On December 29, 2021, following the explosion of a huge tax supplement fine by "Weiya", just over a week later, "Zhang Ting, Lin Ruiyang, and his wife's company were investigated and punished for pyramid selling" hit the hot spot, with a reading volume exceeding 780 million within 24 hours. This incident involves many legal issues. How do consumers protect their rights? What legal responsibilities will participants at all levels of the "pyramid selling" act bear, and how should they protect their legitimate rights and interests? Why can we continue to operate due to repeated complaints about product quality issues? Should we assume responsibility for product quality and how? Why is the market supervision and administration bureau responsible for the investigation rather than the public security organ? Are pyramid schemes suspected of committing crimes and what crimes may be involved? Many of the above legal issues involve various fields of civil, administrative, and criminal law, and require in-depth research and resolution by professionals.

 

We now take this event as an opportunity to briefly introduce how laws and regulations identify pyramid selling and its manifestations, and call on enterprises to comply with the bottom line of compliance in their operations. In the future, we will continue to explore issues related to corporate compliance management from the perspective of corporate governance.

 

Brief review of the event

 

December 24, 2021

 

"Li Xu anti fraud team" WeChat official account said that it had received a reply from the Market Supervision Administration of Yuhua District, Shijiazhuang City on the verification letter. According to the reply, on June 5, 2021, according to multiple public reports and inspections, the bureau filed an investigation into Shanghai Dalwei's suspected pyramid selling and reported it to the higher authorities level by level. The Market Supervision and Administration Bureau of Yuhua District, Shijiazhuang City replied that due to the use of financial institutions by Shanghai Dalwei to transfer or conceal pyramid selling funds, the bureau has applied to the People's Court for preservation measures in accordance with the law, and the case is currently under further investigation.

 

On the evening of December 28, 2021

 

Shijiazhuang Yuhua District Market Supervision and Administration Bureau revealed that Shanghai Dalwei Trading Co., Ltd. was investigated for allegedly using the network to engage in pyramid selling activities.

 

Early morning on December 29, 2021

 

"Shanghai Darwei Trading Co., Ltd. is a legally operated company that has always followed government guidance, adhered to legal operations, and paid taxes in accordance with the law since its establishment. I am very grateful to the Hebei Shijiazhuang government for guiding our company to investigate risks. Currently, the publicity and operation are all normal, and our company will actively cooperate with relevant departments in their work."

 

December 30, 2021

 

The relevant personnel of the Yuhua District Market Supervision and Administration Bureau of Shijiazhuang City once again stated that the relevant pyramid sales organizations have been characterized by a long span of time, a large number of personnel involved, and a large amount of funds involved since 2013, and have now entered the financial audit stage.

 

What is pyramid selling?

 

We all know that pyramid selling is illegal, but in real life, many people are easily tempted by the clothing of pyramid selling. So what is pyramid selling? The essence of pyramid selling is "Ponzi scheme", which is an illegal activity of selling through soliciting people. How do laws and regulations define pyramid selling?

 

According to Article 2 of the "Regulations on the Prohibition of Pyramid Selling", the term "pyramid selling" as used in these Regulations refers to the acts of organizers or business development personnel who seek illegal benefits, disrupt economic order, and affect social stability by calculating and paying remuneration to the developed personnel based on their direct or indirect development of the number of personnel or sales performance, or by requiring the developed personnel to obtain membership qualifications on the basis of paying a certain fee.

 

What are the manifestations of pyramid selling?

 

Article 7 of the "Regulations on the Prohibition of Pyramid Selling" clearly lists three typical manifestations of pyramid selling:

 

（1） "The organizer or operator, through the development of personnel, requests the developed personnel to develop other personnel to join, and calculates and pays remuneration (including material rewards and other economic benefits, the same below) to the developed personnel based on the number of personnel they have directly or indirectly developed in a rolling manner, seeking illegal benefits;";

 

（2） The organizer or business operator, through the development personnel, requires the developed personnel to pay fees or pay fees in disguised form by subscribing for commodities, so as to obtain the qualification to join or develop other personnel to join, and seek illegal benefits;

 

（3） The organizer or operator, through the development personnel, requests the developed personnel to develop other personnel to join, forming an online and offline relationship, and calculating and paying online remuneration based on the sales performance of the offline, seeking illegal benefits.

 

With the development of Internet technology, new types and new means of pyramid selling models have gradually emerged.

 

Business operations should comply with the compliance bottom line

 

Corporate compliance refers to the compliance of the operation and management behavior of an enterprise and its employees with laws and regulations, regulatory provisions, industry standards, corporate bylaws, rules and regulations, as well as international treaties and rules. Obviously, the incident of Shanghai Dalway Trading Co., Ltd. is a major incident triggered by corporate non-compliance. According to the "Reply to the Verification Letter" sent by the Yuhua District Market Supervision and Administration Bureau of Shijiazhuang City to the "Li Xu Anti Transmission and Fraud Prevention Team" on December 23, Shanghai Dalwei Trading Co., Ltd. "is suspected of using the network to engage in pyramid selling activities.".

 

The noncompliance of Shanghai Dalway Trading Co., Ltd. has generated significant compliance risks, which refer to the possibility that an enterprise and its employees may incur legal liability, be subject to relevant penalties, cause economic or reputational losses, and other negative impacts due to noncompliance. As the current case is still under investigation, it is preliminarily judged that the legal risks caused by this non-compliance event may exist in the following three situations:

 

The first is to determine that the actions of Zhang Ting, Lin Ruiyang, and their company involve false propaganda and are not considered pyramid schemes. In this case, the legal consequences and penalties for the company and relevant responsible persons are the lightest.

 

The second is that after investigation and verification, it is determined that relevant acts have constituted pyramid selling, and the company and relevant responsible persons are subject to administrative penalties in accordance with the "Regulations on the Prohibition of Pyramid Selling".

 

The third is that the Market Supervision and Administration Bureau of Yuhua District, Shijiazhuang City believes that the behavior of the company and related personnel has been suspected of committing a crime, and transfers it to the public security organ for filing and investigation. Finally, the crime of organizing and leading pyramid selling activities and other criminal responsibilities will be investigated in accordance with the criminal law. In this case, the Zhang Tinglin Ruiyang couple has almost no chance of turning over.

 

Business operations should comply with the bottom line of compliance, which is the internal guarantee for stable business operations. At the same time, enterprises should attach importance to compliance risk management, which should implement the entire process of enterprise operation management. Compliance management not only assists enterprises in risk prevention and control, preventing them from touching the legal red line, but also helps enterprises achieve risk control through predetermined management systems in the event of emergencies, avoiding greater losses.