The Direct Selling Association of Malaysia (DSAM) will set up an Ethical Council in the first quarter of this year to curb pyramid schemes, which can erode the wealth of the general public.
These schemes promise quick returns through aggressive recruitment of members instead of selling actual products. Bonuses are paid when members introduce people to the scheme, so the more people they recruit, the more money they earn.
As many of these are no better than Ponzi schemes, where fees collected from new members are used to pay those who had joined earlier, they will collapse in a relatively short time, leaving those who were recruited later at the losing end.
Datuk Seri Mortadza Nazarene, director of the Commercial Crime Investigation Department at Bukit Aman, has said in news reports that the police received 485 reports of such schemes in the first six months of last year, with victims suffering losses of more than RM100 million.
DSAM president Frederick Ng says this only represents a fraction of the problem. In fact, over the years, the money tied up in pyramid schemes could have easily surpassed RM1.3 billion — the total revenue of the legitimate direct selling industry last year.
“There has been no proper research done on the amount of money involved in these schemes. But it is definitely much more than the proper direct selling business and it is still growing,” says Ng.
Concerted efforts needed
Why do people fall prey to pyramid schemes in Malaysia? Ng says there are a couple of reasons, including a lack of knowledge among the victims and greed at the thought of making a quick buck with little or no effort. The biggest reason, however, is the lack of enforcement and concerted efforts the relevant parties.
“The power of enforcement lies with the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC). However, the ministry may not have enough resources to gather sufficient evidence to prosecute these operators when something happens. That is why we proposed to establish the council,” says Ng.
For instance, the ministry only investigated and took action against Zhang Jian, a scammer from China, after he had made off with more than RM300 million, according to news reports. Zhang, who had called himself “the richest man in the world”, had marketed his YSLM scheme publicly for months before being investigated the authorities in July 2014 under the Direct Sales and Anti-Pyramid Scheme Act 1993.
Zhang managed to flee to Thailand before the ministry confiscated the assets of his company. However, he was arrested the Thai police three months after taking refuge there.
“We hope the Ethical Council will enable us to put all our information and resources together to help the authorities act more quickly on any pyramid scheme, moving forward,” says Ng.
The council, which will be led the DSAM, will have representatives from various parties and departments, such as the MDTCC and the Commercial Crime Investigation Department. There will also be lawyers from the Associated Chinese Chambers of Commerce and Industry of Malaysia and the Federation of Chinese Associations Malaysia.
“We are also engaging with the Malay and Indian trade and commerce associations as this is a national issue and we want everyone to be involved,” says Ng, adding that pyramid schemes are gaining traction among the Malay community and many are being conned into putting a large chunk of their savings in them.
Time to do something about it
There has been a growing number of pyramid schemes over the years and it is time for the authorities to look into this, says Ng.
Not everyone can plead ignorance or gullibility. “Today, it is not only people from the lower middle class who are lured into such schemes; even professionals such as lawyers and bankers are getting involved in them,” he points out.
“Some of them were greedy and were lured the numbers. Others actually understood what was behind the scheme, but decided to go ahead anyway to earn a quick buck [before it collapsed].”
Meanwhile, pyramid scheme operators have been using the internet to attract members, making it even harder for the authorities to track them and get physical evidence to establish a criminal case.
Ng says these operators have evolved and become more sophisticated. For instance, the pyramid scheme structure, which benefited only a few people at the top, has been amended so that members in the middle levels also benefit. As a result, more people — the beneficiaries of the schemes — are coming out to defend them.
Pyramid scheme operators have also widened their network and formed alliances with ex-police officers and celebrities to market their businesses, he says. “They market their companies so well and are so persuasive that they give people the impression that their companies are even more reliable and reputable than a proper direct sales company.”
This is despite the fact that almost all of these schemes fail within one to three years, leaving those who join later to suffer losses. “The collapse of these schemes usually comes about when the money collected from the members is no longer enough to sustain the company’s expenses,” says Ng.
What is even more worrying is that some of these companies are using their ill-gotten gains to invest in legitimate businesses. “They have investments in magazines, radio stations, hotels and resorts,” he says.
An uphill task
All this begs the question: Why haven’t the victims of such schemes come together to take action against the operators?
First, many of them (especially those in the middle and upper-middle-income groups) have benefited from these schemes. Others are afraid because they have been threatened the operators. “Most of them are not willing to take their grievances to court because of these threats,” says Ng.
The association has received 10 to 20 complaints a month about pyramid schemes over the past few years. And these are only the tip of the iceberg, he says. “It is also very hard for the victims to take a stand against the operators, who are usually cash-rich and can afford to defend themselves.”
This is also why the council requires lawyers among its members. “It is a very risky and challenging task for us because if we are not familiar with the law and say something inaccurate publicly, these operators [of pyramid schemes] can have their lawyers take action against us,” says Ng.
Despite these challenges, the DSAM will not let the council just “sit there and do nothing”, he says. “It is not meant to show that the association and government are doing something when nothing is being done. Rather, we will do our best to curb the pyramid schemes. How successful we will be really depends on the authorities — in this case, the MDTCC, as it is in charge of enforcement.”
The YSLM saga
Even though Zhang Jian, the Chinese scammer who set up the YSLM scheme, has fled Malaysia, the senior distributor of his company was awarded the Darjah Sultan Ahmad Shah Pahang (which carries the title Datuk Seri) in August 2014, according to news reports.
In July last year, Datuk Seri Jessy Lai came under media scrutiny once again when Monspace Sky Airlines — owned Mon Space Group, which she founded and owns — violated several aviation regulations.
The Malaysian Aviation Commission lodged a police report against the airline and the Department of Civil Aviation issued a show-cause letter to the company for operating a commercial flight without an air service permit.
According to a local news report, Mon Space Group owned five companies — Mon Space (M) Sdn Bhd, Mon Space City Sdn Bhd, Mon Space Media Entertainment Sdn Bhd, Mon Space F&B Sdn Bhd and Mon Space Synergy Power Sdn Bhd. The report also said the five companies had zero capital and cash reserves and were shell companies that were renamed and parked under the Mon Space Group.
Segambut Member of Parliament Lim Lip Ying lodged a police report in January last year against Mon Space (M) Sdn Bhd, claiming that it was involved in a pyramid scheme. He called on Bank Negara Malaysia to conduct an investigation into the company. However, there were no further developments after the report was made.
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