Easy money promises and the risks behind them: How to tell network marketing from a financial pyramid

In Uzbekistan, confusion most often arises between two superficially similar concepts: network marketing and financial pyramids. While the former is permitted under the law, the latter is explicitly classified as a criminal offense.

What network marketing is

Network marketing, also known as multilevel marketing (MLM), is a sales model in which goods or services are distributed through independent agents. These agents earn income from direct sales and may also receive commissions or bonuses based on the sales performance of agents they recruit.

In legitimate MLM systems, income is tied primarily to the sale of products or services. When compensation is proportional to actual sales activity, the model can function as a lawful incentive-based distribution mechanism. Its key distinction from financial pyramids lies in its core purpose: selling products, rather than recruiting participants.

Key signs of a financial pyramid

Financial pyramids, by contrast, generate income mainly through the continuous recruitment of new participants. Any product or service involved typically plays a secondary or symbolic role. Experts identify several warning signs that indicate pyramid schemes:

First, the product is unavailable through conventional retail channels. Often, there is no physical or online store, and goods are sold exclusively within the network, usually at inflated entry costs.

Second, participants are required to pay money upfront while the promised product or service is delivered later, if at all. Common examples include offers of discounted cars, luxury housing, or “miracle” cosmetics that are allegedly still under production, while payment is demanded immediately.

Third, recruiting new members is far more profitable than selling goods. Participants may receive minimal rewards for sales but substantial bonuses for bringing in new recruits, often after paying an initial “entry fee” not tied to the value of any product.

Fourth, it is difficult to clearly understand what the company is actually selling. Products may be vaguely described as “future technologies” or “fast-growing market innovations,” accompanied by claims that the company distributes 100% of profits to participants – an assertion widely regarded as unrealistic in a market economy.

Common forms of pyramid schemes

Financial pyramids appear in several forms. Single-level schemes attract investors with promises of high passive returns, paying early participants with funds from new entrants until the system collapses. Multi-level pyramids shift recruitment responsibilities to participants, distributing funds upward through multiple tiers.

More complex matrix-based pyramids can operate for longer periods, requiring participants to fill structured levels before advancing and earning returns. High-yield investment programs, or HYIPs, represent an accelerated version of such schemes, offering implausibly high daily or hourly returns and encouraging early entry before an inevitable collapse.

Legal framework in Uzbekistan

Uzbek law defines network marketing as a form of retail trade conducted by independent agents whose income depends solely on sales volume. This activity is not restricted by legislation.

Financial pyramids, however, are prohibited under Article 188-1 of the Criminal Code. The law defines them as illegal activities involving the attraction of funds or property by assuming obligations that are fulfilled using the assets of newly recruited participants. Organizing, participating in, or advertising such schemes constitutes a criminal offense.

What to do if you are affected

Recovering funds invested in a financial pyramid is often difficult, as participants typically transfer money voluntarily. Nevertheless, victims are advised to avoid individuals posing as “lawyers” who demand upfront fees and claim they can recover lost funds quickly.

The recommended course of action is to file a complaint with law enforcement authorities. If a scheme is officially recognized as a financial pyramid and organizers are convicted, victims may pursue civil claims for damages. However, the recovery process can take years, as fraudsters often conceal assets or transfer property to third parties in advance.

Conclusion

Financial pyramids are illegal and harmful for both participants and promoters. While network marketing is a legitimate business model, it can also be misused to monetize low-quality or uncompetitive products. Distinguishing between the two requires careful attention to how profits are generated – through real sales or through constant recruitment.