Scams affect us all. As Nebraska’s attorney general from 2003-2015, one of my key priorities was safeguarding against scams. In 2010, I helped Nebraska’s Legislature pass a model law to protect consumers from pyramid schemes. Similar laws have now been adopted in 21 states.
However, incredibly, there is no federal definition of a pyramid scheme. Congress has the ability to change that through the passage of the bipartisan Anti-Pyramid Scheme Protection Act of 2017 (H.R. 3409), sponsored by U.S. Reps. Marsha Blackburn, Tennessee Republican, and Marc Veasey, Texas Democrat.
This important legislation clearly defines pyramid schemes by mirroring the language successfully used at the state level and it protects consumers without overly burdening legitimate business.
Pyramid schemes are outright frauds. They offer participants compensation for recruiting others without regard to the sale of products or services. They prey upon people’s weaknesses, promising easy money for no work. They take advantage of human nature.
It is quite true that Americans buy and sell products. It’s what we do. We’re stay-at-home moms earning extra money for our kids’ activities. College students looking for part-time work and flexible hours. Young people and retirees who want to be our own boss. Minority populations seeking to gain a hand up in today’s economy. Direct selling is an important way in which Americans experience buying and selling, and it needs to be protected.
Direct sales companies are an important component of the U.S. economy, with nearly $36.5 billion in sales during 2016. They employ thousands of individuals, and have literally millions of independent distributors who sell products and services to supplement their family incomes.
The companies themselves rely upon an industry-led code of ethics to sell quality products and services through distributors working on a commission basis. But shady businesses running pyramid schemes can harm consumers by compensating primarily on the recruitment of others and not on the sale of products or services, often pretending they’re legitimate opportunities.
All of us have been harmed by bad actors and a federal government that often can’t seem to get out of the way. Congress needs to protect our direct sellers by clearly defining and banning pyramid promotional schemes.
As Nebraska’s top law enforcement officer, I recognized the harm being caused to consumers from these illegal pyramid schemes. That is why my office utilized legislation suggested by the Council of State Governments to pass a law in Nebraska to clearly distinguish pyramid schemes from legitimate multilevel marketing plans. I believed so strongly in the bill that I put the full weight of my office behind it.
Nebraska’s bill passed unanimously with bipartisan support. The law continues to protect consumers, help keep pyramid scheme operators out of the state, and gives prosecutors the tools to investigate and prosecute pyramid schemes.
Bottom line: the Federal Trade Commission has enforcement authority but no federal law defining a pyramid scheme. Congress should address this ambiguity and close this loophole, giving the Federal Trade Commission the full set of tools it needs to do its job, and removing unnecessary fear of direct sellers engaged in legitimate buying and selling.
That’s why it’s so important to pass bipartisan legislation that defines and bans pyramid schemes. H.R. 3409 clearly defines a pyramid promotional scheme and fights those schemes by banning businesses from basing compensation primarily upon the recruitment of others. The bill would also require companies to repurchase inventory when distributors leave a legitimate business, while also protecting against inventory loading.
The federal government has the opportunity to follow the states’ leadership and adopt a clear standard for pyramid schemes, defining and banning them. In doing so, our stay-at-home moms, college students, and direct sellers will be protected from the illegal and unethical promotions of the bad actors.
It is high time for the federal government on Capitol Hill to do what the states have already been doing — move to protect our citizens from these scams.
Jon Bruning is a former Nebraska attorney general and president of the National Association of Attorneys General. He is managing partner of the Bruning Law Group.