Pyramid Schemes & Informality

In early December Government of India proposed new guidelines to state governments about MLM (Multi Level Marketing). These proposed amendments are to a piece of law named the Prize Chits and Money Circulation Schemes. Small Chits funds have been popular in India for a long time. They operate on an informal level without regulation. They function based on 100% trust. Participants often go through an intense screening process. They have been a important financial tool, providing access to finance for individuals and families pressed for cash. But in the world of increased greed, many operators are running Ponzi schemes in the guise of Chit funds. The Government is trying to plug in some loop holes with the proposed amendments.

Many people who rely on the income from MLM are worried that the new proposals will outlaw all Multi Lvel Marketing in India. Others feel that MLM can never be banned as is obvious from failed attempts towards it in countries such as UK. They feel that the Government's attempt is to close the loopholes for Ponzi schemes to operate. Even if enacted, it is not clear how effective an amended law can be in India where enforcement has been a challenge in many other areas. Experts think that even in the US, where MLM is legal,  it is very difficult to detect a Pozni scheme masquerading as an ML. Federal Trade Commission recently updated its website with the following clarification

"Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it's not. It's a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."

The new economy is bringing new ways of making money. But is it all that new? Chit funds have been popular among common folk in India. Can trust be replaced by any piece of law? Even fifty years ago anyone could have run a Ponzi scheme disguised as a chit fund. It probably would not have worked because the informality and sense of belonging among the participants and the owner of the Chit fund. So are Governments everywhere not able to sustain these values anymore?