Police investigate a pyramid scheme in Dayang town of Hefei, capital of Anhui province in this file photos. [Photo/China Daily]

Products exchange hands through direct selling or multi-level marketing. Direct selling means producers selling directly to consumers. In multi-level marketing, distributors buy the goods from producers and sell them to consumers. Both are accepted modes of sales.

Problems arise when distributors pay for concepts, instead of products, and then make profits by selling those "concepts" to lower-level distributors. This mode is nothing but a scam.

The pyramid scheme has its origin in the Ponzi scheme, which Charles Ponzi floated in the United States in 1919. It was based on continuous investments from new investors, which were used to pay interest to the old investors. The pyramid scheme is variant of the Ponzi scheme, and it is called so because its "business" structure looks like a pyramid.

Pyramid schemes in China have become a bigger social and economic threat in recent times. Well-organized gangs use alluring schemes to deceive people into becoming new investors, who find it almost impossible to escape from the clutches of these gangs.

Since some pyramid schemes continue to operate in China despite the crackdown, the authorities should consider imposing stricter punishments on those who run such schemes.

According to Article 224 of the Criminal Law, "distributors" of pyramid schemes can be sentenced to imprisonment of a maximum of five years, and in extraordinary circumstances, they can be sentenced to more than five years' imprisonment and/or made to pay a hefty fine. The prison term is too short and the standard of prosecution too high to deter pyramid scheme operators from continuing to lure new investors or launching new pyramid schemes.

Though a three-month crackdown on pyramid schemes was launched on Aug 15, it is unlikely to make much difference. More comprehensive efforts are needed to check the spread of pyramid schemes and eliminate the existing ones.

Apart from imposing stricter punishments on the pyramid scheme operators, the authorities should also strengthen online information security, because pyramid scheme gangs hunt for graduates mostly through online recruitment sites. We need in place thorough regulations on the issue, a normative supervision system and an up-to-date blacklist of pyramid scheme operators.

Online job hunters, on their part, must make careful choices. They should learn how to avoid fraudulent companies, for which they need to do careful research on the backgrounds and managements of their target companies before actually contacting them.

More important, regular inspection of communities and monitoring of areas where such schemes are known to operate could help curb the menace of pyramid schemes. And since pyramid scheme gangs are known to "detain" individuals in rental houses, the regulations on rental housing should be strengthened, so as to ensure rented property is not used for such illegal activities.

The author is the director of the Department of International Private Law at the Southwest University of Political Science and Law.