The more successful MLM’s add products and divisions and grow to a size that makes enforcement very difficult.

The largest of the MLM’s have very deep pockets and can endure regulatory actions through legal maneuvers, statistical reporting deceptions, public relations ploys, donations to political parties in power and to influential officials and groups, and lobbying against legislation which would make anti-PPS enforcement easier.

Unfortunately, most enforcement against pyramid schemes masquerading as MLM (or network marketing) is reactive, not proactive. Victims of PPS’s seldom complain, having been tutored that anyone can succeed if they will only try hard enough to “work the system.” When distributors quit, they usually leave quietly, too embarrassed to complain to anyone. Many will even apologize to their upline for having failed. So agencies that enforce laws against pyramid schemes by acting on the basis of number of complaints will often be acting after the fact. The damage is done before any action is taken, and victims are not likely to significantly recover their losses.

So enforcement agencies are at a disadvantage when they wait until many complaints are filed to enforce laws against pyramid schemes. Investigations involving interviews of company representatives, surveys of participants, analysis of financial records, and other typical evidence gathering are timeconsuming and often inconclusive.

The above characteristics, however, are easy to identify with a careful study of the compensation system and marketing structure of the company by investigators with expertise in principles of marketing and elementary statistics.

It can be demonstrated that the prognosis for any company that incorporates these three features into their compensation and marketing plan is certain: an emphasis will be placed on recruiting over sales of products and services—regardless of “rules” or company policies to the contrary. Again, behavior that is powerfully rewarded is more likely to occur than weakly rewarded behavior.

An agency that uses these tools skillfully can identify PPS’s at the first sign that such a company is starting up. Enforcement action could thus be timely and thereby prevent major losses.

The best scenario would be for legislation to be passed (or rulings by enforcement agencies) requiring submission of the compensation and marketing plan by any MLM company at startup. The application to do business could then be approved or rejected, based on carefully designed mathematical and/or defining criteria, such as the three explained above. It is my sincere hope that this paper will encourage such a proactive approach.

It is my belief, however, that PPS’s can be identified for enforcement action, using the tools provided herein to interpret and apply the FTC definition and most state statutes as they stand.