DIFFERENT STROKES (MoneyLIFE Issue, 12th March 09)
Since 2006, I have received several letters, complaints and inquiries about GoldQuest (also known as QuestNet), a chain-marketing scheme (they call it network marketing) that sells limited edition gold coins, figurines or watches for Rs30,000–Rs35,000. The big draw, however, is the trailing income that is offered on persuading two more customers to buy the coins and take the scheme forward. Most people want to know if the scheme is legitimate or will collapse some day. A web search only adds to the confusion by pointing to a raging global debate with strong opinions for and against the scheme.
Those who think it is a fraud cite reports about police action against GoldQuest, the fact that many countries ban network marketing and point to complaints from those who want to sell the medallions but can’t find buyers. Those who have introduced people to GoldQuest and earned big trailing income defend the scheme by pointing to its seemingly rock-solid façade, claims of ISO 9001:2000 certification, and a presence in 22 countries with headquarters in Hong Kong. They also point out that home minister P Chidambaram’s wife was its legal advisor and former world billiards champion, Michael Ferreira, is its ambassador in Mumbai.
For three years, I have been trying to establish who would regulate such a scheme. Although the company’s offices have been raided, some of its officials arrested and otherwise hounded (especially in Chennai), the central regulatory and enforcement agencies offer no clear views on its legitimacy. Two years ago, an Intelligence Bureau (IB) source told me that the agency had sent a negative report on GoldQuest to the finance ministry but nothing happened. I have also written several letters to the Reserve Bank of India (RBI) over the past two years, but it has merely transferred the responsibility to other agencies. On 6 February 2009, RBI’s executive director, G Gopalakrishna, wrote to tell me that QuestNet was examined under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, which is administered by the state governments. The issue was forwarded to all chief secretaries of state governments and to the Ministry of Consumer Affairs and Ministry of Finance, Department of Economic Affairs (Banking Division) for information and necessary action. The matter has also been referred to the enforcement directorate (ED) for investigation. What does this mean? Simply that RBI has washed its hands of the issue; that the finance ministry is doing nothing (just as it has not acted on the IB report), nor is the ED or chief secretaries of ‘all’ Indian states. However, if the scheme collapses, it is safe to bet that all will spring into action when it is too late.
Interestingly, QuestNet itself is most transparent about its situation. In response to our query about customer complaints and RBI’s letter, it has sent us a detailed report about the police action against the company and the arrest of its India chief in May 2008. It insists that its business operations are “legitimate and do not infringe any laws.” It says that delivery of medallions was delayed because the Chennai police had seized its considerable inventory of medallions (20,168), watches (12,000) and QPhones, but has resumed since January 2009 after winning a legal battle to release them. The company also points out that “not a single charge sheet has been filed against it after 10 months of investigation.”
A customer who receives the expensive medallion, watch or figurine for which he has paid Rs30,000–Rs35,000 has no reason to complain. It is another matter that there may be no resale market for the products and no appreciation. The company claims that it will fulfil all orders by June 2009 and is not taking any fresh ones. Since GoldQuest’s real lure is in the trailing income (based on a detailed matrix) earned on luring new customers to the scheme, the scheme will probably fade away, once that option is closed. GoldQuest’s legal experts would have ensured that those who have already earned a hefty trailing income have no claim, if the chain comes to a halt.
However, since the government has taken no stand on the legitimacy of such network marketing schemes, GoldQuest may be replaced with other schemes and the entire cycle will be repeated because the allure of instant riches through such Ponzi schemes is everlasting.