The concept behind an affinity fraud scheme is simple: Gain the trust of a group of people with something in common and scam them out of lots of money. The "groups" are often based on ethnicity, immigrant status, religious affiliation, college alumni association, or something along the same lines. These groups of people are often very trusting of one another, and if a scammer can get an "in" with the group, it is often easy to convince them to part with their money.

This week, executives of WexTrust Capital LLC in Chicago were arrested and charged by the feds with conspiracy to commit securities fraud. They're accused of running a Ponzi scheme since at least 2005, which cost consumers about $255 million.

Most of the 1,200 people defrauded by this scheme were Orthodox Jews, fitting nicely into the framework of an affinity fraud. A Ponzi scheme (also called pyramid scheme) like the one this company is being accused of running collects money from participants, pretends to invest the money, and pays "investment returns" to participants with money collected from people who are newer "investors." There are little to no real investments, and the scheme relies on the continuous recruitment of new participants to generate money to pay the early "investors."

I've been studying multi-level marketing for several years, and Robert FitzPatrick has been studying the industry even longer. He's been qualified as an expert witness in MLMs and knows a whole lot about the industry. He recently released a report on 11 large MLMs which demonstrates that a full 99% of participants lose money.

I've believed for a long time that any business venture which boasts 99% failure rate is one to avoid. Quite predictably, the supporters of multi-level marketing plans exclaim that those who don't succeed (i.e. turn a profit) have not worked hard enough or have not done the right things. Really? Could it really be that all 99% of the participants in MLMs are lazy losers who don't try hard enough? I seriously doubt it.

Sure, any business venture carries risk along with it. But FitzPatrick wrote recently on his blog that multi-level marketing is systematically flawed, and I agree with him. There's no such thing as a "good" MLM. People will suggest you "just haven't found the right one." Yeah. Ask the people who are on their eighth or ninth MLM and still haven't made any money.

Yesterday California's Attorney General, Edmund G. Brown Jr., announced a lawsuit against YourTravelBiz.com (YTB) for being a "gigantic pyramid scheme." He says that the multi-level marketing company recruited tens of thousands of members with false earnings claims.

YTB was supposed to a business through which members could operate online travel agencies. In reality, it was nothing more than a pyramid scheme meant to make those at the top rich, while thousands of people below them lost a lot of money. The operation is accused of being a pyramid scheme because the members were paid for recruiting new members, regardless of whether they sold any travel services.

Members pay $450 to join the scheme, and a monthly fee of $50 to stay active. In 2007, it is alleged that there were over 200,000 members, and that only 38% of them made any money from selling travel services. The median income for those making commission on travel services was only $39. (You read that correctly... not even enough made all year to pay for one month of fees!)

If you're like over 90% of the people who get involved in multi-level marketing, you're going to lose money. The sad thing is that most people get involved in MLMs because they want to make money.

Below is the story of one college student who lost thousands in an MLM. These companies are known for preying on some groups of people who can least afford to lose money: college students, stay-at-home moms, single parents, people looking for some extra income to pay down debt.

Why are these ventures so expensive? They often involve the purchase of expensive inventory, lots of "business tools", attendance at expensive seminars, and all sorts of small costs that add up quickly. Sure, I've heard the phrase that you can't make money unless you spend money. The problem is that the chance of actually making any money in MLM is very, very slim.



And don't forget the most attractive part of multi-level marketing: Trying to recruit friends and family. Most people are wise to the "come and listen to a great presentation about a fantastic opportunity" line. The only opportunity you're really giving them is a chance to lose money. Spare them and yourself the agony!

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

China doesn't allow Multi-Level Marketing (MLM) schemes or pyramid schemes, period. The government allows single level direct sales if a company has a proper license. But no recruiting is allowed and no multi-level structure is allowed.

While we often think of China as being behind the times compared to the United States, those of us who study the ill effects of MLM wish that our government took such a hard line against this abusive business structure. Despite the laws against MLMs in China, there are people and organizations who do businesses there anyway. Companies have discovered that it is impossible to make money with the single level selling that the government allows, but that the MLM structure thrives with over a billion people available to be recruited. Usana Health Sciences and Herbalife are just two MLMs that have been found doing business illegally in China by undercover investigators.

And now a promoter of an Ant Farm pyramid has left thousands of Chinese consumers penniless. Liaoning province is fast becoming the hub for illegal pyramid schemes and illegal MLM activities in China. It was there that the Yilishen Tianxi Group offered an "opportunity" to purchase a box of ants for the equivalent of U.S.$1,375.

One of the credibility-building factors that modern multi-level marketing (MLM) companies rely on is the assertion that they're legal. Often, it's said that if a company wasn't following the laws, they would have bee shut down by now.

Those things do sound credible. Average consumers assume that the government cracks down on businesses that are breaking the law. But the sad fact is that the FTC, the organization in charge of regulating MLMs and pyramid schemes, has chosen not to act against almost all MLMs.

Only a select few MLMs and pyramid schemes are targeted by the FTC. The rest are allowed to exist and operate as they please.

The key to avoiding being labeled a "pyramid scheme" by a government agency is having a "product" (or service) upon which your scheme is based. Traditional pyramid schemes only involve an exchange of money between people. MLMs skirt this by including a product in the mix – people are supposedly exchanging money for a product.

The holiday season is a time for family... a time for friends... a time for conversation... a time for you to get roped into a "special opportunity."

Did Uncle Bill ever approach you at a gathering of family and friends to tell you he wanted to share an opportunity with you? Or did he walk up to you and say that he had just started his own business? (And you were probably dumbfounded because you couldn't think of any type of business that Uncle Bill was qualified to run.) What about an invitation to come hear a great motivational speaker? Or an invite to a meeting, the substance of which Uncle Bill wouldn't tell you... but he would say that you would be really interested?

All of these are typical come-ons when someone has become involved in a multi-level marketing scheme. They go by different names – MLM, network marketing, dual marketing, direct selling, binary plans, and many others. They'll tell you "this company is different," but it's really not.