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YMCA Seoul
[Declaration to Urge a Revision of the Laws on Network Marketing, etc.] The laws related to network marketing should be revised in such a way as to prevent a recurrence of the JU scandal and other potential problems.
- The Fair Trade Commission should admit that the move to deregulate the multi-level marketing business in 2002 was a policy failure that only disturbed the market order.
- The deregulation abolished the punishment provisions applicable to violations of the rules prohibiting the incitement of the speculative spirit and the offering of excessive commissions.
- The JU scandal is a predictable product of the failure of the current regulation system.
- The relevant laws should be amended to restore the punishment for violating the commission rules, and the JU scandal should serve as a turning point in the formulation of future policies regarding network marketing.
The JU scandal has caused various ripple effects. JU promised a 250% return on their investment to middle-aged and elderly people, as well as hundreds of trillions of profit from oil field development projects. In addition, it expanded into movie production and the publishing business, and hired senior government officials and other high-profile figures. Finally, its fraudulence has come to an end with the bribery scandal. The JU Group can no longer engage in business as the contract of the mutual benefit contract association has been terminated. The company is involved in a complicated web of various debts and fines, and its executives were apprehended recently, followed by the arrest of the JU Group's chairman, Joo Sudo, on the 26th.
Even though the figures of 5 trillion won in losses and 350,000 victims alleged by the victims may have been somewhat exaggerated, the JU scandal is by far the biggest in scale compared to other multi-level marketing scams that have caused social problems. In addition, the 2002 deregulation of network marketing has certainly contributed to this scandal. In this context, the JU scandal will highlight the need to review the laws and policies currently in place.
The JU scandal has caused serious social ripples after revealing the depth of the speculative mind-set prevalent in this society. JU restructured the network marketing strategy by shifting the target from young people, including college students, to middle-aged and elderly people. It increased the amount of investment from some million won to tens or hundreds of million won by luring victims with an offer of a 250% return. According to a survey published by the Fair Trade Commission (FTC) in July 2006, members of the JU network spent an average of 20 million won to purchase goods annually, which represents an 18-fold increase.
The JU Group was able to commit a series of scams by offering unrealistic returns because the FTC revised the laws and lifted all the regulations, putting too much autonomy in the hands of the network marketing companies. The FTC justified the deregulation by arguing that the move was intended to create a healthy network marketing market by forming Mutual Aid Associations and encouraging self-regulation of the network marketing market. As a consequence, the only legal device deterring network marketing companies from making excessively speculative offers has been eliminated.
Under the original law, commissions paid by a network marketing company could not exceed 35% of its sales and a violation of this ceiling resulted in serious punishment. However, the FTC eliminated this legal basis for punishment. Furthermore, the FTC made it far more complicated and difficult for consumers to exercise their right of withdrawal, while it expanded the scope of products that can be sold via network marketing to include intangible products as well as tangible products. Consequently, the market and autonomy of network marketing were increased while the risks posed by the elimination of devices intended to deter the negative social ramifications were largely ignored.
The JU scandal was an inevitable product of the revision of network marketing regulations that had been in place for 3 to 4 years following the abolition of the risk management scheme. However, there certainly were a few opportunities to prevent the JU scandal from developing into a social disaster of this magnitude. Nevertheless, the FTC remained lukewarm in exercising its authority to request the disclosure of information and take administrative actions, thereby allowing the JU problem to snowball into a major scandal. For instance, the FTC did not take immediate measures - such as suspending JU Group's business - despite the company's repeated violations of the prevailing laws and the growing number of consumer claims, until the scandal broke this year and it finally took belated administrative actions including the imposition of a fine, all to little effect.
The Networking Marketing Mutual Aid Association responsible for directly supervising networking marketing companies has hired FTC officials as senior executives for many years. Everything was perfectly set for the FTC to communicate its policies directly to the industry through the association. The FTC was in a position to gain sufficient knowledge about the company in question through the association under this supervisory structure, but it failed to take any precautionary measures and did not disclose the results of the operation audits of the association. Considering the FTC's failure to handle this issue properly, it is primarily the FTC that should be held responsible for the scandal.
The JU scandal should serve as a turning point for policy makers as far as the modification of the laws, systems and policies relating to network marketing is concerned. The FTC should admit its policy failure during the last 4 years and overhaul its network marketing policy.
It is essential to establish the basic order and principles of network marketing in order to reduce claims and losses that are continually caused by network marketing. But what is currently being discussed at the National Assembly suggests that there will be only a minimal revision to the related laws. A second JU scandal could break out any time soon without a dramatic shift in the policy.
The FTC and the National Assembly should revise the laws as early as possible in order to revive the provisions on punishment for excessive commissions, establish the basis for regulation of quasi deposit-taking activities, prohibit network marketing companies from dealing with marketable securities, improve the withdrawal procedures, ban business closure for the purpose of obstructing withdrawal, strengthen user liability of network marketing companies, restore the price tag system, introduce a comprehensive warrant system, clarify the boundaries between door-to-door sales and network marketing, and tighten the requirements for network marketing companies. In particular, the FTC should accept some responsibility for the policy failure and shift the priority of its policy from fostering network marketing to protecting innocent consumers, and should be more proactive in supervising and regulating network marketing companies and the association to ensure stronger consumer protection.
▶ For more information, please call Oh Su-jin, manager, and Kim Hui-kyeong, head of the team, at 725-1400. |
