The EconomistFebruary 3rd 2018 271T
HE authorities call them “business
cults”. Tens of millions of people are en-
snared in these pyramid schemes that use
cult-like techniques to brainwash their tar-
gets and bilk them out of their money. In
July 2017 victims of one such fraud held a
rally in central Beijing (pictured), an ex-
tremely unusual occurrence. The police
quickly dispersed it and the government,
in panic, declared a three-month cam-
paign against the scams. Hundreds of them
were closed down and thousands of peo-
ple arrested. But the cults are adopting new
guises. The problem may still be growing.
Li Xu shows how they work and why
they are so hard to fight. Mr Li was 34 when
his family got him a job at Tianshi, which
claimed to be a company selling cosmetics
and health products in the coastal province
of Jiangsu. He paid 2,800 yuan ($340) as a
“joining fee” and rose quickly through the
ranks. He recruited others, including his
younger sister. “They gave you a vision of
wealth and success,” he says. “It does won-
ders for your confidence.”
As he became more senior, however,
Mr Li started to worry aboutthe business.
Its head office was miles from anywhere.
Surrounded by colleagues day and night,
he rarely saw outsiders, or customers—let
alone the riches he had been promised.
There is a genuine cosmetics company
called Tianshi, but the firm Mr Li workedThey pay old investors out of new depos-
its, which means theirliabilities exceed
their assets; when recruitment falters, the
schemes collapse. China is no exception. In
2016 it closed down Ezubao, a multi-bil-
lion-dollar scam that had drawn in more
than 900,000 investors. By number of vic-
tims, it was the world’s largest such fraud.
Chinese pyramid schemes commonly
practice “multi-level marketing” (MLM), a
system whereby a salesperson earns mon-
ey not just byselling a company’s goods
but also from commissions on sales made
by others, whom the first salesperson has
recruited. People often earn more by re-
cruiting others than from their own sales.
Since 1998 China has banned the use of
such methods, although it does allow
some, mostly foreign, MLM companies to
do business in China as “direct sellers”.
This involves recruiting people to sell pro-
ducts at work or at home.Family connections
The distinguishing feature of the Chinese
scams is the way they combine pyramid-
type operations with cult-like brainwash-
ing. Typically, says Mr Li, a friend or family
member will persuade a new recruit to go
to an unfamiliar, often isolated place for a
week of “introductions and training”. Cao
Yuejie, for example, was enticed into join-
ing such a scheme by her husband while
on honeymoon. In many cases the recruit-
er (who is often duped) will spend the first
three days trying to persuade the victim
that the firm is a benevolent institution
(not like those awful Ponzis!) and that
working for it would be for the good of the
family. For the next four days, the com-
pany’s representatives will appeal to the
recruit’s ambition and greed, as well as his
loyalty to his family.for was not it, nor did it seem to make mon-
ey selling cosmetics. Rather, he thought, its
revenue came from the “donations” which
he, hissister and other members of the
swelling workforce willingly paid out in
the expectation of big returns. Eventually
Mr Li realised the operation was a scam.
The firm’s real business, he realised, was to
trick people into handing over money and
then persuade them to hoodwink others to
do the same.
Mr Li left the firm and convinced his sis-
ter to do so as well. But most of his col-
leagues believed the company, not him.
They stayed with it right up until it was
closed down for breaking laws on fraud.
Determined that others should not suffer
as he had, Mr Li told his family that he was
going to become an itinerant labourer. In-
stead, his travels took him in search of oth-
er victims of pyramid schemes. Most of
those he found believed, like his former
colleagues, that the companies which had
taken their savings had their best interests
at heart. Beginning with a couple of
phones and volunteers, he founded and
built up an NGO, the China Anti-Pyramid
Promotional Association, into the main
private institution taking on this warped
product of China’s growth.
Many countries suffer from Ponzi
schemes, which typically sell financial
products offering extravagant rewards.Pyramid schemesA multi-level scourge
BEIJING
Ponzi schemes cause huge social harm in China. Crackdowns may not be workingChina