A Chinese Pyramid Scheme Built on an Anthill

Making a living out of
ants turns out to be yet another Ponzi scheme for thousands in
Liaoning

 

On
November 22, more than 10,000 angry people besieged the Liaoning
provincial government in the capital of Shenyang, demanding
compensation of millions of yuan from a pyramid sales scheme which
bought dead ants, supposedly to be turned into health products. The
demonstrators blocked a railway line and overturned cars, requiring
the government to mobilize more than 1,000 police and armed police to
disburse them.

In
a country full of scams, pyramid schemes and commercial frauds, this
is one of the most spectacular, and certainly one of the most
elaborate. In a single month, from July 16 to August 15, according to
the government news agency Xinhua, authorities cracked down on some
600 such schemes, arresting 3,300 organizers and core members in 14
provinces and cities. In Liaoning Province alone, police said,
between 2002 and 2004, they closed 16 companies involved in illegal
fund-raising or collecting money fraudulently, involving more than 10
billion yuan.

However,
Wang Fengyou apparently escaped the net — until last month. He
had established the Yilishen Tianxi Group in 1999, running it for
eight years on hype, guanxi, or political connections, and
what appeared to be an irresistible offer — pay 10,000 yuan to
buy three boxes of ants, give them food and water until they die,
when the firm would pick them up. After 14.5 months, depositors would
receive 13,250 yuan.

Ant
products are virtually unheard of outside China. But they are
believed to relieve a wide variety of ailments, heighten the physical
stamina of athletes, combat aging, improve immunity and, of course,
increase male potency. Yilishen established a 10,000 square meter
factory with two production lines for wine and four for capsules with
an annual sales capacity of 50 billion yuan. He hired famous film
stars to advertise his products on posters and television,
cultivating local politicians, including Bo Xilai, the governor of
Liaoning before becoming Minister of Commerce in 2004.

Yilishen
went beyond mere ants. It advertised that it had developed into a
“modern, hi-tech health products enterprise of commendable
integrity, combining the traditional Chinese culture of preserving
health with modern biological science and technology, research and
production with sales, and science and technology, agriculture,
industry, commerce, trade and real estate with media communication in
terms of culture. The company, according to its website, advocated an
“honesty concept” aimed at “founding the honesty
great wall of the harmonious society.”

With
his political clout, Wang made well-publicized donations to local
charities and earned a dozen awards as a company making excellent
foods and ‘a Top Ten Kidney Invigorant Brand.’ He also
earned a good credit rating. This all guaranteed him excellent media
coverage. Some 50,000 to 80,000 pharmacies were said by the company
to be selling Yilishen health care products.

The
business attracted thousands of people, especially the retired, those
on low salaries and farmers who saw a good chance to supplement their
meager incomes. The mother ants bred prolifically, giving a constant
supply. According to the Chinese media, up to 1 million people bred
ants for Yilishen, giving it annual turnover of 15 billion yuan.

Wang
ran his business as a private company with most of the bank accounts
in his own name. He boasted of rising sales in China and exports to
the United States, South Korea, Japan and East Europe. But he was the
only one who knew the real sales figures and whether he simply used
the deposits of new clients to pay back old ones.

“Science
and technology,” the company said, “is our guide.”
However, the first blow to Yilishen Group came in 2004, when the US
Food and Drug Administration banned the import of the company’s
products on the grounds that they were worthless as health products,
delivering a serious blow to Yilishen’s credibility.

On
October 11, the company missed a repayment day for the first time. It
told depositors to wait until October 27. On that day, Wang wrote an
open letter, saying that he had raised new capital from a Kuwaiti
investment group which would be available on November 22. When there
was no money that day, the depositors took to the streets, going
first to the Yilishen headquarters and then the provincial
government.

“From
the beginning the government was involved,” wrote one angry
depositor on a website. “The media and Internet have been
blocking news about Yilishen. The government wants us farmers to take
the losses. It does not care if we live or die.”

“Normally,
something like this would not work in the long term,” wrote
another. “But the efforts of Yilishen, the government’s
acquiescence and the media keeping the ball rolling and people
thinking that a pie had fallen from the sky, Yilishen ended up where
it is today.”

They
accuse the government of being an accomplice by allowing the company
to thrive for eight years, by giving it awards and favourable media
coverage and not alerting the public to its true nature.

For
its part, the government said initially that the dispute was a matter
between the depositors and Yilishen and it was not involved. But, on
November 23, the police chief of Shenyang announced Wang Fengyou’s
arrest, banned further demonstrations and ordered depositors to
register their losses at local government offices.

Direct
sales were banned by Beijing in 1998 after widespread reports of
fraud and malpractice, some of which led to large-scale social
protest, such as in Shenyang, from people demanding their money back.
Since the company managers had escaped with the funds, it was the
government that faced the anger of depositors.

Another
factor which alarmed the government about the direct selling schemes
was the existence of large networks of people outside its control, at
the time when the Falun Gong was organizing. It was banned in July
1999.

Beijing
only allowed direct sales to resume in December 2005, with companies
having to put down registered capital of 80 million yuan and
restrictions that allow only one level of selling. The multi-layered
model whereby sales people can create their own networks is not
permitted. Those involved in selling must receive training and be
registered with a branch of the sales company.

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