Why is the issue of remuneration basis and source of income important in MLM?

Author:

Lawyer Zeng Jie is a financial crime defense lawyer, a senior partner of Guangdong Guangqiang Law Firm and the director of the Defense and Research Center for Illegal Fundraising Cases

(If you need to reprint, please send a private message or contact the author himself for authorization)

Lead:

However, with the increasing number of types and modes of pyramid scheme cases in judicial practice, there are more and more discussions on whether the new economic model constitutes a crime, and the basic issues involving the relationship between pyramid scheme crimes and administrative violations of pyramid schemes, such as the basis for remuneration and the source of income, have become more and more important.

Mr. Zeng will discuss the basic issues of MLM cases through a series of articles based on the MLM cases published in the case database of the people's courts and past typical cases, with a view to promoting further research on such issues.

(Note: The article is only for legal academic discussion, not as a reference for business model, if you need to reprint, please add contact information to obtain my permission)

Body:

With regard to virtual currency cases and pyramid schemes, the case of Chen Mouzhi et al. Organizing and Leading Pyramid Selling Activities published by the People's Court's Case Database was to discuss "the determination of the nature of the act of requiring investors to purchase coins to join in the name of providing virtual currency value-added services on the platform and settle the proceeds according to their development and downline".

On the issue of the source of proceeds, the case mentions an essential point of the adjudication that is worth studying: " After the actor establishes an online platform, in the name of providing virtual currency value-added services, requires participants to purchase a certain amount of virtual currency to recharge the platform to obtain membership qualifications, the platform does not have most of the profit models publicized by the actor, and mainly illegally profits from the investments of participants at all levels, and the settlement method for participants to obtain profits is virtual currency, and the income mainly depends on the number of people in their downline and the amount of investment in the downline, rather than obtaining income from the rise or fall of the market price of virtual currency, it shall be found to be a pyramid scheme. ”

The meaning of this paragraph is twofold: first, the issue of the entry fee that constitutes the crime of pyramid schemes, and second, whether it is the income of the participants, whether it comes from the number of people who are downline and the amount of investment, or whether it comes from the rise and fall of the market price of virtual currency.

According to the second question, if the investor's income comes from the rise and fall of the currency price in his own hands, that is, it comes from the change of the assets he holds, it cannot be recognized as a pyramid scheme.

This kind of viewpoint is a relatively new topic in the study of pyramid schemes, but it also cuts to the essence of the problem.

The reason why MLM crimes are harmful to society is that they do not create the income of the participants through the value-added of the product or service, but make up for the income of the upline participants through the entry fee paid by the subsequent participants, thus forming a Ponzi scheme that needs to constantly pull people to obtain rebates.

Therefore, the basis for calculating remuneration for pyramid selling crimes is to directly or indirectly calculate the number of recruited personnel, that is, the number of heads, while simple "team remuneration" pyramid marketing activities with the purpose of selling commodities and sales performance as the basis for remuneration are not treated as crimes.

Source of income and basis for remuneration

1. The question of the source of income, whether it is static income or dynamic income

The source of income in MLM criminal cases refers to how the participants in the pyramid scheme make money, and in most MLM cases, the sources of income obtained by the participants are generally static income and dynamic income. For example, in the case of virtual currency pyramid schemes, the platform can continue to provide mining, guaranteed principal and interest payments, etc., so that the investor's own investment part can obtain "value-added". In the appearance of this kind of static income, the taste of "pyramid scheme" is not strong. (However, the setting of static income will involve the issue of the promise of guaranteed principal and interest in illegal fundraising, so there are cases in the judicial opinion and judicial practice of pyramid selling crimes turning into the crime of pyramid selling fraud/illegally absorbing public deposits)

The dynamic income generally comes from the capitation rebate and downline investment rebate obtained after the development of downline members. If the source of income of a pyramid marketing platform mainly comes from static income, that is, the value-added part of its own investment, such as the market price increase of the purchase of a virtual currency, or the normal sales revenue after the purchase of goods, and the proportion of income from the dynamic income part is very small or none, even if it is determined that such a platform has a pyramid hierarchy structure and a rebate mechanism, it cannot be easily determined that it constitutes a criminal pyramid scheme, but may be determined to be a non-criminal administrative illegal pyramid scheme.

Therefore, in the actual handling of cases, statistics and spot checks can be carried out on the sources of income of most members to verify their sources of income.

In MLM crimes, the source of rebates generally comes from the entry fees and investment fees paid by subsequent members. (The so-called entry fee, i.e., the fee for requiring participants to pay fees or purchase goods or services in the name of business activities such as promoting goods and providing services, etc., to obtain the qualification to join, according to the relevant guiding cases of the SPC, this kind of qualification for joining actually refers to the qualification to obtain a higher amount of rebates for the development of downlines).

Therefore, in the actual case, it can be verified that the overall proportion of the number of members who purchase or invest, if most of the buyers do not reach the so-called entry fee threshold, they are only engaged in ordinary consumption or investment, and do not actively strive for the qualification of developing the downline, indicating that most of the fees paid or paid by the platform members are used for personal consumption or personal investment, pursuing the value-added part of personal investment, and pursuing static income, rather than actively developing the downline to obtain dynamic income. At this time, you can verify the purpose of the platform, whether it is to sell goods and services, or to pull people's heads.

If it is a normal commercial commission or an administrative illegal team-based paid pyramid scheme, the rebate is derived from the profit from the sale of goods or services, and there is no problem of paying rebate by charging entry fees, nor is there any problem of rebate eligibility. For example, in business behavior, there are many legal agent models, no need to pay entry fees, salesmen or part-time salesmen, agents sell a company's goods or services, get a commission or earn the price difference.

In the case of Chen Mouzhi et al. organizing and leading pyramid marketing activities released by the people's court's case database, the elaboration of this issue has been pioneered, that is, to verify where the source of profits obtained by the members of the platform comes from?

The crime is described as "the settlement method of income is EOS coins, and the source of income mainly depends on the number of downlines and the amount of investment in the downline, rather than the income from the rise and fall of the market price of EOS coins, and the EOS platform itself does not have most of the profit models it promotes, and basically relies on pulling people to develop downlines to maintain the operation of the platform." That is, the court distinguishes between the sources of rebates or the sources of income, and the income of the members of the platform mainly comes from the investment amount of the downline.

2. There are certain deviations in the judicial determination and regulations in practice on the basis of remuneration

The so-called remuneration basis also refers to the basis of rebates, which refers to the basis designed by the MLM platform to give the MLM participants how to obtain and how much rebate they receive. In pyramid scheme cases (including criminal pyramid schemes and administrative illegal pyramid schemes), there is a problem of remuneration basis, but there is a clear difference between the two: criminal pyramid schemes are directly or indirectly based on the number of recruited personnel, that is, the number of people who are recruited, while administrative illegal pyramid schemes, that is, team remuneration pyramid schemes.

This issue is also mentioned in the case of Chen Mouzhi et al. Organizing and Leading Pyramid Marketing Activities released by the People's Court's case database, and its crime is described as "directly or indirectly using the amount of investment, the number of personnel recruited, and the level of development as the basis for rebates, thereby inducing participants to continue to recruit others to participate." In addition to the static income according to the amount of EOS coins invested by themselves, each participant also obtains dynamic income according to the number of downlines and the amount of downline investment. ”

From the expression of the basis for compensation, it can be seen that in the case of Chen Mouzhi et al., which organized and led pyramid selling activities, the court used "the amount of investment and the number of personnel recruited" as the basis for compensation, and thus determined that it constituted a pyramid scheme crime. However, if it is strictly based on the "Opinions on Several Issues Concerning the Application of Law in Handling Criminal Cases of Organizing and Leading Pyramid Selling Activities" issued by the "Two Supreme People's Courts and One Committee", the requirement must be that the number of recruited personnel must be directly or indirectly used as the basis for remuneration or rebates. If the remuneration is based solely on the amount of investment, it does not seem to comply with the provisions of the criminal law and judicial opinions. However, in the case of Chen Mouzhi et al., which organized and led pyramid marketing activities, there are two types of remuneration bases - the number of development personnel and the amount of investment.

First, many cases do not have a reasonable system of evidence to prove the basis of remuneration, and some cases are determined entirely on the basis of vague confessions of relevant personnel, rather than conducting investigative experiments or data extraction and relevant documentary evidence to prove the basis for remuneration;

Regarding the rebate directly or indirectly based on the number of development personnel:

If the provisions of the Criminal Law and judicial opinions are strictly followed, the number of personnel is used as the basis for remuneration, that is, how many people are developed, and how much profit can be obtained by the upline, which is in line with the salient characteristics of traditional pyramid scheme criminal cases, and belongs to the direct use of the number of personnel as the basis for rebates; and indirectly based on the number of personnel, it is that after the development of new members, the members pay the entry fee and the relevant investment amount under the guidance of false propaganda, and then calculate the rebate of the upline according to the entry fee and investment amount paid by the downlineThe amount paid does not have any consideration, but only a rebate qualification fee, at this time, it can be identified as "indirect rebate based on the number of development personnel".

Therefore, whether the fee paid is the purchase of genuine goods and services, or whether it is an "air product" that has been tricked into purchasing, determines whether the fee paid can be used as the key to determining the source of illegal rebates.

The so-called interlocking logic of argumentation is one of the reasons why this type of crime is complicated.

(If you need to reprint or quote any content of these articles, please communicate the authorization matters by private message, and indicate the source at the beginning of the article when reprinting.) No content in these articles may be reproduced or used without our authorization. If you are interested in further exchanges or discussions on related topics, please feel free to contact us. ）