Lawmakers Want to Blur the Lines Between Legal and Illegal Marketing Schemes

Republican members of Congress want to make life a little easier for multi-level marketing companies. They are pushing legislation to ease restrictions on the pyramid-like companies that have long histories of exploiting their customers and their recruited sales forces.

In mid-July, Rep. Tom Graves (R-Ga.) introduced HR 3280, the Financial Services and General Government Appropriations Act of FY 2018. Around the same time, a Michigan Congressman, John Moolenaar (R), tacked on an amendment to the bill that loosens the definition of the term pyramid promotion scheme and limits funds for enforcement actions outside this new definition. It was adopted on a voice vote by the House Appropriations Committee, and they will go forward with the bill—never mind that the bill and the amendment aren’t remotely related.

A simple definition of a pyramid scheme would be a scam, right? It’s an enterprise built on a broad base with a narrowing as money rises to the top, but where the base finds their money gone and those at the top get rich.

No law or regulation clearly distinguishes a scam from a direct-selling or multi-level marketing company that both looks and operates like a pyramid scheme.

Direct-sales companies, such as the cosmetics marketer Avon, sell their products or services directly to consumers. Business regulators and burned participants say that too often, companies such as Herbalife International of America Inc., ignore the consumer part of the equation and generate most or all of their sales revenue not from customers, but from people recruited to sell the products. Those people have to buy the products as inventory to get started and many have over the years bought a garage full of lipsticks or soaps or diet pills that they could not find buyers for at any price, which looks like a pyramid scheme.

Herbalife paid $200 million and overhauled its business practices as part of its Federal Trade Commission settlement. Earlier this year, the FTC cut nearly 350,000 checks to people who lost money trying to run Herbalife businesses.

The FTC relies heavily on decades of court decisions on what constitutes unfair or deceptive practices to pursue companies. But Republicans have recently made some moves that could further muddy the definition of a pyramid scheme and tie the hands of the FTC.

In addition, Rep. Marsha Blackburn (R-Tenn.) introduced a bill in late July deceptively titled the Anti-Pyramid Promotional Scheme Act of 2017, HR 3409. This bill, which looks to amend the Federal Trade Commission Act would “dramatically limit FTC actions against pyramid schemes,” says William Keep, dean of the School of Business Administration at The College of New Jersey.

Keep wrote in a blog for The Hill that since 1996, the FTC filed 26 pyramid scheme cases against multi-level marketing companies. Of those willing to face FTC prosecutors in court, all lost. The remaining cases all settled, agreeing to FTC terms. And the vast majority closed their doors, he wrote. “If made into law, the amendment ties the hands of federal regulators and further facilitates an already troubled industry that lacks transparency. If multi-level marketers and [the association] truly believe in the various manifestations of the multi-level business model, then let them welcome a full congressional hearing on the matter.”

The bill has seven co-sponsors, five of which serve on the Congressional Direct Selling Caucus, established in September 2015 by the Direct Selling Association and co-chairs Blackburn and Marc Veasey (D-Texas), one of the bill’s co-sponsors. Rep. Moolenaar is also a caucus member.

And if you’re wondering why such a green congressman is central to all of this—Moolenaar has only been in the House of Representatives since 2015, though he does serve on the Appropriations Committee—it likely boils down to simple proximity. Moolenaar’s district is just east of Ada, Mich., the Grand Rapids suburb where Amway, the nation’s largest multi-level marketer, is located. It has good reason to want to loosen the language around pyramid schemes; Amway paid $56 million to settle a class-action suit in 2010 alleging the company operated as one.

These recent legislative machinations have the Direct Selling Association written all over them. Though the association claims it wants pyramid schemes prosecuted to the fullest extent of the law —as president Joseph Mariano wrote in a blog for The Hill recently—he also wrote erroneously in that same article that “nowhere in federal statute is it clear to consumers or anyone else what constitutes a scheme.”

The FTC certainly knows what constitutes a pyramid scheme and has more than 40 years of case law to back it up. The problem with the Moolenaar amendment is that it further blurs the definition of a pyramid scheme, giving more leeway to these multi-level businesses. One way it does that is by removing the burden of product demand by actual consumers. Instead, the businesses could sell more freely to distributors affiliated with the business. Sounds like a scam, right? That’s an area the FTC has pushed back on for years.

By loosening the definition of a pyramid scheme, and by limiting funds to enforce actions outside of that vague definition, the FTC gets shackled. And consumers who get sucked into these schemes lose safeguards and protections. “Shockingly, because of language attached to an appropriations bill, without a hearing or prior consideration, the House of Representatives is poised to pass a bill that would entirely stop the FTC from shutting down these kinds of scams,” Terell McSweeny, a commissioner with the FTC, wrote as a rebuttal to the amendment for The Hill. “This language would handcuff the FTC and enable deceptive and unfair multi-level schemes to continue to victimize consumers.”

McSweeny also called out the direct-selling industry and its allies for employing the “same deception they have used on millions of consumers over the years.” She said removing the amendment from the final appropriations bill is just a start, noting that similar proposals have advanced as stand-alone legislation and “model statutes are currently being peddled to unwitting state legislatures across the United States.”

Unwitting? Unlikely. Think of the Direct Selling Congressional Caucus. And of the money funneled into politics by the direct-selling industry, which was a $36 billion business in 2016, according to the association. Not to mention that many of these direct-selling companies have their own PACs and super PACs. For example, Amway/Alticor Inc. was a PAC that raised just shy of $190K in the 2016 election. And the DeVos family, which runs Amway, spent about $10 million electing Donald Trump, which placed Betsy DeVos in Trump’s Cabinet. Trump even licensed his name to a multi-level marketing scheme called Trump Network in 2009.

And then there’s the money the Direct Selling Association has spent on lobbying and campaign efforts. Over the first six months of 2017, it laid out $140,000 to lobby politicians, according to the Senate Office of Public Records.

It also operated an outside spending super PAC in the 2016 election, spending close to $43,000, with $31,000 going mostly toward a few House Democrats in its Congressional Caucus, according to the Center for Responsive Politics.

But the Direct Selling Association is also a dark money operator. From 2008 through 2014 it operated blatantly under its own name with a total reported spending amount of $47.2 million, according to the Center for Responsive Politics. In 2014, it spent $7.5 million—the most over the six-year period. The only year it reported political spending to the IRS was in 2012 when it acknowledged doling out more than $50,000. It’s unclear if the association has done any other dark money dealings in the past couple of years because it hasn’t done so under its company name.

Featured photo: A video grab from an Avon recruitment video, This Is Boss Life.