Short answer: yes. Pyramid selling is banned in China, and organizing or leading a pyramid scheme is a criminal offence under Article 224-1 of the Criminal Law — up to five years’ imprisonment or criminal detention and a fine, or more than five years if the circumstances are serious. Ordinary members are usually not prosecuted, but the people who build and run the structure can be.
What makes a scheme a pyramid scheme in China?
Article 224-1, added by Amendment VII to the Criminal Law, describes the offence precisely. A scheme is criminal where, in the name of selling goods or providing services, it requires participants to pay a fee or buy goods or services to obtain the right to join; arranges participants in tiers; pays or rewards them directly or indirectly according to how many people they recruit; induces or coerces participants to keep recruiting others; and by doing so defrauds money and disturbs the economic and social order.
The decisive test is where the money comes from. If members earn mainly from recruiting new members rather than from selling real products to real consumers at a real price, the arrangement is a pyramid scheme.
When does it become a criminal case?
Under the 2013 Joint Opinion of the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security, organizers and leaders become criminally liable once a pyramid organization has more than 30 participants and three or more tiers. The same Opinion defines who counts as an organizer or leader: those who initiate, plan or direct the scheme, those who manage or coordinate it, those responsible for promotion or training, and others playing a key role in building or expanding it. A person who merely performs assigned manual work for the company is generally not prosecuted.
Direct selling versus pyramid selling
Direct selling is legal in China if the company holds a direct selling licence under the Direct Selling Administration Regulations; pyramid selling is separately prohibited by the Regulations on the Prohibition of Pyramid Selling. The dividing line is the compensation model — recruitment-based rewards are the problem, not the product itself.
What this means in practice
For companies, the red flags investigators look at are membership fees charged for the right to sell, tiered commissions, and rewards tied to recruitment. For executives, liability attaches to the individuals who design or run the plan, and “team leader” roles that look administrative on paper have ended in prosecution. A foreign business using a multi-level marketing model in China should verify whether its local partner holds a direct selling licence before adopting any tiered reward plan.
A short scenario (hypothetical)
A cosmetics company sells a starter kit for 5,000 yuan, promises members commission on everyone they sign up, and rewards those recruits for signing up more people. Real cosmetics exist, but the money flows mainly from new entrants — a classic Article 224-1 structure. If the organization has more than 30 members and three or more tiers, its founders and top promoters face criminal liability, and a foreign investor who funded the venture may still be drawn into the investigation.
Frequently asked questions
Q: Is pyramid selling illegal in China?
A: Yes. It is banned by the Regulations on the Prohibition of Pyramid Selling, and organizing or leading a pyramid scheme is a crime under Article 224-1 of the Criminal Law.
Q: What is the penalty for running a pyramid scheme?
A: Up to five years’ imprisonment or criminal detention plus a fine; if the circumstances are serious, five years or more plus a fine.
Q: How many members and tiers make it criminal?
A: More than 30 participants and at least three tiers, according to the 2013 Joint Opinion.
Q: Is direct selling legal in China?
A: Yes, but only with a direct selling licence, and compensation must not be based mainly on recruitment.
Q: Are ordinary members prosecuted?
A: Generally no. Criminal liability targets organizers and leaders, not rank-and-file participants.
Wang Guan | Co-founder, Beijing Haolue Law Firm | +86 17813108512