Amway India CEO William Pinckney
When police in the Indian state of Kerala arrested US citizen William S. Pinckney last month, a local official attempted to explain how the CEO of Amway India ended up in handcuffs.
"With the call of easy money, [Amway has] been luring people to invest," the official told an Indian press gathering. "The new members in turn had to get more people and this was leading to illegal money circulation."
It sounded familiar. In the US, similar allegations have plagued Herbalife, the Los Angeles-based multi-level marketing company (MLM) that’s used some sketchy internet marketing tactics to expand its nutritional-supplement empire in recent years. In December, Wall Street hedge fund manager Bill Ackman placed a very public, billion-dollar bet that the company’s easy-money promises were tantamount to a pyramid scheme that would eventually lead to its demise. He called for an investigation into Herbalife by the US Federal Trade Commission (FTC). Others have followed suit.
The FTC has yet to officially probe Herbalife’s business practices. But if they ever do, they might look toward Indian law enforcement’s pursuit of Amway as an example of what to do — and what not to do — when alleging fraud against a multi-billion-dollar business.
Amway is a Michigan-based MLM. It’s one of the first MLMs to become a household name in the US and one of the first to expand successfully abroad. Amway’s defined by a vast product line including home and personal care products, electronics, jewelry, and even insurance and dietary supplements. But its business model is indistinguishable from MLMs all over the world: its non-employee distributors are paid small commissions to sell products and recruit as many new non-employees as possible.
The legal pursuit of Amway in India goes at least back to September 2006. After a public complaint from the Reserve Bank of India, the company’s business practices came into question. Police in the Indian state of Andhra Pradesh raided the offices of various Amway distributors. Officials said Amway had violated the "Prize Chits and Money Circulation Schemes (Banning) Act of 1979," which outlaws pyramid schemes and similar money circulation scams. Distributor offices were shut down and the company’s Indian headquarters were forced to cease operations.
That only lasted a few weeks, though. The Times of India quoted an Amway spokesman explaining that the controversy had "snowballed" after a man decided to take "revenge on his wife" by concocting "a complaint against his wife’s colleagues" at Amway. By the end of September 2006, officials called off the shutdown. A court — uninterested in taking on a multi-billion-dollar company at the local level — determined that Amway’s business practices didn’t violate the Prize Chits Act.
the controversy snowballed after a man decided to take revenge on his wife
The company’s offices — and the offices of its distributors — were soon allowed to reopen. But the episode was not over, not by a long shot. By 2008, Andhra Pradesh’s state legislators banned Amway from advertising at all in the massive state with a population of about 85 million. Regardless, Amway India survived and apparently thrived: Pinckney, the company’s CEO in India, claimed it grew by double-digit percentages every year between 2008 and 2011.
In late 2011, however, Amway India ran into a new problem — this one focused in Kerala, a state on the southwest coast of the Indian subcontinent with a population of about 33 million. In many ways, the police raids repeated themselves. But this time they went further.
Kerala state police temporarily sealed Amway offices in major cities, claiming that they had received multiple complaints about the company’s practices and its distributors. In response, Amway spokespeople claimed the raids were a setup. They said citizens had been "called to police stations" and were "harassed" to make on-the-record complaints about the company, according to a report from the Hindustan Times.
Amway was still allowed to operate in Kerala, but about a year later, in November 2012, Kerala police again raided and closed offices in various cities. One manager was arrested for fraud. He’s yet to be tried, but Pinckney's arrest last month only adds questions about the difference between an illegal pyramid scheme and a legal multi-level marketing program in India.
Amway claims its business is the latter. But Kerala police — perhaps protective of citizens in the wake of timeshare and plantation scams that plagued the population in the 1990s — have gone further than any Indian government agency thus far in probing the difference between the two. Arresting a CEO for fraud — a US citizen, for that matter, who operates a successful branch of a company with $11 billion in 2012 revenues — is no meager statement. The Indian Direct Selling Association told The Hindu that it was a "big blow" that "has not only ‘dazed’ the industry, but also risked the future [of the MLM] industry in India."
It’s too early to say whether Pinckney or any of his Amway India colleagues in Kerala will face serious repercussions. They’ve been charged with fraud but all of them have been bailed out of jail. Their cases have yet to be heard in a high court. Amway distributors are still allowed to operate in Kerala, but, in many ways, their future with Amway is up in the air.
In the meantime, Amway has made appeals to Indian officials to clarify the difference between an illegal pyramid scheme and an MLM. A minister from the Indian Ministry of Corporate Affairs — which acts as a kind of corporation watchdog, much like the FTC in the US — told the Press Trust of India last week that the Indian government is working on it. "While we must take strong action against the companies that are misusing the laws and duping investors, reputed companies that are doing good work and did not violate any Indian laws should be allowed to operate without any fear," the minister said. "They must be given confidence."
Such statements from high-ranking government officials make it seem like the national Indian government is less aggressive about its stance on MLMs than lower state governments in Kerala and Andhra Pradesh are. That could make prosecuting Amway’s CEO a very difficult task.
While Kerala police have perhaps have taken the fight against MLMs to a new level by publicly placing a CEO in handcuffs, it’s another matter whether they can outlaw MLMs altogether. So far, the only country to take definitive legal action against a major MLM is Belgium, which in 2011 ruled that Herbalife runs an illegal pyramid scheme. (Herbalife has appealed the decision.)*
in 2011, a Belgian court declared Herbalife an illegal pyramid schemeBut it took Belgium seven years of litigation to finally rule that Herbalife is an illegal pyramid scheme. And questions about Amway in the US extend back to the company’s formation in 1959. (The company’s business practices are the basis of a landmark FTC decision that established the main rules for MLMs in the US; those rules are still the subject of contentious arguments to this day.)
The Verge spoke with Dr. William Keep, a US trial expert in various pyramid scheme cases as well as the dean of the School of Business at The College of New Jersey. He said questions raised by the Amway arrests in India should make US legislators sit up and pay attention. "Questions raised in India about Amway cannot be dismissed," he said. Defining pyramid schemes is a worldwide problem, he said, and the Kerala arrests "highlight continued concerns over the lack of transparency" in these companies.
"The irony is, if you talk with people in the multi-level marketing industry, or if you talk with the president of the Multilevel Marketing [International] Association, they will say, ‘We know pyramid schemes operate in our industry.’ Yet they fight every attempt to regulate the industry," Keep says.
"That’s a really disingenuous position," he continues. "And the combination of inconsistent regulatory zeal" by government bodies in India as well as those in the US "and a disingenuousness within the industry about its desire to clean up pyramid schemes has sustained an environment over the last 20 to 30 years allowing pyramid schemes to operate indiscriminately by claiming to be multi-level marketers."
"So that’s the state we’re in now," Keep says. "And it’s anyone’s guess as to whether that can change anytime soon."
* An earlier version of this story said Herbalife had been banned in Belgium. Herbalife distributors continue to operate in Belgium despite the court's ruling that the company is an illegal pyramid scheme.