SFIO recommends body to curb fraudulent chit funds, MLMs

NEW DELHI: The Serious Fraud Investigation Office ( SFIO) has recommended setting up of an institution under the Central government to check fraud through chit funds and multi-level marketing schemes.

A report prepared by SFIO says the Centre should monitor all multi-level marketing (MLM) schemes through the enforcement directorate and the intelligence bureau to help oversee implementation of laws across states.

"Bringing the cases under the Centre's ambit is crucial as some schemes being run with the direct or indirect help of local authorities is not unheard of," an SFIO official said on condition of anonymity.

However, he said the implementation should be the states' subject, as MLM plans are mostly based in rural areas and their designs vary from region to region.

Chit funds and MLMs are forms of informal credit schemes that usually function as a cooperative. Members make monthly deposits and at the end of each month bid to acquire the collected sum. There have been instances of chit funds and MLMs being misused by promoters who decamp with the collection.

The SFIO report says all networking firms, under which most MLMs function should be registered with the central authority to make it easy to identify companies running such plans.

"The issue is that of signalling. Once the states along with the Centre start taking stronger action, the popularity of such schemes will fall," said another official.

In India, money circulation plans are banned under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. However, the Act is governed not by the Centre but by the state governments. Some states such as Rajasthan and Tripura are yet to even notify it.

Also, penalties can only be meted out by the state police, which hinders in effective implementation of curbs.

The ministry of corporate affairs is currently working with the Reserve Bank of India to strengthen the rules governing MLM firms.

Chit funds have come under increased scrutiny after the Speak Asia fraud, which is estimated to be over Rs 8,000 crore.

The SFIO is also probing Gold Quest, a Tamil Nadu-based company running a chit fund worth Rs 1,000 crore.

"The firm is in clear violation of the Act. We have submitted a detailed report to the corporate affairs ministry on not only the company in question but on such cases, which are basically ponzi schemes," said an SFIO official.