Scam artists take advantage of downturn in China's economy

ByCalum Macleod, Usa Today
September 07, 2009, 5:28 PM

BEIJING -- Zhang Xue remembers how dazzled she was by the sales pitch — a glamorous, middle-aged woman who appeared in a sleek suit and jewelry and spoke of her successful struggle to become a millionaire.

"I only wanted to earn money and live by myself," says Zhang, 21, sobbing at the memory, "but I hurt my parents and friends."

The ensuing months saw her immersed in one of the many pyramid schemes and other financial frauds that have become common in China as the economy here sputters and more people seek to earn a quick buck.

The proliferation of such schemes — many of which have morphed into bizarre, cult-like underworlds — has bankrupted countless young Chinese of modest means as well as richer, relatively savvy investors. That has in turn sparked a massive, unprecedented crackdown by Chinese authorities who, because of the weak economy, are especially eager to avoid any additional financial disruptions or social unrest.

In Zhang's case, a $730 membership fee bought her entry into a health product company — and a whole new world, it seemed at first. Zhang moved 900 miles from northwest China to the coastal city of Qinhuangdao and a small dormitory that housed other young recruits. Older members washed her socks and cooked for her, she said.

Zhang admitted she lied to her father to get the membership fee, telling him the money was for a computer. She said she felt bad, because he earns just $440 a month, but she thought she was punching her ticket to a better future.

"The teachers were passionate, giving us daily lectures, such as 'No pain, no gain' and 'The way to overcome the economic crisis is to join this career,' " she recalled.

Pyramid schemes usually rely on members making an initial investment to join, then persuading others to follow suit. Members make money from new entrants, but in many cases, including Zhang's, actual products are never sold. As a result, pyramid schemes are prone to sudden collapse, leaving the most recent members out of hundreds of dollars or more.

In China, the schemes have taken on unique characteristics. Many feature a communal lifestyle, charismatic leaders, mass singing and daily lessons that have led Chinese police to call the schemes "economic cults." Strong-arm tactics by organizers include confiscating recruits' ID cards and restricting their movement, according to state news agency Xinhua.

When a classmate who felt cheated by Zhang's scheme informed her father, he brought her to the China Anti-Pyramid Sales Association in Beijing. The independent group tries to help people who have lost all their money — and, in several cases, have tried to commit suicide — after becoming involved with schemes. Li Xu, the founder, estimates that at least 10 million Chinese may be engaged in pyramid sales nationwide.

"The problem is worse than ever," says Li, 38, who himself worked in a pyramid scheme for 17 months in 2004-05 until he grew disillusioned with the dishonesty and the low returns. "Pyramid sales are like spiritual opium. The organizers brainwash people to believe they will definitely get rich. Like drug addicts, you have to get them out of that environment to help them."

Nationwide crackdown

When pyramid sales first exploded in China in the mid-1990s, the schemes were usually local affairs, targeting the naïve hopes, and lifesavings, of farmers or the working class. Today, many schemes target new graduates and white-collar professionals, Li says.

Organizers are using the global economic crisis to persuade new members to join, by claiming "this is your only chance to get rich," Li says.

Chinese police are engaged in a 100-day, nationwide crackdown on financial fraud — part of a broad drive to create "a harmonious, stable social environment" before the 60th anniversary of the communist government's reign in October, according to the official notice.

Some of the frauds have been Ponzi schemes similar to the Bernie Madoff heist in the USA, in which money from new investors is used to pay artificially high returns for older ones. A related campaign has broken up nearly 280 gangs who operated telephone scams, a rising problem this year, the Ministry of Public Security, said Monday.

Armed with machine guns and riot shields, police have busted into formal dinners and hotel conference rooms throughout the country. In Xiaogan city, Hubei province, police cracked open 24 pyramid sales "dens" in a single day in July.

The China Anti-Pyramid Sales Association, which is funded by its own volunteers, donations and travel fees paid by relatives, is engaged in its own "rescue" activities.

"We don't want others to suffer like we did," says Liu Song, a former member of a fashion and jewelry pyramid scheme.

It's a daunting task — some members don't want to leave, while others are virtual prisoners. Li says he and his 10 colleagues have often been beaten up by company representatives desperate to keep their members. Li says that in July, he persuaded a man to climb down from a construction site in Anshan, northeast China, where he was planning on committing suicide after being confronted by his father about pyramid sales.

Lies upon lies

The lies told to perpetuate the schemes can be both outrageous and highly convincing, says Wang Hao, author of A Record of My Pyramid Sales Brainwashing, a book published in January.

"At classes, teachers would tell us that 'Hillary Clinton became very rich working for Amway. China secretly supports our industry, as Amway is so successful earning Chinese people's money. Our country wants us to be the No. 1,' " Wang says.

In 2007, Wang became a mid-level manager in the Heavenly Lion pyramid scheme in Zhejiang province. The operation was raided last month by police.

Wang Hao welcomes the crackdown but says more should be done.

"It's not that hard to find pyramid sales, as these groups are large, and neighborhoods realize they are doing strange things," he says. "But the victims must be given psychological support and help to find new jobs. They believe they can make money, and many will try to find another scheme," he says.

Like Wang, whose wife left him, Li Xu blames pyramid sales for his own divorce.

"To do pyramid sales, you trick your own friends and relatives. That's the real danger," Li says. "You will always be considered a cheat."

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