The government is taking steps to regulate multilevel marketing (MLM) to protect consumers from deceptive business practices, especially the growing issue of pyramid schemes disguised as MLM, according to the Minister of Trade and Industry, Prudence Sebahizi. Regulation of multilevel marketing is one of the proposals in the draft law relating to competition and consumer protection which is in Parliament for consideration. Multilevel marketing is the practice of selling goods or services on behalf of a company in a system whereby participants or distributors receive commission (variable-pay remuneration or compensation) on their sales as well as the sales of any participants they recruit. Understanding multilevel marketing and pyramid schemes Sebahizi told The New Times multilevel marketing is distinct from pyramid schemes in several ways. In MLM, revenue is mainly generated through the sale of products, while pyramid schemes rely on recruitment fees, Sebahizi said. MLM emphasises selling genuine products to customers, whereas pyramid schemes focus on enrolling new members. While MLM can sustain itself in the long term if there is ongoing demand for its products, pyramid schemes are inherently unsustainable and collapse when recruitment slows down, he indicated. Additionally, he said, MLM companies provide tangible products or services to consumers, whereas pyramid schemes often lead to financial losses without any real value in return. ALSO READ: Central Bank warns against emerging fraud schemes Concerns about lack of multilevel marketing regulation Sebahizi said multilevel marketing operates without clear regulations in Rwanda, which has led to the rise of pyramid schemes masquerading as legitimate MLM operations. This situation includes fraudulent activities where companies use money circulation schemes while pretending to sell products. “Many businesses have taken advantage of this regulatory gap, misleading consumers into investing in unsustainable business models. A prevalent trend is that these companies often prioritise recruiting new members over selling genuine products,” Sebahizi observed. ALSO READ: Six arrested in multi-level marketing scam To avoid scrutiny, Sebahizi said, some of these businesses (pyramid schemes) introduce proxy products—typically overpriced and of little value—that serve as a substitute for recruitment fees. “There have been numerous complaints from consumers who have lost money after investing in such schemes and many of these have been banned from operating on the Rwandan market,” he said. The lack of regulation has resulted in several issues, particularly confusion between multi-level marketing and pyramid schemes, Sebahizi observed. Consumers and authorities find it challenging to distinguish between legitimate MLM businesses and fraudulent schemes due to the absence of legal clarity, he pointed out, adding that many individuals invest in pyramid schemes, mistakenly believing they are legitimate MLM opportunities, only to lose their money when the scheme ultimately collapses. Devota Muhayimana, ventured into a pyramid scheme dealing in crypto. That was early 2023. She said she was attracted to the scheme by her father who had invested in it after being convinced by his colleagues. “After my father got a return on his initial [Rwf100,000] investment, he decided to triple outlay, I was convinced that the business was profitable and had no doubt whatsoever about that,” she said. But, she said, the scheme collapsed before she got any returns – and lost her investment. The initiators of the dealing were nowhere to be found. “I had invested Rwf40,000 in it,” she said, adding that she was set to make more investments had she received profit on the initial outlay. Muhayimana’s case is just an example of how some people have been economically exploited through pyramid schemes. ALSO READ: Proposed consumer protection law seeks to tackle 'unfair' market practices MLM regulation and how it could protect consumer rights Rwanda aims to regulate multilevel marketing to clearly define legal structures and prevent pyramid schemes from operating under false pretenses, Sebahizi said. This regulation, he indicated, will require MLM businesses to register, making it easier to monitor their activities. The new rules will enhance transparency by mandating that companies provide clear information about their earnings and product or service pricing models, he added. “Consumer protection will be strengthened by prohibiting fraudulent schemes that focus on recruitment rather than product sales. Additionally, a caution deposit will be introduced to compensate consumers in the event that a company disappears or goes bankrupt,” he observed. To ensure compliance with the regulations, he said, regulatory enforcement will be improved through the monitoring of MLM businesses and the implementation of a quarterly reporting mechanism. To prevent pyramid schemes from disguising themselves as MLM operations, regulations will require MLM companies to clearly disclose their revenue sources. This will ensure that income primarily comes from product sales rather than recruitment. Misleading recruitment incentives will be prohibited, and authorities will closely monitor product pricing to prevent overpriced, low-value products from being sold under the guise of legitimate sales, he said. Also, strict licensing and monitoring will be enforced, requiring MLM businesses to undergo regular audits to ensure compliance. “By implementing these regulations, Rwanda aims to protect consumers, eliminate fraudulent schemes, and enable ethical MLM businesses to operate under fair market conditions,” he said. According to Muhayimana, regulating MLM will benefit people engaged in it as they can claim their rights as provided for by the law.
