Amway under ED Scanner

 The Enforcement Directorate (ED) on  April 18, 2022 attached ₹757.77 crore worth of assets of direct-selling company Amway India Enterprises Private Limited, accusing it of running a multi-level marketing scam.

The attached properties include over ₹400 crore worth of immovable and movable properties such as a parcel of land and the factory building of Amway in Tamil Nadu’s Dindigul district, plant and machinery, and vehicles. The remaining attached assets include bank balances and fixed deposits in 36 bank accounts identified so far, having a cumulative balance of ₹345.94 crore, the ED said.

What is the case against Amway ?

Amway is an American direct-selling FMCG (fast-moving consumer goods) company that started its Indian operations in 1995 in the form of the Indian Direct Selling Association. It then started a charity in 1996 called the Amway Opportunity Foundation, conducting seminars to enrol members, and eventually established a subsidiary in 1998. Its operations are based on the direct selling and multi-level marketing (MLM) models.

Amway India faced multiple police complaints and court cases between 2006 and 2014 in Hyderabad and Kerala pertaining to fraudulent activity and cheating, with its former CEO William Scott Pinckney being arrested twice, in 2013 and 2014.

The action by the ED is based on a past complaint registered in Hyderabad. The ED said that its investigation into Amway revealed that the company had been running a “pyramid fraud” under the guise of a direct selling multi-level marketing network.

The central agency alleged that Amway had collected about ₹27,562 crore through its business operations from 2002-03 to 2021-22, of which it paid commissions of ₹7,588 crore to its distributors and members in India and the U.S. during the same period.

The ED further said: “Amway has brought ₹21.39 crore as share capital in India in 1996–97, and till 2020-21, the company has remitted a huge amount of ₹2,859.10 crore in the name of dividend, royalty and other payments to their investors and parent entities.”

What are the laws governing such schemes in India?

In December 2021, the Centre released new guidelines for direct selling companies like Tupperware, Amway, and Oriflame, banning them from promoting pyramid or money circulation schemes.

With the Consumer Protection (Direct Selling) Rules, 2021, direct selling companies were for the first time brought under the ambit of the Consumer Protection Act. The new Rules were introduced to make companies like Amway liable for the grievances arising out of the sale of goods or services by its direct sellers.

The rules said that direct selling entities and direct sellers would be prohibited from promoting a pyramid scheme or enrolling any person on such scheme or participating in such arrangement in any manner whatsoever in the garb of doing direct selling business. This is what the ED has accused Amway of doing.

Besides last year’s rules, another legislation banning such activities is the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. This bans “prize chits and money circulation schemes or enrolment as members or participation therein”

“No person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme,” reads Section 3 of the Act. Sections 4 and 5 underline the penal provisions and punishments for violation of the Act.

Section 6 describes how the Act would be applied to companies committing such offences, stating that “every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished.

Analysis :

Even as the government action against Amw ay India Pvt. Ltd. tightened after its nodal agency Enforcement Directorate (ED) attached both moveable and immoveable properties of the firm in Tamil Nadu recently, business observers expressed their doubts about it.

How effective the action will prove to be is still to withstand the test of time. In the past there have been many instances where Amway India was let off the hook after being booked for serious breach of our country’s financial regulations.

▪︎ Amway India has come under the ED scanner only after the government at the Centre clearly spelt out in its December 2021 regulation. 

The law spells out that corporate entities seeking to recruit and operate a direct selling model should not be permitted to use the pyramid structure.

▪︎ This means that Amway India trying to rope in more and more distributors by asking each member to earn commission by enrolling members under their wing is in violation of government regulations that govern a direct selling model.

▪︎ In simple words, direct selling would just mean the existing team of distributors would directly target end users or end consumers to sell their products at affordable prices as compared to those that use media platforms to commercially advertise and market their products.

▪︎ However, Amway India’s products are unreasonably priced as their focus is only on increasing the number of distributors for the purpose of earning commissions, with no intention of affecting the sale of any of their products to any end consumer.

▪︎ Many business observers cautioned that companies like Amway India that have deep pockets can use their financial lobbying clout to dilute government regulations and wriggle out of the legal mess they find themselves to be in, time and again.

(Inputs from Hindu and Sprouts )