A Chinese Pyramid Scheme Built on an Anthill
|Dec 3, 2007|
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.