A manufacturer signs a distribution contract with a company that promises to “build a nationwide agent network” for its products. Six months later, complaints flood in: participants paid large “membership fees” to join the network, earnings come mostly from recruiting new members rather than selling products, and the manufacturer’s brand is now named in a pyramid-scheme scandal. The manufacturer never ran the scheme — but its goods, its trademark and its reputation are all entangled in it.
1. Distinguishing legitimate distribution from disguised multi-level marketing
Lawful multi-level marketing (MLM) in Vietnam is tightly regulated: businesses must obtain an MLM registration certificate, and key prohibitions apply. A disguised pyramid scheme typically shows these signs, as addressed by Decree 40/2018/ND-CP on MLM business management (amended by Decree 18/2023/ND-CP):
- Participants must pay money, buy starter kits or meet purchase quotas to qualify for commissions;
- Commissions and bonuses are paid mainly for recruiting new participants, not for actual product sales to end consumers;
- The goods are overpriced, of unclear origin, or barely move — they are a pretext for the money flow;
- The operator has no MLM registration certificate or operates beyond its registered scope.
A genuine distributor earns margin on goods actually sold; a disguised scheme earns on people recruited. That single test resolves most borderline cases.
2. The manufacturer’s exposure
A manufacturer that merely supplies goods to an independent distributor is not automatically liable for the distributor’s scheme. But exposure grows quickly where the manufacturer knew or should have known: continuing to supply after complaints surface, co-branding recruitment events, or setting sales targets that can only be met through recruitment. At the extreme, organizing or assisting a pyramid scheme can attract criminal liability under Article 217a of the Penal Code 2015 (violations of MLM business regulations), alongside administrative sanctions under Decree 40/2018/ND-CP. Even without liability, the brand damage — press coverage naming the product — is often the costliest part.
3. Termination, evidence and reporting
When the signs appear: (1) freeze supply immediately and suspend the distribution contract on breach grounds (misuse of trademark, reputational harm clauses); (2) preserve evidence — recruitment scripts, commission tables, event recordings, participant complaints — the distributor may destroy them once warned; (3) issue a public distancing statement clarifying the manufacturer never authorized the recruitment model; (4) report to the authorities — the provincial Department of Industry and Trade and the police — filing as a victim/witness rather than waiting to be investigated.
Prevention belongs in the contract: require the distributor to sell through retail channels to end consumers, prohibit charging participation fees or paying recruitment commissions, grant audit rights over the distributor’s sales records, and reserve immediate termination for any MLM-style conduct. Vet the distributor’s business model before the first shipment — not after the first complaint.
1. What is the difference between licensed MLM and an illegal pyramid scheme?
A lawful MLM business must hold an MLM registration certificate and comply with Decree 40/2018/ND-CP (amended by Decree 18/2023/ND-CP), including bans on charging participation fees disguised as training or starter kits and on paying commissions for recruitment rather than real sales. If the partner has no certificate at all, the operation is not “MLM” in the legal sense — it is an illegal pyramid scheme, and the manufacturer should disengage and report rather than negotiate compliance.
2. Is the manufacturer automatically liable for the distributor’s pyramid scheme?
Not automatically. A manufacturer that genuinely sells goods wholesale to an independent distributor, without knowledge of or participation in the recruitment scheme, is a separate legal actor. Liability risk arises when the manufacturer knew or should have known — e.g., continuing supply after complaints, co-hosting recruitment events, or structuring incentives around recruitment. Documenting the manufacturer’s ignorance and its prompt reaction (suspension, reporting) is the core defense.
3. What evidence should be collected before confronting the distributor?
Evidence first, confrontation later. Before any termination notice, secure recruitment scripts, commission/bonus tables, recordings of recruitment events, participant lists and complaints, and payment records. Once the distributor senses exposure, this material tends to disappear. A lawyer should supervise collection so the evidence is admissible and the process does not itself create liability.
4. Should the manufacturer issue a public statement distancing itself?
A public distancing statement is protective but must be carefully worded: state facts (no authorization of any recruitment or commission model; the distribution contract covers wholesale of goods only), avoid accusing specific individuals of crimes (that is for the authorities to conclude), and announce concrete steps taken (supply suspension, report filed). Have counsel review the wording — an aggressive statement can trigger a defamation counter-claim from the distributor.
5. Where should the manufacturer report a suspected pyramid scheme?
Reporting proactively positions the manufacturer as a victim/witness cooperating with enforcement, rather than a subject under investigation. File with the provincial Department of Industry and Trade (which supervises MLM activity) and the police economic-crimes division, attaching the preserved evidence. Early reporting also supports any later claim that the manufacturer acted diligently the moment it learned of the scheme.
This article has been quality-reviewed by the FLAW AI Legal Council
