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Do MLMs Protect Their Online Sellers From Fraud?

You might be selling leggings to a catfish.

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Lorrie Orozco regretted shipping the lip gloss. The Orange County-based distributor with SeneGence — a cosmetics-focused direct-sales company — hadn’t yet received payment from the woman who claimed it on her Facebook page, where Orozco conducts most of her SeneGence business. But the claim came in from a fellow direct sales consultant, so Orozco quickly put her order in the mail and invoiced her.

Months passed, but Orozco never received payment. “I'd see her doing her live sales on her [Facebook] page,” says Orozco. “She was conducting business, but she never followed up with me.” When Orozco messaged the woman about the outstanding payment, the woman became angry, says Orozco, and supplied excuse after excuse. “She had even mentioned that she was a bad payer.”

Orozco swallowed the cost.

Scroll through Facebook’s newsfeed, and it won’t take long to stumble across a post from a friend or acquaintance advertising her or his direct sales wares. Be it limited-run legging “movement” LuLaRoe, essential-oils giant doTERRA, or kitchen-tool mainstay Pampered Chef, direct-sales companies are more popular today than ever before, attracting a record 20.5 million sellers, customers, and party hosts in the US in 2016, including 5.3 million direct sellers. A lot of sellers conduct their business — where else? — on Facebook.

Direct-sales companies, aka multilevel marketing companies or MLMs, operate on the upline/downline model, where new salespeople are recruited by existing consultants. On top of earning income off of product they sell themselves, consultants earn a cut of what their downline (or consultants they recruit, and the consultants those recruits recruit, etc.) makes. Some MLM retailers, like those at LuLaRoe, must purchase inventory shipments from their companies to sell directly to the consumer; other consultants, at companies like SeneGence, buy sample items needed for demos at product parties.

Much of the cultural conversation surrounding MLMs hinges on the industry’s downsides: namely, the potential for consultants to accumulate debt while attempting to build their businesses, and the most egregious offenses of “pyramid-shaped” MLMs like Herbalife. But what often gets left out of the MLM dialogue are the pitfalls that can befall the folks who do find success and turn a profit in direct sales — no one talks about the least salacious scams.

Some sellers pick up direct sales as a sideline gig. Others pursue it full time. LuLaRoe and the like are especially desirable employment options for people with kids who want (or need) to both stay home and earn income. “It's too expensive to send them to childcare,” says LuLaRoe independent retailer Amanda McCann, who is based in Orange County, California, and has an 11-year-old son. “So it makes sense for [stay-at-home parents] to start an at-home business.” There are other points of appeal, like the flexible hours, not to mention an advertised level of autonomy. Salespeople are anointed titles like “consultants,” “distributors,” “Wellness Advocates,” and in the case of LuLaRoe, “independent retailers.” Each individual who works in direct sales, their companies’ mandates proclaim, owns her own businesses.

McCann, who recently celebrated her first anniversary with LuLaRoe, confesses initial wariness at entering the direct-sales world, but has had a positive experience as a retailer so far. “They really emphasize that you're your own business owner,” says McCann of LuLaRoe. “They really give us the freedom to decide what we want to do.”

But there’s a level of vulnerability that comes with operating an “independent” direct-sales business, one that depends on online interactions for networking, organizing parties, and selling. Sometimes the lack of accountability that online interactions accrue translates into lost sales; other times, sellers fall prey to scam artists. How do direct salespeople protect themselves against the pitfalls of online sales?

One of the least nefarious downsides to online selling — yet one of the most common — is the customer who, for whatever reason, doesn’t pay his or her invoice. Most seasoned consultants know better than to ship product before receiving payment, a lesson often learned the hard way.

McCann relates an experience when she first started with LuLaRoe when a customer told her that she didn’t have the money for her order, after McCann had already put it in the mail — which means that McCann was out the wholesale cost personally for the item. “I just figured, the way that the cards fell, she needed it more than me at the time,” says McCann. “And I've been there before financially.” She let her customer keep the leggings, for free. It ended up paying off for McCann eventually, when the same customer returned once she had money to spend, and made good on another order.

That sort of forgiveness protocol is not necessarily company policy, says McCann, but it's embedded in company culture. “LuLa is very big on blessing people,” says McCann. “They encourage us to be generous.” (LuLaRoe’s back office page — only accessible to LuLaRoe retailers — includes tabs for invoicing systems named “Bless” and “Old Bless.”)

Claiming an item on a LuLaRoe retailer’s VIP page on Facebook is the first step in a customer’s agreement to submit payment for it, since claiming an item takes it out of the running for other shoppers. But online selling and buying is something of a para-marketplace — a commercial market manned by independent sellers, adjacent to the marketplace where big businesses function. And the casual, interpersonal quality of purchasing from an individual retailer on the other side of a computer screen often means that customers don’t take these interactions as seriously as they might take an in-store shopping experience.

Oftentimes there’s no sinister intention at play when customers don’t pay; they simply forget, and later regret making the claim, or they find something they want more from another seller.

“It doesn't hurt as much,” says McCann of online shopping. “You're not handing someone cash right there, or swiping your card at a store. So it's almost like it doesn't count in a way to them, mentally, I guess.”

It can be challenging to get strangers to pay up, but it can be even harder to secure payment from friends and family. “I feel like friends will take advantage of you sometimes,” says Lynette Haggerty, a consultant with purse and tote bag company 31 Gifts in Oklahoma. “It's not, “Muhaha, I'm going to take advantage of her,’ but it's like, ‘Well, it's okay that it's been four weeks.’ It's just not high priority [for them] because it's inconvenient.”

The onus is on consultants to maintain professionalism in all business interactions. “It's too easy in this industry to be casual, because a lot of it is social marketing,” says Kalen Clark, a realtor and direct salesperson in Lexington, Kentucky. After joining sex toy company Pure Romance in 2012, Clark rose to its “Board of Directors” level in her first year, and became a corporate trainer in her third year. Holding inventory wasn’t a requirement at Pure Romance, but Clark knew that most of the customers she met at home parties would want products in hand that day, especially since those products were of a sensitive nature. She transported $5,000 worth of inventory in a toolbox in the back of her van every day. The team she built produced close to $900,000 in sales annually.

Clark, now at “tea party” direct-sales company Steeped Tea, credits her success to the level of seriousness she injected into her business — it’s a huge risk, she says, not to. “I was firm about payments being on time,” says Clark. “I didn't do any favors, I didn't set up plans for people where they could pay me later, and it was expected to be done like they would do it anywhere else they shop.” She didn’t accept checks either. “It's too easy for that to go south.”

Checks can bounce even when written by the most well-intentioned customers; they’re also a tried-and-true scam-artist staple. Haggerty remains skeptical of customers offering to pay by check or money order, and points to a particular kind of consumer email that she says tends to prey on new consultants.

“Within your first couple of months, it seems to be everybody gets hit,” says Haggerty. The emails follow a similar script: The consumer wants to purchase a big order, but doesn’t have a credit card, and offers to pay via check or money order. “I'm naturally suspicious of emails like that. […] Obviously at no point is this person going to say, ‘Hey, I'm lying!’ So you have to decide at a certain point what you're going to do.”

It’s not just customers that sellers need to be wary of — direct salespeople can, and do, get scammed by other consultants, too. Clark says that “farming contacts” is a big enough issue that she hid her friends list on her business page so that other consultants couldn’t access it, and steal her contacts.

“Everybody's etiquette in the industry is not always great,” says Clark, “or they're improperly trained.”

The same goes for the customers who host product parties in exchange for a discount or free product, what many companies call “hostesses.” Orozco, the distributor with SeneGence, speaks of an experience where a party host claimed she hadn’t received the free product due to her after hosting another distributor’s party. It turned out that this host not only received her free product, but she also approached a number of other distributors with the same story, over and over. “She was getting double the free products,” says Orozco, who blocked her once she got wise to the host’s scheme.

Orozco adds that the industry’s dependence on Facebook can give sellers a false sense of security. Facebook interactions aren’t anonymous — all parties’ names and photos are plainly clear. But, says Orozco, “They could be scamming you by not using their true name and information.” Or a person could go by several aliases, making it harder to track past transgressions. “I think our society is so into social media, we really don't stop to be cautious, maybe like we should.”

Then there are the scenarios that are less textbook scams, and more shady ways to do business. McCann cites “unicorn hunters”: shoppers, often working in groups, who purchase items from a retailer only to resell them, often for higher prices, on eBay, Mercari, or Amazon, or directly to other customers with an up-charge. An “ex-friend” and unicorn hunter did exactly that to McCann, reselling one of McCann’s pairs of LuLaRoe leggings, and advertising them with the same promotional picture McCann had created.

Because LuLaRoe trades in limited-edition, exclusive prints, LuLaRoe retailers are particularly vulnerable to unicorn hunters — each pair of leggings is a hot commodity, like this “4th Birthday Unicorn Cake” set now priced at $5,000 on eBay.

“In a way they are scamming people,” says McCann, “because they're leveraging LulaRoe to make more money on the product, but they're not consultants.”

Resold products don’t just make a profit that neither the company itself nor the original retailer will see, they’re also bad for business because they’re at risk of damaging the integrity of the company. Companies and consultants lose control over quality when third-party sellers come into play, but that might not make a difference to the customer who ends up with an inferior product. During Clark’s time at Pure Romance, she saw a number of her company’s products on Amazon. “The way that I liked to explain it [to clients] was that I didn't know where it was sourced from, if it had ever been opened and used, it had no type of return policy on it, and some of the products do expire.” The legal team for Pure Romance, she adds, typically handles those issues.

Because so much action within the direct sales para-marketplace occurs on Facebook, many, many, many Facebook groups have cropped up as networking opportunities for consultants. But these groups serve a bonus purpose: to sound the alarm against suspected scam artists. Some so-called “bad apple” groups exist purely to warn the masses.

One such group, “The Good and Bad of Direct Sales,” is closed and currently holds 1,001 members. Its description reads: “This group is meant to share the good and the bad in direct sales. Whether it be an experience from a COTM [Consultant of the Month], a train, a swap, etc. Be [sic] sure to post facts and not emotion driven drama. If you have something to share that you feel would benefit others to know, please post. The admins are NOT responsible for whether the reports are accurate - only that we will do our best to keep things consistent and honest.”

A public group with 963 members— whose description requests that members, “PLEASE REFRAIN FROM BASHING CHILDREN OR PARENTING SKILLS!!” [sic] — includes a recent post that cautions in caps, “BE AWARE OF THE SCAM ARTISTS THAT ARE OUT THERE TRYING TO PREY ON PEOPLE RUNNING THESE BUSINESSES. The most recent one reached out from a cell phone asking for an email to order 65 items.” The name of the group: “Lularoe [sic] B/S/T, Paparazzi B/S/T, Amazing Consultants, Bad Apples….”

Buy/Sell/Trade — or, “B/S/T” — Facebook groups, where consultants from individual direct-sales companies congregate to swap with one another, seem to be a breeding ground for scams. Racked received an anonymous tip about the existence of a Dropbox solely dedicated to storing screenshots of one scam artist active in a number of different B/S/T groups who was accused of buying but not paying, and selling but never sending product.

Sometimes these groups are “no rules,” like this closed group of 106,470 LuLaRoe retailers and enthusiasts. Among infractions that can get members banned, according to the group description, are “Scamming,” “Fake/Sob stories trolling to get free stuff,” “Contacting someone's spouse/friends/family/work because of a problem in here. That is an automatic ban! This is leggings we're talking about. There is no tolerance for getting anyone in their personal life involved.”

B/S/T groups can be helpful for new consultants who feel more comfortable behind a computer screen than hitting the pavement for leads. They can also be useful for distributors at companies like SeneGence, who must purchase each individual cosmetic product for demos. The company doesn’t condone swapping, says Orozco, so she avoids participating, and will only do so if she feels like she’s helping out a fellow consultant and has the product to spare. “I know what it was like when I first started, and I didn't have all the [lipstick] colors.”

But B/S/T groups are frowned upon by many direct-sales companies, even if they’re not outright violations of company policy.

“They've been pretty strict, especially recently, that if you are found [selling] in those pages they can even suspend your contract,” says McCann of LuLaRoe’s position on B/S/T groups. “There are so many of us that it's really hard to even monitor. But their solution is basically, don't be in it. Just don't even go there. Because it's not something that's going to sustain your business.”

In a statement provided to Racked, LuLaRoe writes that B/S/T groups “diminish and dilute the LuLaRoe brand. Accordingly, LuLaRoe asks that LuLaRoe products not be listed or sold by Independent Fashion Retailers on buy/sell/trade pages.” When asked how home office handles company violations like participation in B/S/T groups, LuLaRoe says that its compliance team works with retailers individually, but did not provide further comment on punitive measures.

The independence of consultants — they are contractors responsible for their own businesses, and not full-time employees with benefits — unearths another vulnerability. These individuals are, in many ways, going it alone. Can they still turn to the bigger company for protection when targeted by scam artists?

That answer seems to depend on the company. Haggerty says that 31 Gifts’ consultants are encouraged to report to home office if there’s a problem with a particular customer.

This doesn’t seem to be the case with LuLaRoe. “Independent Fashion Retailers are independent contractors [who] run and control their own businesses,” says LuLaRoe. When asked if consultants are encouraged to seek support from LuLaRoe home office for issues with customers who fail to pay their invoices, or resell LuLaRoe products on other sites, the company says, “The nature of being an Independent Fashion Retailer provides that their relationships with their customers are unique to their circumstances, which they support in their discretion as Independent Fashion Retailers running their own businesses.” LuLaRoe adds that for issues related to hostesses, retailers can turn to home office’s “Training Tools” feature, and to the LuLaRoe Retailer Services Team for concerns about other consultants, adding, “As a community, Independent Fashion Retailers are encouraged to connect with each other to work and build their businesses together.”

Many have found success within their particular direct sales companies, including the women consulted for this piece. But there’s an additional vulnerability of entering the direct-sales world that might not affect these MLMs per se, but is a real danger of the industry nonetheless: pyramid schemes.

What’s the difference between a legitimate MLM and a pyramid scheme? The Federal Trade Commission says: “One sign of a pyramid scheme is if distributors sell more product to other distributors than to the public — or if they make more money from recruiting than they do from selling.”

The FTC maintains tight guidelines that render pyramid schemes illegal. However, the industry as a whole is now at risk for pyramid-scheme expansion.

According to watchdog nonprofit Truth in Advertising, bill HR 5230 — proposed by the Direct Selling Association — did not pass the House of Representatives last year, but has now been attached to 2018’s Financial Services and General Government Appropriations bill as the Molenaar amendment, and will go to a House vote soon. Although it's touted as an "anti-pyramid scheme" bill, its provisions loosen the definition of “ultimate user” from a purchaser outside of the company (a consumer) to include people within the company — which is pyramiding.

Pyramid schemes spoil the pot for legitimate direct salespeople out there hustling for their income. It’s possible, say consultants interviewed for this story, to create lucrative businesses in certain companies, if certain precautions are taken.

“I’m really passionate about this industry and I think it gets a lot of negative feedback,” says Clark. “The industry itself needs so much more widespread training: its conferences, its policies, how it's getting consultants set up to be successful. And I hope that with more transparency, and talking about things like this, how to protect yourself if you decide to sign up for a company in the direct sales industry, it'll encourage people that this can be a real job.”

The number one rule, agrees Haggerty, is to take this job as seriously as any other. “Think about how Target would handle a situation like [scammers]. Yes, we can be a little more personal and a little more friendly, but we're not here to buy [people] gifts. We're running a business. So stop and think about treating it like a business.”


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