ST Explains: What are pyramid schemes and how are they dealt with in Singapore and China?

SINGAPORE - It often starts with an innocuous invitation to attend a sales talk or an overseas trip for what seems like a lucrative business opportunity. Sold as a training programme for how to get rich quick or an exclusive, time-limited deal, the pitch is simple.

All one needs to do is pay an upfront fee and recruit a few others, with promises that the initial investment will be paid back in multiple folds for every additional participant recruited.

There are also promises of financial rewards if these recruits then bring in more new participants, or what is known among these circles as “down-lines”.

This structure of having the earliest participants at the top and later recruits at the bottom is what gives pyramid schemes their name.

And because such schemes are sustained solely by the upfront fees collected from new joiners, rather than income from legitimate sales, they are illegal in countries around the world, including Singapore and China, given the high risk of participants losing all of their money.

On Sept 4, it was revealed that 52 Singaporeans were arrested in China’s Guangxi autonomous region for suspected pyramid scheme activities, in what is likely the largest foreign detention of Singapore citizens on record.

The Straits Times explains how these pyramid schemes operate and how Singapore and China deals with them.

What is difference between a pyramid scheme, MLM and direct selling?

Pyramid selling and multi-level marketing, or MLM, are often used interchangeably. The difference is that the latter involves selling products to consumers, while pyramid schemes are funded solely by recruits’ “joining fees”.

In Singapore, both are banned under the Multi-level Marketing and Pyramid Selling (Prohibition) Act, which was passed in 1973 and later amended in 2000 to broaden its scope.

But when making the 2000 amendment, the Government also recognised that not all MLM techniques are undesirable.

Hence, a legal carve out was made for legitimate businesses such as insurance companies, master franchises and direct selling companies that fulfil certain criteria, like rewarding participants based on the sale of a product or service rather than recruitment.

In China, pyramid selling and MLM schemes, known as “chuan xiao” in Mandarin, are also illegal, while single-level direct selling, which involves a person buying products from a company and selling them on to others, is allowed but tightly regulated.

Under Chinese law, those who lead or organise pyramid schemes that have more than 30 people and more than three levels face a fine and up to five years in jail.

For serious cases – schemes that have 120 or more participants, or involve funds exceeding 2.5 million yuan (S$470,000) – the penalty is a fine and at least five years’ imprisonment.

In Singapore, those who promote or participate in an illegal MLM scheme can be fined up to S$200,000 and jailed for up to five years. Additionally, the courts can impose a separate penalty that does not exceed the amount or value of the benefits received from the illegal scheme.

On its website, the Ministry of Trade and Industry (MTI) said anyone in Singapore who participates in MLM or pyramid selling is considered to have committed an offence as they would have played an “active but destructive role” in attracting others.

“We believe that this is the best way to deter the potential promoters of such schemes,” MTI noted.

How common are pyramid schemes?

In Singapore, the most high-profile case of pyramid selling is the now-defunct Sunshine Empire.

Founded in 2003 by motivational speaker James Phang Wah, the MLM company made wild claims about building fictitious projects such as an underwater city and promised sky-high yields through the company’s investment plan.

In all, about 20,000 Singaporeans were cheated of more than $180 million. In 2010, Phang was jailed for nine years and fined $60,000.

In 2023, then Minister for Home Affairs and Law K. Shanmugam told Parliament that between 2018 and 2022, the Singapore police investigated only one case involving possible pyramid selling and MLM offences.

Over that same period, 10 individuals were convicted of such offences, for investigations that took place before 2018.

Meanwhile, in China, authorities investigated more than 200,000 cases of pyramid schemes and direct selling violations between 2021 and 2025.

Among the most notorious and hardest to eradicate is a scheme called “1040 Sunshine Project”, which is said to have originated in Guangxi as far back as 1998 and has since spread across China and parts of South-east Asia.

There are multiple variations of the scheme that operate under different guises, such as “chain operation”, “capital operation” and the “Beibu Gulf Development Project”.

The general premise is that new participants pay an upfront investment fee of 69,800 yuan, with the promise of earning up to 10.4 million yuan later.

Based on past cases, the scheme operates under a “five-level, three-promotion” structure, with positions ranging from general salespeople to directors and general managers.

Chinese media outlets previously reported that these pyramid networks often operate in secrecy and in small teams to avoid detection and prosecution.

Another common tactic is for these groups to rent residential flats, where participants are brainwashed through group activities and lectures on getting rich.

This is known in China as the “Southern-style” model, which contrasts with “Northern-style” schemes that are characterised by violence and illegal detention.

A growing concern among Chinese lawmakers is that pyramid schemes in the country have evolved to become harder to detect, with many going online and using digital tools like short video and online group buying platforms.

That is one reason why China proposed major changes to existing regulations in May 2026, with the State Administration for Market Regulation pointing to a large number of hidden online pyramid schemes that have fallen through the legal cracks.

How can I protect myself and others from pyramid schemes?

In Singapore, it is the police’s Commercial Affairs Department that investigates pyramid schemes. Those who suspect that a business or investment scheme may constitute pyramid selling can lodge a police report online or at the Police Cantonment Complex in Outram.

Other resources include the Direct Selling Association of Singapore, which represents legitimate direct selling companies operating here, as well as the Monetary Authority of Singapore’s Investor Alert List.

Following the arrest of the 52 Singaporeans in China, Second Minister for Foreign Affairs and Home Affairs Sim Ann urged the public to exercise caution when considering business or investment schemes, whether overseas or local.

The Securities Investors Association (Singapore) (SIAS) issued a similar warning against participating in investment schemes promising exceptionally high returns with low risk through the recruitment of new participants.

In a statement on Sept 4, SIAS said investors should ask some basic questions before transferring any money, including the exact nature of the investment, where the money will be held, whether there are audited financial statements and whether the investment can be withdrawn freely.

“If satisfactory and independently verifiable answers are not available, investors should walk away and not stay because they are tempted by high returns,” the association said.

“If an investment opportunity sounds too good to be true, it probably is, and more often than not, it is likely to be a scam,” it added.