Overview of Financial Crimes through Multi-Level Marketing (MLM)

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Amit Rethrekar
Amit Rethrekar
Amit Rethrekar is a noted author on the subject of Cyber Security, Anti Money Laundering and Compliance related issues.

Many of us must have at least heard from someone about-MLM- Money Lifestyle Magic. (It actually stands for Multi-Level Marketing). This trend is gathering huge momentum now as you read, in this pandemic scenario where everyone is glued to their screens connected by internet, some are unemployed/some are thinking of switching jobs due to WFH pressure whereas some want to make quick bucks. Unfortunately, these times are breeding ground for such MLM schemes. Let’s take a quick stroll in the MLM world.


MLM- Multi Level Marketing, also known as “Referral” Marketing- Network Marketing is a technique of sales wherein products/services are sold directly through acquaintances/ persuasive selling instead of the brick and mortar set up or even the e-commerce click and order route.  Sometimes it is also loosely referred to as Direct Selling. It appears to have begun in America, where food supplement products were distributed through friends and family only. This concept slowly picked up and spread across the globe.

For certain products (empirically shows high cost and limited mass appeal products like health supplements) opting the distributor/franchise model doesn’t add up to their expected scheme. Therefore, instead of a formal set up; their focus is on acquiring new leads from their existing leads/customers itself and thereby grows this chain to push more sales amongst this close knit community.


Acceptance of money under Money Circulation/ Multi-Level Marketing/ Pyramid structures is a cognizable offence under the Prize Chit & Money Circulation (Banning) Act, 1978.

As a part of its caution, the Reserve Bank of India has reiterated the general public against MLM activities so that investors do not fall prey to unscrupulous entities. Multi-Level Marketing companies, Direct Selling Companies, Online Selling Companies do not fall under the purview of RBI. Activities of these companies fall under the regulatory/administrative domain of respective State Government, however if brought to the notice of RBI, they inform the concerned State Government authorities.

Considering the growing number of scams in MLM and to tighten the noose around these fly-by-night operators of such MLM schemes, states like Maharashtra have covered them under Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act).


Normal business has several stages, products to manufacturer to distributor/franchisee/wholesaler to retailer to customer. The customer pays the retail price of the goods along with GST, if any applicable for the products procured. There is an express agreement; the risks of the products get transferred on possession after payment of the reward. Lets look at some of the practices-

Direct Selling:-

It is not expressly banned. Internal Trade Division, Department of Consumer Affairs deals with the matters relating to direct selling and Multi-Level Marketing (MLM). Inter-Ministerial Committee has framed Guidelines on Direct Selling on ‘The Direct Selling Guidelines, 2016’. This requires any direct selling entity conducting direct selling activities to mandatorily require submitting an undertaking stating that it is in compliance with these guidelines. The guidelines requires them to be in compliance of various aspects right from trail of records, KYC of direct sellers, compensation structuring and an undertaking that deceptive, unfair trade practices will not be undertaken. Therefore some of the entities complying these guidelines are allowed to operate according to the guidelines by respective State Governments.

Pyramid schemes:-

These are PUREST fraud schemes. Call them Pyramid- Growth Multiplier-Seed Plantation; they are nothing but PONZI schemes. In such schemes, members are enrolled for a fee and in turn asked to enroll further members under them effectively forming a chain. Surprisingly, these schemes work for a short duration on the “teaming and lading” model, robbing Peter to pay Paul.  They suffer from the inherent TGTBT (Too Good To Be True) syndrome offering astronomical returns within shortest spans, disguising the entry fee in various innovative ways such as “Starter packs”, bundling compensation with additional investments, luring low income group with freebies initially all are traits of a ‘Ponzi’ in the making. It’s a “Made for Scam” scheme and recipe for disaster; you should not fall for it.

Pyramid schemes have lured and robbed many innocent people of their hard earned money. Due to the inherent nature, people have not just lost money, but also money belonging to their family/friends and acquaintances who invested on their insistence. In fact, the MLM word itself is a taboo in some circles due to the negative impact it has created over the years.


KYI means KNOW IT YOURSELF exercise. If you come across any such scheme, look for the following Red Flags:

  • Age-educational qualification and skills sets don’t matter to be a member/direct seller.
  • One day maximum one week of “Induction/Training” coupled with an initial investment/entry fee/starter pack purchase is all what it takes for you to generate your “Code” which is linked with someone who referred you
  • Your targets are not just to sell the products of the scheme but also to keep enrolling more members under your ambit.
  • There is blurring line of whether you are the distributor/direct seller or yourself the ultimate consumer.
  • Frequently asked to deposit the sale proceeds below amounts less than Rs.50,000/- in various bank accounts of different banks bearing different account names, drawing high number of prepaid instruments DD in cash of small values, etc.
  • Your compensation is paid only when the membership enrollment targets are completed.
  • Like in a normal job/franchisee set-up for underperforming/ not performing at all you are not thrown out, just overlooked till other fish is caught
  • Words like, “You are your own boss”, “Financial Freedom” will be used and you will be discouraged to divulge details of your work with outsiders or ignore people who are trying to warn you about the legitimacy of the scheme.

In case of missed compensations, even after repeated reminder and follow up, the scheme gives non committed answers and asks you to be patient/ not responding, etc.


As Financial Crimes investigating professionals, we all have encountered this MLM at some or the other point in time; sometimes some demographics/particular sectors being more prone. A thorough diligent KYC during customer onboarding is our strong deterrent to not open such “on the face of it” MLM accounts. However these MLM players are getting organized, with proper corporate structures and no presence in negative screening lists, they get through.

Even their business model & compensation outgo is structured in a way that it appears genuine and a careful analysis of the pattern of credits, followed by debits, many to one, one to many transfers alerts raised during the “Transaction Monitoring” exercise, you may be able to derive conclusions. Also, close attention on to the “Adverse Media” and “Public Complaints” offline source of alerts is needed, if you are to unearth such MLM companies which are still persisting and rampantly making money at the cost of others.

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