Fed Prosecution of Pyramid Money-Processor, Payza, Reveals Dilemma of Identifying “Legitimate” MLMs
July 29, 2020 |
by Robert L. FitzPatrick
The U.S. Dept. of Justice (DOJ) recently obtained guilty pleas from two individuals involved in a global PayPal-like money-transfer company, called Payza. According to the DOJ, Payza served numerous merchants that were “Cyclers” and “MLMs”. The DOJ claims the scheme processed more than $250 million in illicit transactions.
As an unintended consequence, this criminal prosecution provides yet more evidence that it is not possible to tell the difference between illegal MLMs and what the government calls “legitimate” MLMs. In this case, admitted criminals – who were knowingly trafficking in pyramids and Ponzis and other illegal operations – were themselves stumped when they tried to distinguish MLMs that are set up as “obvious illegal Pyramid schemes” from what they believed the government would classify as “legitimate” MLMs.
As part of their efforts to evade law enforcement, co-conspirators in the Payza scheme tried to “sanitize” their scheme by sorting out the “obvious illegal” MLMs from their client base. In an email cited by the DOJ as evidence, one of the co-conspirators acknowledged having difficulty making the distinction. He could identify “adult gambling, drugs and schemes involving violence.” But identifying illegal MLMs was “the tricky part,” he wrote.
So, how does a consumer know whether an MLM is “legitimate” and not a disguised pyramid scheme?
Unfortunately, the DOJ case against Payza offers nothing substantive as a guide. It referred to “minimal or no-product” MLMs as likely illegal pyramid schemes, but it does not explain what constitutes a “product”, how much product sales are required , who the products are sold to or how profit on “sales” is gained. More importantly, it does not account for past DOJ criminal prosecutions of MLMs that did sell products. The FTC for its part, has prosecuted more than 30 MLMs as illegal pyramid schemes, all of which sold hundreds of millions of dollars of products to millions of consumers.
Clearly the sale of products is not a reliable indicator of legality. Not only is the sale of products or services not a usable guideline, product sales can be a key part of the pyramid fraud. They function as lures, like bait on a mousetrap. They distract recruits from seeing the financial trap lurking just beyond the products: the “endless chain” recruiting scheme. They launder the ill-gotten money gained from victims and transferred to perpetrators at the top of the recruiting chain. To “qualify” for the promised rewards, the MLM recruits pay entry fees and purchase quotas of products. This is like selling tickets to get access to the pot of gold at the end of the rainbow.
Sometimes MLM products are also frauds all by themselves, as in the many MLM products now being sold as cures or preventions of Covid-19. MLM has a long history of medical frauds. The very first MLM, Nutrilite, was prosecuted by the FDA in a landmark case for claiming its vitamin potions would cure or prevent almost any ailment.
Though MLMs solicit virtually every household in America, the FTC has never offered a useful way for citizens to distinguish illegal from what it calls “legitimate MLM.” This strange silence, leaving millions vulnerable to pyramid fraud, led New York Times op-ed columnist and author, Joe Nocera, to directly inquire. Recounting his interview with FTC officials, in September 2015, Nocera reported:
“‘I have nothing for you,’ said Frank Dorman, a spokesman for the Federal Trade Commission. ‘Lots of reporters have asked that question. Our final response is, We’re not going to answer it.’”
Nocera explained: “What had I asked that was so sensitive that the F.T.C. wouldn’t respond? I had requested that the agency explain what distinguished an illegal ‘pyramid scheme’ from a legal multilevel marketing company.”
Nocera concluded that the FTC was “derelict” in not clarifying the difference. Actually, there is a very good reason the FTC won’t clarify how to tell the difference between illegal MLMs and “legitimate” ones and why it has never named even one MLM that it would verify as “legitimate MLM.” There is no difference. All MLMs operate with the same “endless chain” structure; all charge money (in fees and/or purchases) to join the endless chain; all falsely promise “unlimited” income, based on the “endless” chain; in all MLMs recruiting is the only way to gain the promised rewards; and all MLMs transfer most of the “reward” money from those at the end of the chain to a tiny few at the top. They all rob Peter to pay Paul, year after year.
The final proof that there is no difference between the illegal and the “legitimate” MLMs: all MLMs, including those classified as illegal and all the others not prosecuted, produce exactly the same loss rates among the participants: 90-99% lose per year. Factored over a longer time, the overall loss rate approaches 100%.
The crooks at Payza faced the same impossible dilemma in trying to “sanitize” their scheme of “illegal” MLMs as millions of consumers do when they are recruited and attempt due diligence. Finding “legitimate MLMs” is a rigged shell game. The shells are moved all around on the table. Each has a different name and sells a different product and claims to be unique. But there is no bean under any of the MLM shells.
Robert FitzPatrick was under contract with the U. S. Dept. of Justice to serve as expert in the Payza case.
The DOJ Payza guilty plea announcement: https://www.justice.gov/usao-dc/pr/payza-and-patel-brothers-plead-guilty-conspiring-launder-money-and-operating-unlicensed
Joe Nocera’s remarkable account of asking the FTC to distinguish legal from illegal MLM: https://www.nytimes.com/2015/09/15/opinion/joe-nocera-the-pyramid-scheme-problem.html