By the Skin of Their Teeth

By+Lan+Xinzhen

U.S.-based Nu Skin Enterprises， Inc. issued a statement on January 20 pledging to cooperate with a probe into its Chinese business operations by Chinas commerce and market watchdogs.

Before the statement was made， the State Administration for Industry and Commerce（SAIC） and the Ministry of Commerce（MOFCOM）， which are responsible for crackdown upon pyramid selling and approval of direct selling respectively， both said that they have started investigating whether or not Nu Skin is involved in a Ponzi scheme.

Shen Danyang， a spokesman for the MOFCOM， said on January 16 that the ministry will publicize investigation results in a timely manner.

Founded in Provo， Utah in 1984， Nu Skin is one of the top five direct-selling companies in the world. Operating in 53 international markets， it is a leading supplier of personal care and nutritional supplement products.

Nu Skin began operations in China in 2003 and received a direct-selling license in 2006. According to the companys statement， from January to September 2013， its sales revenue on the Chinese mainland reached $667.4 million， nearly one third of its global total.

Business blemish

A young girl named Tian Tian recently sent a letter to Peoples Daily， a Beijing-based newspaper with a daily circulation of more than 3 million， setting off the Nu Skin pyramid-selling debacle. In her letter， Tian said that her aunt was brought into Nu Skin as a distributor by a female “tutor，” who told her aunt that she could earn big money and utterly change her life by joining the company. After Tians aunt had spent tens of thousands yuan buying Nu Skins products， the “tutor” encouraged her to establish a sales network among her relatives. At the time， Tian began to wonder as to the exact nature of her aunts “Nu Skin business.”

Peoples Daily reporters then conducted investigations and published a report on January 15， claiming that Nu Skin may be in violation of Chinese regulations against pyramid selling. The report outlines several pieces of evidence supporting the allegation.

According to the report， on January 7， a distributor of Nu Skin invited a Peoples Daily reporter to his studio in Beijing and said to the reporter， “Do you want to earn 1 million yuan （$165，000） within half a year？ Join our direct-selling team right now. The government work report to the Fifth Session of the 10th National Peoples Congress in 2007 also said ‘direct selling is a current trend and the best opportunity for people to find jobs， and numerous people will definitely achieve success in this industry. ” The reporter later found that the government work report in 2007 never mentioned direct selling.endprint

According to Nu Skins brochures， the company has a team of top anti-aging technology consultants from across the world， including some Chinese professors. However， when Peoples Daily contacted a professor on Nu Skins expert list， Cao Shilong， who has retired from Fudan University in Shanghai， said that he is an honorary consultant in name only but never did anything for Nu Skin. Georges Halpern， a professor at the Hong Kong Polytechnic University， also claimed that although he has a title of consultant， he had not attended any meetings conducted by Nu Skin or the consultant team since 2011. Indeed， he admitted that he had not contacted with Nu Skin in the past three years.

Nu Skins brochures also claim that the ageLOC technology the company owns can“reset age-related genes” and make people look young. The Nu Skin distributor contacted by Peoples Daily went further by saying that this gene technology has been verified by scientific studies and that related research results have been published by the Science journal. However， Peoples Daily reporters could not find any articles in the magazine on Nu Skins “generesetting” technology.

Moreover， the Nu Skin distributor repeatedly mentioned media reports on the company， saying that Peoples Daily once published four pages of reports on Nu Skin （China） on the same day， and showed a picture of a front page of Peoples Daily that “reports” Nu Skins ageLOC technology. But Peoples Daily reporter found that the “reports” he claimed were actu-ally advertisements for Nu Skin.

In response to the Peoples Daily report， Nu Skin issued a statement on January 15， claiming that it is engaging in direct selling， not pyramid selling.

In China， direct selling and pyramid scheme are clearly differentiated in law. For direct selling， neither companies nor their branches are allowed to publicize or advertise information on compensation or commissions received by distributors， and they are prohibited from forcing distributors to pay any fees or buy products in the recruitment stage.

In pyramid schemes， distributors are organized in multiple levels and earn from other distributors they bring to the company.

In the late 1980s， a Japanese company named Japan Life went to south Chinas Shenzhen， selling magnetic mattresses in pyramid schemes. In 1990， the first registered pyramid scheme company on the Chinese mainland， Sino-U.S. joint venture Guangzhou Avon Co. Ltd.， was set up. The pyramid-selling boom reached its peak in China in 1993， when there were pyramid scheme organizations in almost all provincial capitals.endprint

Being deceptive in nature， pyramid selling aroused widespread public condemnation. The State Council， Chinas cabinet， prohibited all pyramid-selling activities in April 1998， and required in June of that year that all foreign-invested pyramid scheme companies should change their sales model and set up retail outlets. In 2005， the Regulations on the Prohibition of Pyramid Selling were enacted， offering legal grounds for cracking down on pyramid schemes. In the same year， the Chinese Government promulgated the Regulations on Direct Selling Administration， protecting legitimate directselling activities.

The MOFCOM has awarded direct-selling licenses to more than 40 companies such as Avon， Nu Skin and Amway.

Shen with the MOFCOM said the ministry supports and protects operations of directselling companies in compliance with laws and regulations， but if any company or individual is involved in pyramid selling or irregular direct selling， the ministry will support investigation and punishment by related departments in accordance with relevant regulations.

Official statistics show industry and commerce authorities across China investigated 1，141 pyramid scheme cases with a combined value of 3.4 billion yuan （$562 million） in 2013.

Awaiting the judgment

Nu Skins direct-selling license from the MOFCOM in 2006 allows the company to operate direct-selling business in 14 provinces and municipalities on the Chinese mainland. In July 2013， the MOFCOM allowed Nu Skin to operate direct selling in another five inland provinces as well as 30 districts and counties.

Although it does possess a direct-selling license， Nu Skin has often been implicated in being involved in pyramid selling by the media. For example in 2005， soon after its flagship store in southwest Chinas Chongqing was set up， it was reported to the local commerce watchdog that the shop was engaged in pyramid selling. In 2007， Nu Skins branch in Heilongjiang Province was investigated by the Bureau for Industry and Commerce of Harbin， the provincial capital， for suspicious activities.

Each time an allegation has surfaced， Nu Skin has been able to counter using the excuse of being engaged only in direct selling.

According to the recent Peoples Daily report， to join Nu Skin China， one must first buy its products valued at 500 yuan （$82.6） at retail prices and become a client enjoying a 10-percent discount. Nu Skins distributors are divided into multiple levels， and the higher level a distributor is at， the higher commission rate he can get. Such a pattern closely resembles that of a pyramid scheme. Moreover， Nu Skin sells more than 100 kinds of products in its sales terminals， while according to information from the MOFCOM， the company is only allowed to sell 84 kinds of products of three categories in 151 districts （counties） in 19 provinces， autonomous regions and municipalities.

If the above facts are verified， Nu Skin will undoubtedly be affirmed to have been involved in pyramid selling.

According to relevant regulations， the SAIC will shut down illegal pyramid scheme organizations and the MOFCOM will revoke the directselling license of companies involved in pyramid selling. In addition， organizers of pyramid schemes may face criminal punishment.

It is hard to say whether Nu Skins fortunes can endure the latest round of allegations， but at the very least， its share prices have been influenced. Nu Skins New York-listed shares fell 15.56 percent by close of trading on January 15 at $115.23 apiece.endprint