Chin Chi International Enterprise Co., Ltd. violated the Fair Trade Law through engaging in an illegal multi-level sales scheme

Chinese Taipei

Case:

Chin Chi International Enterprise Co., Ltd. violated the Fair Trade Law through engaging in an illegal multi-level sales scheme

Key Words:

multi-level sales, illegal multi-level sales

Reference:

Fair Trade Commission Decision of October 11, 2002 (the 570th Commissioners’ Meeting); Disposition (91) Kung Ch’u Tzu No. 091163

Industry:

Direct Sales Enterprises (4821)

Relevant Law:

Article 23 of the Fair Trade Law; Article 12 of the Supervisory Regulations Governing Multi-level Sales

Summary:

1. In March 2002, information regarding the operations of Chin Chi International Enterprise Co., Ltd. (Chin Chi) was submitted to the Fair Trade Commission (FTC) by a member of the general public inquiring as to its legality. It was found that Chin Chi filed a report with this Commission in March 2001 to engage in multi-level sales. In August of that same year (2001) Chin Chi was the subject of a disposition by this Commission for violating the regulations under Article 5(1), Article 11(1) and Article 12 of the Supervisory Regulations Governing Multi-level Sales. In November 2001 the respondent (Chin Chi) filed a notice with this Commission that it was ceasing operations. Subsequently, on 15 January 2002, Chin Chi filed a new report of its intent to implement a multi-level sales platform for the marketing of “mobile phone messaging services.” While handling Chin Chi’s application, the FTC issued a warning regarding possible violation of Article 23 of the Fair Trade Law and initiated an ex officio investigation.

2. Chin Chi sold mobile phone messaging services through a network-marketing platform. Participants could purchase a single unit for NT$1,680, three units for NT$5040 or seven units at NT$11,760 and were subsequently placed at an organizational level corresponding to the number of units purchased. Participants would also receive one, three, or seven lottery tickets, respectively, and would be eligible to participate in the drawings and the apportionment of lottery winnings. Participants who recommended new members, assistant directors or directors would receive respective introduction bonuses of NT$180, NT$540 and NT$1260 as well as one, three, or seven lottery tickets, and would be raised one, two, or three organizational levels (a system of “promotion” referred to as the “bungee system”). Organizational bonuses were also distributed. Participants who recruited three members down-line on both the left and the right sides would receive NT$180 and one lottery ticket. By recruiting another 3 members down-line on both sides, the participant would again receive NT$180 and a lottery ticket. Participants who reached the daily limit of thirty recruits each on the left and right sides would receive NT$1800 as well as 10 lottery tickets. Under the system described above, participants would not only enjoy Chin Chi’s messaging services but would also receive lottery tickets and participate in lottery drawings. Furthermore, by introducing new participants, they would receive recommendation bonuses, more lottery tickets and promotions within the organizational scheme. These promotions would lead to even more of the benefits listed above. As each bonus included lottery tickets, it would seem that the distribution of these tickets was the main purpose of the network marketing scheme in question. A review of lottery prize distribution found that monies were distributed according to a multi-level award system. Participants who won lottery prizes would be entitled to an exclusive 33% distribution from the winnings, while each of the next 18 levels upstream would divide 3% as an organizational bonus. By continually recommending participants, through subsequent promotions based on the bungee system and through automatic re-investment, participants could increase the units of the prize draw they would receive. Although Chin Chi nominally sold messaging services through a multi-level marketing platform, they in fact used this multi-level sales method to attract participants and stand-ins for the purpose of obtaining bonuses and participating in lottery drawings. The main purpose for joining Chin Chi was to receive bonuses through the introduction of new members and to be eligible to participate in lottery prize drawings and the apportionment of lottery winnings.

3. Chin Chi provided service for 100 messages for each unit purchased, providing participants a large volume of messaging in a single package. Portions that exceeded this amount were calculated at prices of NT$2.5 to NT$3.5 per message at costs ranging from about NT$1.5 to NT$1.8. In actual fact, however, participants either failed to use the aforementioned services or were unfamiliar with the services, and at no point did participants make requests for these transmission services from the respondent. In Chin Chi’s marketing system, of the NT$1680 new members paid for each unit, NT$180 was distributed as a recommendation bonus while the three down-line participants on both the right and left sides would also receive another NT$180 each. These bonuses were obtained from funds derived from newly enrolled participants, so that the bonuses was dependent on the introduction of new members. As for the “bungee system,” participants who introduced new members, assistant directors or directors, would also be promoted one, two, or three organizational levels respectively in addition to receiving recommendation bonuses. The promotion system was organized in such way that those receiving a one-level promotion would be moved to the bottom of the upline of the member who originally introduced them; those receiving a two-level promotion would be placed upline from their original recommender and below Chin Chi; those receiving a three-level promotion would be placed two levels upstream from their original recommender and below Chin Chi. In the system described above, a participant’s position was not fixed within his/her own part of the organizational structure; they would become members of the organizations of those who had recommended them, their uplines, or the company itself. They would be assigned to a position within the organization based on the priority of order of their accession to promotion, which means that the commissions, bonuses, or other economic benefits gained would include benefits derived from their positioning relative to other participants who had been neither directly nor indirectly recommended by them. The enterprise had therefore already departed from a focus on the sales performance of an individual participant and those directly related to them within the organization, but was dependent instead on the continuous introduction of new members and other new members further introduced by them. It was found that the participants did not use the messaging services allegedly provided by Chin Chi and thus were not involved in the marketing and sale of goods or services; there was also sufficient evidence proving that, for most participants, the motives and purpose for joining was to receive substantial bonuses and to partake in the apportionment of lottery winnings.

4. Examination of the content of the messaging service in question revealed that Chin Chi provided nothing but basic message transmission services. Rates for similar services from other telecommunications carriers such as Chunghwa Telecom, Taiwan Cellular, Far Eastone, and KG Telecom on average ranged from NT$2.5 to NT$3.5 per message. Accordingly, if Chin Chi had provided service for 100 calls for each unit purchased, calculated at average market rates for transmission services, the actual value would only have been between NT$250 and NT$350. Even calculating in the cost of lottery ticket would have brought the total to only between NT$300 and NT$400. In contrast, the sale price for Chin Chi’s services was NT$1680, which was further compounded by the fact that, in practice, participants did not use those services. Based on the fact that the services in question were provided merely as a formality, that the participation in the organization was not based on the use of such services and that the entire network marketing scheme was based on the introduction on new members as its main source of income, the FTC found Chin Chi in violation of Article 23 of the Fair Trade Law.

5. In addition, the content of contracts signed between Chin Chi and its members failed to include information on those laws relevant to multi-level sales or on bonus systems, product information and other items required by law. Thus, Chin Chi was also found in violation of Article 12 of the Supervisory Regulations Governing Multi-level Sales.

6. In conclusion, the FTC found Chin Chi in violation of Article 23 of the Fair Trade Law and Article 12 of the Supervisory Regulations Governing Multi-level Sales. Hence, pursuant to the fore part of Article 41 of the Fair Trade Law, and considering the number of participants, the operational conditions, the volume of business, the cooperativeness with the investigation and the extent of damage to the trading order, an administrative fine of NT$800,000 was imposed on Chin Chi for its violation of Article 23 of the Fair Trade Law as well as an NT$200,000 administrative fine for its violation of Article 12 of the Supervisory Regulations Governing Multi-level Sales, for a total of NT$1 million. Chin Chi was also ordered to cease its illegal practices.

Appendix:
Chin Chi International Enterprise Ltd.’s Uniform Invoice Number: 12717887

Summarized by Kuo, An-Chi; Supervised by Lin, Ching-Tarng