear whether it's legit or a pyramid-style scam.
But how can you tell the difference? Read on.
How MLM Programs Work
Participants usually have to sell products such as cosmetics or housewares to family and friends. But they often also have to recruit new sellers from whom they'll get some sort of commission or to whom they'll profitably supply stock. And the new sellers, in turn, may be asked to recruit yet more people.
Taken to its logical conclusion, an MLM operation could end up with too many competing sellers and not enough buyers. If this happens, latecomers to the program can end up with lots of unsold stock. The big money-making claims fall to bits.
Estimates based on historical figures suggest there could be as many as 20 million Americans selling through MLM programs.
Late last year, the US Federal Trade Commission (FTC) send out more than 1,000 letters to MLM firms and other companies promoting business opportunities, warning about false or misleading earnings claims.
Firms that do make such claims or who play down the risks involved can face fines of up to $44,000.
To make things worse, researchers have now discovered a new scam targeting those who have previously fallen victim. Crooks offer to buy up unsold stock for peanuts or to help victims recover their investments. They charge a fee, of course, but never recover anything.
Often, they pretend to be attorneys, complete with fake websites, advertising on social media sites like Reddit. And they end up taking yet more money from people who can least afford it.
Victims Unaware
Part of the problem, according to experts at the Consumer Awareness Institute (CAI), is that victims don't realize they're being conned and often blame themselves for failing to make the earnings they were promised. As a result, they don't make official complaints.
Some years ago, CAI president Jon Taylor claimed in a research paper that some MLM companies were "defrauding millions of victims of tens of billions of dollars every year." And despite the FTC's initiative, crooks are still getting away with it.
The trend toward working from home isn't helping. In a recent report, Time magazine noted that "some MLM distributors are wooing new investors with promises of big money and the opportunity to work from home -- seemingly ideal for people who are unemployed."
Sometimes, victims were lured into buying products such as essential oils for resale, which were dishonestly claimed to be able to treat the Coronavirus or at least strengthen immunity.
What You Can Do
So, how do you avoid getting drawn into this web?
Start with this FTC guidance:
"If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors."
Then, watch out for these 7 red flags:
- You have to pay to join the program or to train.
- Promises of high earnings with little or no effort.
- Claims you'll only make big money by recruiting others.
- High-pressure tactics warning that you'll lose out if you don't act now.
- You're told you must buy more product to retain your status within the organization or to earn a bonus.
- Products are poor quality, don't represent value for money or are overhyped.
- You're encouraged to make unreasonable claims about quality and value.
Even if you think an MLM operation is legit, you still need to investigate to ensure you have the time and the right selling skills to make it a success.
And if you've already been caught out and have lost money through an MLM scheme, the CAI's Taylor urges you to complain.
"… with determined effort, you can often recover much if not all of your losses and in the process alert others and law enforcement of the ongoing fraud in MLM," he writes. "So please speak up and act."
Don't be fooled by social media ads purporting to be from legal firms and claiming they can help you get your money back. Instead, you can download Taylor's suggested recovery actions here: The Case (for and) against Multi-level Marketing.
And think of this: If you do get sucked into an MLM program that involves recruiting others to join, how will you feel when they themselves join the line of victims with unsold products and end up heavily out of pocket?
This Week's Scam Alerts
Profile Pics: Are you tempted to use one of those mobile apps that enabled you to change your profile pic, for example, by transforming it into a drawing or work of art? Beware. According to security software firm ESET, some profile data harvested in a top-rated app could end up in Russia. Read the small print in the app listing to find out how your personal data will be used.
Latest Currency Scam: It's bad enough that many investors have had their fingers burned in the rout that hit cybercurrency markets recently. Now crooks pretending to be from one of the biggest cybercurrency exchanges, Coinbase, are after what's left. They're trying to con investors into approving a temporary address where all their money will be diverted. If you deal with Coinbase, always work via their website at coinbase.com.
That's it for today -- we hope you enjoy your week!