Organizing or Leading a Pyramid Scheme: Where Team Compensation Ends and Headcount Selling Begins

Selling genuine products and paying team commissions can still lead to a pyramid-scheme charge. This article breaks down the compensation basis, the deception element, the tier-and-headcount findings, and who really counts as an organizer — plus what families should do during the investigation.

"We only paid team commissions": why that is how so many pyramid-scheme cases begin

In my client meetings, people charged with organizing or leading a pyramid scheme very often begin with the same sentence: "We sold real products, the company had a business licence, we simply paid team commissions." That is not an excuse; it points straight at the most important dividing line in this offence. What the Criminal Law targets is not the business model of a team selling goods and splitting revenue by performance, but an organization that trades on the appearance of business, uses the number of recruited persons as the basis for compensation, and obtains property by deception. So the defence in these cases is rarely about whether a scheme existed at all — it is about which kind of scheme it was, which tier the client stood on, and whether criminal punishment should be engaged at all.

The statutory skeleton: three moving parts

Article 224-1 of the Criminal Law breaks the offence into elements that must all be present: using the pretext of selling goods or providing services; requiring participants to pay fees or buy goods or services to obtain membership; forming tiers in a set order; calculating remuneration or rebates directly or indirectly on the number of persons recruited; inducing or coercing participants to keep recruiting others; and obtaining property by deception while disrupting economic and social order. There is also a threshold. The 2013 Opinion of the Supreme People's Court, the Supreme People's Procuratorate and the Ministry of Public Security on handling such cases provides that organizers and leaders are only criminally liable where the organization had thirty or more participants and three or more tiers. Headcount, tiers, status, compensation basis and deception are all indispensable; if the evidence on any one of them is insufficient, the charge should be weakened accordingly.

Defence point one: is compensation tied to sales or to headcount?

This is the first battleground. Article 5 of the 2013 Opinion is explicit: a purely team-compensation scheme aimed at selling goods and paying on sales performance is not treated as a crime. But where the form is team compensation while the substance remains compensation or rebates based on the number of persons recruited, the offence applies. In evidentiary terms this becomes a very concrete question: are rebates calculated on actual sales, repeat purchases and end consumers, or on new joiners, downline size and generational depth? The first points to genuine commerce; the second to trading in people. The defence should obtain the compensation plan, the back-office profit-sharing rules, settlement records and withdrawal histories, and test the calculation formula line by line, with expert explanation where needed. Many cases turn exactly here.

Defence point two: deception is not an element you can skip

Practice tends to simplify: once a joining fee was paid, deception is assumed. That compresses the text. Article 3 of the 2013 Opinion requires deceptive means — fabricating or distorting state policy, inventing or exaggerating projects and profit prospects, concealing the true source of rebates — and unlawful gain from the fees paid or goods purchased. Read the other way round: where goods were genuinely delivered, prices were not significantly off market, returns were available, and the company bore real procurement and operating costs, both the "deceptive means" and the "unlawful gain" links are open to argument. Note also the same article provides that whether participants actually suffered loss does not affect the finding of deception. So it is not enough to argue that nobody lost money; the defence must attack both the deception and the unlawful gain.

Defence point three: how exactly were "thirty people, three tiers" calculated?

In the case file, tiers and headcount almost always come from exported back-office tables, WeChat group logs and screenshots of the order system. Typical defects: one person registering several accounts and being counted several times; people who refunded or left still being counted; trial memberships merged with full memberships; headcounts from different periods simply added together; tiers drawn from referral relationships rather than compensation relationships. These are technical issues that evidence review can resolve. The defence should require the investigators to explain their counting methodology and data source, obtain the underlying database structure and field definitions, de-duplicate and cross-check, and apply for re-examination where necessary. The two numbers drive the sentencing bracket: under Article 4 of the 2013 Opinion, 120 or more accumulated participants, or 2.5 million yuan or more in accumulated funds collected, constitutes a serious circumstance carrying five years or more. Taking the count from 120 to 119 can move the case back below five years.

Defence point four: who is really an "organizer or leader"?

This offence has a special subject: only organizers and leaders are punished, and ordinary participants commit no crime. Article 2 of the 2013 Opinion lists five categories — those who initiate, plan or manipulate; those who manage or coordinate; those who publicise or train; those previously punished who go on to develop fifteen or more persons across three or more tiers; and others playing a key role in building or expanding the organization. The problem is that in practice lecturers, finance staff, customer service, programmers, warehouse keepers — even a motivational speaker hired for two sessions — can all end up as suspects. One provision is frequently overlooked: where the scheme was carried out in the name of a unit, persons assigned by that unit who performed only limited duties in a secondary role are generally not to be pursued. For such clients the argument that they are not organizers or leaders, or that the circumstances are clearly minor, should be raised at the arrest-approval and prosecution-review stages — not saved for trial.

Defence point five: choosing between charges is itself a sentencing fight

The same set of facts can be characterized as organizing a pyramid scheme, illegal business operation, fund-raising fraud, or ordinary fraud. Article 6 of the 2013 Opinion provides that where a person organizes a scheme for the purpose of illegal possession and the conduct constitutes both this offence and fund-raising fraud, the heavier provision applies. Characterization is therefore not an academic question; it is a question of years. Where funds went mainly into operations, with genuine goods flow and a sustainable sales side, the aim should be to keep the case within the pyramid-scheme offence and prevent an upgrade to fund-raising fraud. Where the allegations genuinely point to a pooled fund and fictitious projects, the defence should pivot early to mitigation — restitution, guilty plea and acceptance of punishment, secondary role, voluntary surrender. Choosing the wrong direction wastes everything else.

Three things families can do during the investigation stage

First, do not delete data. Phones, computers, back-office accounts and chat logs cut both ways, but deletion will be treated as destroying evidence, the risk far outweighs any benefit, and recovery is technically routine. Second, assemble the evidence of genuine operations in an orderly way: procurement contracts, logistics documents, return and exchange records, tax filings, employee social insurance, shop leases, product quality reports. These materials determine whether the deception element can be displaced, and the earlier they are organised the better. Third, instruct a lawyer to meet the detained person as soon as possible and establish three things: the tier and headcount currently asserted by the authorities; which category of organizer or leader the client has been placed in; and whether funds and accounts have been frozen or seized. Those three answers decide where the defence will be fought — and whether a written submission should go in before arrest approval.

Conclusion

Pyramid-scheme cases look fact-heavy and data-heavy, but the real issues are usually few: whether compensation tracked headcount or sales, whether there were deceptive means and unlawful gain, how the thirty persons and three tiers were actually counted, and where the client stood in the structure. Taking each of those apart with evidence is far more useful than repeating that the products were real. For families, the worst moves are panic deletion of records, chasing connections, and missing the window before arrest approval. The earlier a case enters a professional defence track, the more room there usually is.

※ This article is general legal information, not legal advice on any specific matter. For your individual case, please consult a lawyer.