Tomas Syquia, head of the SEC’s Compliance and Surveillance Department, said provisions against pyramiding operations should be tightened to put a stop to these activities.
"Our proposal is to make it (referring to pyramiding) non-bailable so that people would be discouraged from illegally soliciting investments from the public," Syquia said.
Under the Consumer Act of the Philippines, any individual that would be caught engaging in pyramiding operations would be fined by a few thousand pesos and could be jailed for not less than five months but not over one year.
Syquia also wants pyramiding to fall under economic sabotage if it is committed to at least three individuals. "The purpose is to send them behind bars and to make them think before committing any illegal activity," he said.
Pyramid schemes promise consumers large profits based primarily on recruiting others to join their program, not on profits from any real sale of goods to the public in violation of the Consumer Act of the Philippines.
Pyramiding is prohibited because plans that pay commissions for recruiting new distributors eventually collapse when no new distributors can be recruited. When such a scheme collapses, people especially those at the base or lower levels of the pyramid, lose their money.
SEC Chairperson Lilia R. Bautista said the lack of laws on pyramiding had resulted in the proliferation of deceptive and unfair sales acts and practices of chain distribution operations.
Bautista said although the SEC can file criminal cases against perpetrators of pyramid schemes, the agency is helpless in preventing these activities.
The present economic crisis has made middle to low income consumers vulnerable to the tempting promises that a number of companies are using to peddle their get-rich-quick schemes.
With this, the SEC is seeking the passage of a law that would ban pyramiding and/or Ponzi schemes.
A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting. In a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new "members." Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment.
In a typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.
Unlike pyramid or Ponzi schemes, a legitimate multilevel marketing (MLM) scheme has a real product to sell. MLM’s actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system.
A bill seeking to ban pyramid schemes outright is pending at the House. It seeks to amend the Consumer Act by amending the definition of "chain distribution plan or pyramid sales scheme," and clarifying activities and operations that would identify an entity as pyramiding operator.
The proposed measure also defines permissible sales practices of multiple level marketing operations and grants the Department of Trade and Industry and the SEC motu propio powers of cancel registrations of erring entities.
The SEC can motu propio cancel the registration of a company found to be engaged in pyramiding, only if there is a prior finding from the DTI that indeed the company is engaged in pyramiding.
The bill likewise increases the penalty range to P1 million and establishes the offense as an act of economic sabotage.
The bill, which has already been cleared by the House committee on trade and industry, is expected to be approved by the House in the next few weeks.
Based on the draft bill, pyramid schemes are defined as "devices whereby a person, upon condition that he makes an investment is granted by the manufacturers, producers, importers, operators, or their representatives a right to recruit for profit one or more additional persons who will also be granted such right to recruit upon the condition of making similar investments…"
The bill requires a business entity engaged in MLM to register with the DTI before its actual operation. The DTI will determine if the business uses any of the following schemes, which give rise to the presumption of a pyramiding schemes:* prohibitive entry requirements or head-hunting fees, as well s undisclosed claw-back policies and front inventory loading;* absence of a real market for a product and profits that are primarily derived from recruitment; and* unjustified claims of unusually large returns on investment or "get-rich-quick" promises.
The presence of any of these will be a ground for the denial of the application for business registration. Existing businesses using MLM, meanwhile, must be registered with the DTI within a year from the effectivity of the law.