CNA Explains: How does China deal with pyramid schemes?

CNA Explains: How does China deal with pyramid schemes?

Following the arrest of 52 Singaporeans in Guangxi, CNA speaks to lawyers in China about the laws governing pyramid schemes and potential penalties for different levels of involvement.

SHENZHEN/BEIJING: The arrest of 52 Singaporeans in Guangxi over suspected pyramid-scheme activities has put the spotlight on how such cases are dealt with under Chinese law.

Singapore’s Ministry of Foreign Affairs (MFA) has said the Singapore government does not intervene in foreign judicial systems, even as it continues to provide consular assistance to those arrested.

So what amounts to pyramid selling under Chinese law? Does merely taking part constitute a crime, and what if someone was initially a victim but later recruited others?

CNA looks at key questions about China’s law on pyramid schemes, including how they distinguish between participants, recruiters and organisers, and the penalties they may face.

Is pyramid selling a crime in China?

Not always.

Chinese law distinguishes between pyramid-selling activities that are administrative violations and those that amount to criminal offences, said Kevin Hong, a partner at Shanghai-based AllBright Law Offices.

“For pyramid schemes, the criminal offence generally applies only to those who organise and lead the scheme, because the law only punishes organisers and leaders,” he said.

But organisers and leaders are not limited to those who set up the scheme or sit at the top, he added.

Those who manage teams, control funds, conduct training or help expand the network may also fall into this category, Hong said.

Can you be punished for joining a pyramid scheme?

Yes, but the consequences for mere participation are relatively limited in China, experts said.

“Participation in pyramid selling itself constitutes an administrative violation,” said Hong.

Under China’s Regulations on Prohibiting Pyramid Selling, mere participants can be ordered to stop and fined up to 2,000 yuan (US$300).

What if you were a victim first, and then started recruiting others?

“Being deceived at the beginning does not automatically exempt a person from responsibility, and recruiting others does not automatically constitute a crime,” said Hong.

If someone later became aware that the scheme relied mainly on money from new participants and that the project lacked a genuine source of profit, but continued actions such as recruiting others, collecting funds, training members, managing teams or earning recruitment commissions, they could face administrative or criminal liability, he added.

“You have to be an organiser or leader, because many people at the lower levels have themselves been deceived and lured into the scheme. You cannot possibly punish all of them,” Hong said.

Zhao Feiquan, a criminal lawyer and senior partner from Beijing Yida Law Firm, said the key question was how a person’s role evolved after joining such a scheme.

Someone who may have started out as an ordinary participant could move towards criminal liability if they subsequently took on functions that helped operate or manage the network, said Zhao.

He cited the example of people who conducted classes explaining a scheme’s rules, rewards and promotion system.

Those who helped disseminate such information or conducted sharing sessions could also be considered actively involved, he said.

“There is a boundary in the transition from being a victim to becoming a criminal suspect,” Zhao said.

“The key question is whether you played a role in assisting the management and operation of the organisation as a whole.”

How does China distinguish between ordinary participants, recruiters and leaders?

Chinese law does not formally divide people involved in pyramid selling into fixed categories of ordinary participants, recruiters and leaders, said Hong from AllBright Law Offices.

Instead, their actual role determines the liability they may face.

Those who bring in new members, collect funds or earn commissions may be considered recruiters or assistants.

But recruiting others alone does not make someone an organiser or leader, Hong added.

Criminal liability for organising and leading pyramid-selling activities would normally require the person to have acted as an organiser or leader in a scheme involving “30 or more persons” and “three levels or more”.

Beijing Yida Law Firm’s Zhao said investigators would look beyond a person’s nominal position in the network to what they actually did.

For instance, people who delivered training on how the scheme worked or helped spread its messaging could be treated as active participants even if they were not among its top leaders, he said.

What penalties do those involved face?

People who introduce, induce or coerce others to join could face heavier administrative penalties, including fines of 100,000 yuan to 500,000 yuan and confiscation of illegal property and unlawful gains.

For those whose conduct amounts to a criminal offence, like organisers and leaders, the penalty could amount to “fixed-term imprisonment of up to five years or criminal detention, and a fine”, said Hong.

In serious cases, sentences can exceed five years, along with a fine. Such circumstances include having 120 or more participants or collecting 2.5 million yuan or more in funds, Hong said.

Beyond the scale of the network and amount of money involved, other factors could also be considered when determining the seriousness of an offence, Zhao said.

“Another consideration is whether minors or people with disabilities are involved, and whether the person has previously received administrative or criminal punishment,” he said.

In Singapore, pyramid schemes are illegal under the Multi-Level Marketing and Pyramid Selling (Prohibition) Act.

Under the Act, it is unlawful for a person to promote or participate in a pyramid selling scheme. Anyone found guilty may be fined up to S$200,000, jailed up to five years or both.

If someone is released after being detained, does it mean they a