1) What is Amway?
Amway is an American direct seller of FMCG products in the health, nutrition, beauty and home care markets and was listed 28th in Forbes America's largest private companies list in 2011. It began its Indian operation through a subsidiary in 1995. Amway uses the combined direct selling and multi-level marketing model whereby it gets people to either join the business as members and sell Amway products directly or sponsor (recruit) others to do the same.
2) How does this business model work?
The model involves "sellers at the top of the pyramid recruiting others below them and so on down the chain," explains a report in Mint newspaper. This makes it resemble a pyramid scheme which the company categorically denies operating.
"We just create more business opportunities for our distributors, by getting more people to join the business or sponsor others. There is a hierarchy in every company. In any pyramid scheme, the guy on top makes more money than the one down. But in our structure, the guy down can make more money than the guy on top. It's not about when you come in. It's not about your place in the network. It's about how much work you do." William S Pinckney, managing director and chief executive officer of Amway India told this newspaper last year.
Also unlike in a pyramid scheme, Amway supplies real products to the public and does not merely pay members for enrolling other members into the scheme.
Why is Amway in the news?
William S Pinckney, Amway's India CEO was arrested on Monday on charges of cheating and other financial fraud and jailed in Kurnool, Andhra Pradesh where he has been remanded to custody till June 7. Charges were framed against him under section 420 of IPC (cheating) and sections 3, 4, 5, and 6 of Prize Chits and Money Circulation Schemes (Banning) Act 1978.
This is not the first time Amway has courted controversy in India. It has been in news intermittently since 2006 when its offices in Andhra Pradesh were shuttered on allegations that Amway was running a pyramid scheme. A chargesheet was also filed.
In 2013 as well, Pinckney and two India directors were arrested by the Kerala police after a case was filed against Amway for alleged unethical practices of money circulation.
About Monday's arrest, Amway India said it was “aggrieved and shocked" and that "the allegations mentioned in the FIR (First Information Report) are frivolous" and gave a misleading impression about its business.
Is Amway running a fraud business?
The Andhra Pradesh High Court had ruled the company's business model illegal and the case is pending before the Supreme Court currently. But the company says it is a victim of the lack of a legal framework for the direct selling sector and that they have been booked under a 1978 law, which is meant to regulate financial schemes. Amway has been repeatedly seeking an amendment to the above law so as to bring more clarity to regulations and ensure that money circulation schemes are not confused with direct selling. Legal experts concur with this view and say Amway has successfully done business across the world, and that there is no reason why its model should not work in India.
"Questions can be raised on Amway India’s business model or whether there is a problem in its business concept; or, there could be a debate on the quality and high prices of its products but it is not a cheating business as made out to be and neither is the company into defrauding people," a legal and financial expert was quoted as saying to The Hindu when the controversy broke out last year.
Industry body FICCI too has spoken out in support of Amway and said there was no criminality involved in the case which was in all likelihood a dispute between Amway and a consumer.
Has it been as controversial globally?
The Federal Trade Commission in 1975 pronounced that Amway was not a pyramid scheme, but had two main problems in its business model - "its distributors focused on recruiting new people into the sales structure rather than selling products, and distributors made dishonest promises about the riches that new distributors might earn by selling Amway," says the Verge. This resulted in basic guidelines being set by the FTC which critics have called vague and ineffective.
Amway also had run-ins in China, which now accounts for 40% of its global revenues according to Bloomberg. China banned direct selling entirely over a decade ago, but Amway changed its business model and opened stores, teamed up with Harvard University and got a new license in 2006 post which it has scripted a remarkable turnaround there.