UAE residents caught up in direct selling schemes warn of the pitfalls
The business is often billed as an opportunity to supplement one’s income or often as a part time job for mothers at home, but commission is not always forthcoming.
Salespeople who bought into controversial direct selling schemes have warned others to do their homework before handing over thousands of dirhams in joining fees.
Direct selling is built on a multi-marketing model, where buyers are recruited to become sellers and are also offered commissions to encourage others to become sellers too.
The business is often billed as an opportunity to supplement one’s income or often as a part time job for mothers at home.
Sellers make money from their own sales and commission from sales from their recruits, known as their “downline”.
SK, an Indian construction worker who lives in Dubai’s Satwa district, said he was lured into direct selling with one company by a friend who said he could secure his family’s future if he signed up.
“I was told I would get commission on the Dh10,000 payment I made,” SK said.
“People said I would make 40 million rupees (Dh2.3 million) within three years. When I signed up, they gave me travel vouchers as an incentive but I’m not sure where I can use them.”
He was also charged a fee to access online video content with selling techniques and inspirational testimonials.
Investors like SK, who only wanted to give his initials, earn commission from companies by selling items, from wellness and lifestyle products, holidays, watches, jewellery and technology. Regular training seminars are held in Dubai, attended by hundreds of people encouraging others to join.
SK, who has lost out on his Dh10,000 payment and not made any money back, has since asked for a refund after realising he would not be willing to introduce new buyers and risk them falling into debt.
“I borrowed money on a credit card; I was convinced it would allow me to help my wife and children,” he said.
“The man selling these schemes introduced himself as a billionaire, and said he is sitting at home counting his money and earning more than $112,000 a week.”
Direct selling is a legal business model in the UAE, provided the company is registered with the Direct Selling Association of UAE.
The company SK bought into is not currently registered with the DSA.
New investors are told to separate their contacts into three categories - hot, medium and cold - targeting those they know well first, who are most likely to buy in.
SK’s friend earned Dh1,200 for introducing him to the scheme.
Industry experts say key sign of a pyramid scheme is when distributors make more money from recruiting others than from actually selling to the public.
VK, another Dubai investor, said it was clear the nature of the business was to get others involved.
He said it was clear that the company he visited - the same as SK’s - was to sign up other sellers and get their joining fees, rather than sell watches and holidays.
“There was a meeting to discuss calling activity and techniques. I don’t want to con my friends.”
Ali Shabdar, DSA’s general secretary, said talks had been held to encourage firms with a questionable history abroad to register, but there was a lack of cooperation up until now.
“This [SK’s] company first came here many years ago and were the cause of many misconceptions about direct selling,” he said.
“They were shut down, left and then came back. We’ve been in touch with them, and have similar concerns to those internationally.
“Different companies behave differently in different markets. Whether intentionally from the top down, or at a local managerial level, it is not clear.
“The company may come to us and say they want to clean up their reputation, contribute to raising awareness in the market and be a role model here. Enemies of the past could become friends.”
With no UAE direct selling laws, regulation is largely in the hands of the DSA, which has just 11 companies signed up.
Registration takes about two months, with a stringent checking process to ensure good practise.
Firms need to have a UAE trade licence, with products and services registered with health authorities and municipalities.
The DSA also works closely with the Department of Economic Development and chambers of commerce, with registered companies monitored closely for the first six months probationary period.
DSA members will attend seminars and events in that time to speak with clients on their experiences.
“Consumers should know what a pyramid scheme is,” Mr Shabdar said.
“A lot of these companies have a multi-level marketing model, which when drawn on paper looks like a pyramid - but it may not necessarily be a pyramid scheme.
“If a company is operating in recruiting, rather than selling products, that is the first and biggest hallmark of being a pyramid scheme. It is illegitimate, unethical and illegal.
“We are in touch with this company but a lot of changes need to be made to accept their application.”
The Direct Selling Association of the UAE is a full member of the World Federation of Direct Selling Associations and aims to guide and protect direct sellers, network marketers and consumers.
There are just eleven companies DSA registered and certified in the UAE:
Clear signals to spot a pyramid scheme
When David Beckham signed for American Major League Soccer franchise LA Galaxy, its shirt sponsor Herbalife became a name associated with arguably the most famous footballer on the planet.
Allegations the company’s business model was a pyramid scheme later triggered an investigation by the US Federal Trade Commission, a $200 million fine and demands for the nutritional supplement marketer to change its business model.
The waters surrounding similar multi-level marketing schemes offering entrepreneurship remain murky but there are clear signals to spot before signing up.
Ambareen Musa, founder and CEO of financial experts Souqalmal.com, warned those considering signing up to do their own background checks before handing over cash.
“There are quite a few illegal pyramid schemes flying under the legal radar.
“Investors must understand not all direct selling or multi-level marketing businesses are legal,” she said.
“If residents are approached by members of direct-selling businesses, they must first check if the company is registered with DSA UAE to verify its legal status.”
A 2017 report by Euromonitor showed direct selling contributed to more than Dh500 million in sales in 2015, a figure that grew by 5 per cent in 2016.
Multi-level marketing is a key component of the direct-selling industry, and it has proven to be a highly successful method of compensating direct sellers for marketing and distribution of products and services.
The sales force is compensated not only for sales personally generated but also sales of others they recruit, referred to as the participant’s “downline”, providing multiple levels of compensation.
“If people come across a dubious direct-selling business, they should lodge a complaint with a government agency like the Dubai Economic Department or the Dubai Financial Services Authority,” Ms Musa added.
“Certain red flags should encourage investors to ask serious questions of those running the operation.”
Tell-tale signs of investment fraud are marketing slogans promising returns that are too good to be true, over-the-top marketing gimmicks, no information about company ownership, registration or other verifiable details on the company website.
Updated: July 29, 2017 04:13 PM