Online Pyramid Schemes Prosecuted Under Prc Criminal Law
Online Pyramid Schemes and Criminal Regulation in China
I. Legal Framework
1. Criminal Law of the PRC (《中华人民共和国刑法》)
The main provision used to prosecute pyramid schemes is:
Article 224 – Illegal Sales (组织、领导传销活动罪 / Organizing and Leading Pyramid Scheme Activities)
Applies to individuals or organizations that:
Organize pyramid scheme activities (traditional or online)
Recruit participants by promising high returns for enrolling others
Raise funds or goods under the guise of “investment or consumption”
Key Elements:
Hierarchical recruitment (“层级发展”)
Promise of high profit or rewards
Illegal fundraising behavior
2. Supplementary Regulations
2018 Anti-Pyramid Scheme Regulations clarify that online recruitment platforms, apps, and WeChat/QQ groups are equally illegal.
Cybersecurity and Consumer Protection Law: used to address online fraud components.
Penalty Range (Criminal Law):
Standard: 3–7 years imprisonment + fine
Severe: 7–10 years imprisonment + higher fines
Organizers causing especially serious harm: 10+ years
II. Why Online Pyramid Schemes Are Criminalized
Exploitation of participants: Most participants lose money; only early entrants profit.
Fraudulent fundraising: Disguised as investment, membership, or consumption plans.
Ease of online spread: WeChat, QQ, mobile apps, and websites allow rapid recruitment.
Online pyramid schemes are treated similarly to offline MLM pyramid schemes, but online tech tools enhance liability (platform operators, app developers, and promoters can all be charged).
⚖️ III. Representative Cases
Below are six cases that illustrate how PRC courts handle online pyramid schemes:
Case 1 — Jiangsu “Red Diamond Online Pyramid Scheme” (2019)
Court: Nanjing Intermediate People’s Court
Charges: Organizing pyramid scheme
Facts:
Defendants set up an online “investment membership system” called Red Diamond.
Users paid an entry fee of ¥5,000–10,000 to join.
Participants earned commissions by recruiting others.
Total participants: 6,500; total funds raised: ¥42 million.
Legal Issues:
Whether “online investment schemes” count as pyramid schemes.
→ Court held that hierarchical recruitment with promised profits = pyramid scheme.
Whether digital wallets and app-based payments avoid prosecution
→ Court: No; electronic transactions are equivalent to cash.
Outcome:
Main organizer: 9 years imprisonment + ¥2 million fine
Secondary promoters: 3–5 years
Precedent Value:
First major ruling emphasizing online-only pyramid schemes = criminal offense, even without physical meetings.
Case 2 — Guangdong “WeChat Pyramid Scheme” (2020)
Court: Guangzhou Intermediate People’s Court
Charges: Organizing pyramid scheme; illegal fundraising
Facts:
Organizer created a WeChat group offering a “digital token investment.”
Early investors were promised 20–30% monthly returns.
Returns were funded by new members’ payments (classic Ponzi structure).
Total raised: ¥15 million; ~2,000 victims.
Legal Issues:
Whether digital tokens count as “funds” under Article 224.
→ Court: Yes; money or monetary-equivalent assets are covered.
Whether private chat groups constitute “organized activity.”
→ Court: Yes; repeated coordinated recruitment = organized activity.
Outcome:
Organizer: 7 years imprisonment
Assistant: 4 years
Funds confiscated
Precedent Value:
Confirmed WeChat/online chat recruitment platforms are legally equivalent to offline pyramid schemes.
Case 3 — Zhejiang “Mobile App Pyramid Scheme” (2021)
Court: Hangzhou Intermediate Court
Charges: Organizing pyramid scheme; fraud
Facts:
Defendants developed an app called “Lucky Profit” promising high returns for small investments.
Users earned points convertible to cash for recruiting others.
App collected ¥50 million in total; majority of users lost money.
Legal Issues:
Whether app-based reward points = property.
→ Court: Yes, they can be exchanged for money → part of the pyramid scheme.
Liability of app developers
→ Court held developers who know the scheme’s nature are co-organizers.
Outcome:
Main organizer: 10 years imprisonment
Technical team: 3–5 years
Precedent Value:
Clarifies app developers can be criminally liable for pyramid schemes, not just promoters.
Case 4 — Hubei “Online MLM Scheme Disguised as Health Products” (2020)
Court: Wuhan Intermediate Court
Charges: Organizing pyramid scheme
Facts:
Defendants sold “health supplements” online.
Recruitment hierarchy promised cash rewards for enrolling others and purchasing goods.
Total participants: 8,000; total funds: ¥60 million.
Legal Issues:
Whether selling real products avoids pyramid scheme classification
→ Court: No; if recruitment hierarchy dominates profit distribution, scheme is illegal.
Outcome:
Organizer: 8 years imprisonment + fine
Regional managers: 2–4 years
Precedent Value:
Shows “selling real products” does not legalize pyramid schemes if recruitment is primary profit source.
Case 5 — Beijing “Cryptocurrency Pyramid Scheme” (2022)
Court: Beijing No.2 Intermediate Court
Charges: Organizing pyramid scheme; fraud
Facts:
Defendants operated an online “crypto mining investment platform.”
Users invested in tokens; promised daily 5% returns.
Returns were funded by new investors.
Total raised: ¥100 million; victims: ~3,500.
Legal Issues:
Cryptocurrency = property under PRC law?
→ Court: Yes, if it can be converted to cash.
Online nature → enhances sentencing
→ Court: Severe sentence for organized online schemes.
Outcome:
Main organizer: 12 years imprisonment + ¥5 million fine
Technical staff: 3–6 years
Precedent Value:
Establishes cryptocurrency pyramid schemes prosecuted under Article 224 + fraud.
Case 6 — Shandong “Cross-Province Online Pyramid Scheme” (2018)
Court: Jinan Intermediate Court
Charges: Organizing pyramid scheme
Facts:
Defendants recruited members via QQ and a website targeting multiple provinces.
Entry fee: ¥3,000–10,000; bonuses for recruiting.
Total participants: 10,000+; funds raised: ¥80 million.
Legal Issues:
Cross-provincial recruitment → aggravates criminal liability
Online recruitment considered “organized activity”
Outcome:
Main organizer: 11 years imprisonment
Provincial managers: 3–5 years
Website servers confiscated
Precedent Value:
Shows cross-province online pyramid schemes attract harsher penalties.
IV. Key Legal Takeaways
Online pyramid schemes = Article 224 crime regardless of medium: app, website, WeChat/QQ group.
Digital currency or tokens are considered property; still prosecutable.
Selling real products does not legalize schemes if recruitment hierarchy dominates profits.
Technical developers, app operators, and promoters are liable if aware of scheme.
Cross-region/large-scale schemes carry heavier penalties.
Fraud charges may be added if organizers guarantee false returns.
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