Profit Net International Ltd. violated the Fair Trade Law for engaging in prohibited form of multi-level sales

Chinese Taipei

Case:

Profit Net International Ltd. violated the Fair Trade Law for engaging in prohibited form of multi-level sales

Key Words:

multi-level sales, balanced dual-line system, diamonds

Reference:

Fair Trade Commission Decision of January 24, 2002 (the 533rd Commissioners’ Meeting); Letter (91) Kung San Tzu No. 0910000882

Industry:

Direct Sales Enterprises (4812)

Relevant Law:

Article 23 of the Fair Trade Law

Summary:

1. From its establishment in May 2001, Profit Net International Ltd. (Profit Net) made profits illegally through multi-level sales. Participants who paid the membership fee of NT$12,000 up front were not required to introduce new members or sell products, and would receive a return of NT$62,000 after one year (a rate of return of 500%). Participants who introduced new members could also receive bonuses. According to Profit Net’s promotional information, people could become members by paying NT$1000, and those who purchased at least NT$12,000 in products would automatically be upgraded to “management member” status and could receive benefits of consumer rebates, development bonuses, profit sharing from recommendations, and national and Asia regional profits. Consumer rebates were calculated monthly and members were to receive a NT$1000 gift certificate each month as well as one 0.1 carat diamond in each of the third to twelfth months. Those who did not want a diamond could receive a cash conversion of NT$5000. Development bonuses were based on a “balanced dual-line system”. Each investor would receive an NT$2500 development bonus when they had developed downlines on both sides reaching 3, 6, 9, 12, 15 or 18 investment units. Management members would also receive profits from recommendations to be calculated at 10% of the development bonuses of their downline members. Management members who completed 10, 30 or 60 cycles would be promoted to “diamond class”, “silver diamond class”, and “gold diamond class” respectively and would be eligible for sharing national profits. “Silver diamond class” and “gold diamond class” management members were also eligible for sharing that month’s Asia regional profits.

2. Profit Net argued that it simply bought and sold diamonds through a multi-level sales platform, and that there was no operating system in which one would “purchase an NT$12,000 investment unit, and after the third month, receive either a 0.1 carat diamond or an NT$5000 discount in lieu of diamonds, and an NT$62,000 return after one year.” Interviews with Profit Net’s participants, however, as well as information provided by Profit Net and participants’ deposit records, revealed that the company nominally offered diamond pre-purchasing, but the goal of those who participated was in fact the high consumer rebates offered or the economic benefits obtained through such means as the rich bonuses for inducing other participants to join. Although Profit Net was, in name, a diamond broker, it was not in fact engaged in either the buying, selling or delivery of diamonds, but rather used diamond exchange certificates as a substitute, creating an “illusory goods” phenomenon. Given Profit Net’s operating system, for each original NT$12,000 investment unit, without adding in the development bonuses, profit sharing for recommendations, or national or Asia regional profits, there would already be an NT$62,000—or 500%—return. In order for Profit Net to provide such high bonuses and other economic benefits, investors needed to constantly introduce new members, or have current members continuing to subscribe and inject capital to serve as the source of funds for bonuses. The Fair Trade Commission found, therefore, that the commissions, bonuses and other economic benefits received by the members were not based on the marketing and sale of goods or services at reasonable market prices, but rather on the continuous expansion of the organization, in violation of Article 23 of the Fair Trade Law.

3. The Fair Trade Commission weighed the motives, purposes, expected illegal profits, the damage to the trading order and the duration of such damage, as well as the demonstration of remorse following the violation, the cooperativeness with the investigation and other factors. Profit Net’s accumulation of funds were found to have been adversely affected the economic order and to have caused harm to numerous members. The Fair Trade Commission imposed an administrative fine of NT$10 million pursuant to the regulations of the fore part of Article 41 of the Fair Trade Law.

Appendix:
Profit Net International Ltd.’s Uniform Invoice Number: 12877574

Summarized by Wang, Horng-Shiuan; Supervised by Lin, Ching-Tarng