HÀ NỘI — Viet Nam lacks the legal wherewithal to deal comprehensively with dubious multilevel marketing companies operating in the country, officials say.

While a crackdown on pyramid schemes by the Vietnam Competition Authority (VCA) has made some headway, authorities are unable to exercise due control over the multilevel marketing sector, they add.

The VCA, in collaboration with the Ministry of Public Security (MPS), shut down 45 per cent of illegal multilevel marketing companies in the country last year, according to the Ministry of Industry and Trade (MoIT).

The MoIT said the VCA penalised 30 network marketing firms last year after careful investigation, imposing fines of VNĐ8 billion (US$357,941).

Of these 30 companies, 15 had their business licences revoked, 12 shut down their operations and three suspended theirs.

The MoIT also said that the number of firms running selling networks apparently based on pyramid schemes decreased by 25 per cent between 2015 and 2016, from over 637,000 to about 425,000.

“We must concede that multilevel marketing is not a prohibited business, as regulated by the World Trade Organisation. However, in Việt Nam, legal documents relating to this issue are still lacking, particularly as to which goods or services are allowed. The ministry, therefore, has proposed to the Prime Minister and the National Assembly that more rules and regulations be developed for this sector, and firms be subjected to more investigation and control,” said Đỗ Thắng Hải, Deputy Minister of Industry and Trade.

He said provincial and municipal departments of Industry and Trade across the country have achieved greater success last year in implementing government regulations on illegal multilevel marketing activities.

The Ha Noi Department of Industry and Trade levied fines of VNĐ2.59 billion ($115,883) on network selling firms, with the infamous Thiên Ngọc Minh Uy Co. paying the largest fine of more than VNĐ1.5 billion ($67,114) as of April 2017.

Multilevel marketing companies earned an estimated profit of VNĐ7.8 trillion ($348.9 million) last year, down 2.5 per cent from 2015, seemingly unaffected by the drop in downline distributors.

Also, just 11 firms made profits, with 18 reporting low earnings before taxes, not breaking even. Overall operating margin was reportedly just 0.5 to 3.8 per cent of net sales.

Multilevel marketing firms paid around VNĐ881 billion ($39.4 million) in taxes last year. The sector’s post tax profit for 2016 is estimated at VNĐ177 billion ($7.91 million), around 2.2 per cent of their annual revenue.

It is also estimated that these firms paid their employees and downline distributors a total of VNĐ2.4 trillion ($107.38 million), with an additional VNĐ44 billion ($1.96 million) in promotional deals.

The VCA has explained these numbers as the result of the extremely high level of value added tax paid by end consumers instead of actual corporate taxes. This also means that out of more than six hundred thousand network marketing participants in Việt Nam, only a handful are actual resellers. The rest are users.

Most of the revenue for multilevel market companies came from functional food items (59 per cent) and cosmetics (24 per cent) from cosmetic items, followed by household goods, clothes and other products.

According to the MoIT, it is difficult to regulate pricing for these items, which means illicit network sales companies can easily overprice them without reporting actual net sales to the authorities, enabling tax fraud.

A common modus operandi for pyramid sales firms is to use multilevel selling for illegal trading of financial services or raising money illegally.

 “In order to straighten up the network marketing scene in Việt Nam, the VCA intends to continue investigating, monitoring and dealing with irregularities,” said VCA Deputy Director General Trịnh Anh Tuấn.

A new circular and an amended decree have improved State management of multilevel sales activities, helping identify some subterfuges employed.

Globally, pyramid and multilevel marketing schemes appeared in the seventies and generated a lot of controversy. In Viet Nam, it began in 1998 and the number of firms has been growing steadily in the last five to six years, at 20 to 30 per cent a year.

The Vietnam Multi-Level Marketing Association, founded in 2009, has more than 100 member companies, though only 67 firms have been officially licensed by the MoIT.

Multilevel marketing is a legitimate but controversial strategy in which the sales force is compensated not only for the sales they generate, but also for the number and net sales of other salespersons recruited, while applying different bonuses structures as the pyramid, binary and matrix models. —VNS