Law Articles
2026-07-15
MLM
Dual-Track Governance: The Regulatory Dilemma and Reform Outlook of China's Regulation on the Prohibition of Pyramid Selling — Implications for Taiwan's Regulatory Framework (Part II)
【Zhong Yin Law Firm Partner Charlotte Wu / Attorney Dan Yang / Legal Intern Sophy Yao】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
Reassessing Taiwan’s Multi-Level Marketing Regulatory Framework in Light of China’s 2026 Reform of the Pyramid Selling Regulations
The previous article in this series examined the reform movement surrounding China's Regulations on the Prohibition of Pyramid Selling (2026 Draft Amendments for Public Comment) from the perspectives of the existing regulatory framework, responses to social and technological changes, and future reform directions. The key issues addressed by the proposed amendments—including the ambiguous definition of online pyramid selling, enforcement mechanisms that have failed to keep pace with increasingly complex fund flows, the absence of platform obligations, and penalties disproportionate to the scale of violations—raise a broader question: Does Taiwan’s regulatory framework governing multi-level marketing face similar challenges in the current era?
Naturally, the legal foundations of the two jurisdictions differ fundamentally. China adopts a dual-track system combining a licensing regime with the comprehensive prohibition of pyramid selling. Enterprises must obtain a direct selling license before conducting direct selling activities, and any operation without such authorization is deemed unlawful. Taiwan, by contrast, adopts a registration-based system. A multi-level marketing enterprise is only required to file a report with the Fair Trade Commission (FTC) before commencing multi-level marketing activities. The law does not prohibit multi-level marketing itself; rather, it prohibits only “degenerated” or unlawful forms of multi-level marketing.
Accordingly, the regulatory logic of China may be summarized as “prohibition as the rule, authorization as the exception,” whereas Taiwan’s regulatory philosophy is “permission as the rule, prohibition as the exception.” The latter represents a regulatory choice that places greater trust in market autonomy. However, such trust depends upon the accuracy and completeness of ex post supervision mechanisms, enabling regulators to intervene effectively when problems arise. In other words, the legitimacy of a registration-based system rests on the premise that regulators can effectively supervise and control risks after market entry. If regulatory tools fail to keep pace with industry developments, a registration-based system may gradually shift from “openness” toward “laissez-faire.”
This article does not argue that Taiwan should adopt China’s regulatory model. Rather, it seeks to draw lessons from the regulatory challenges addressed by China’s reform and examine whether Taiwan’s existing framework contains potential gaps in the following areas.
I. Challenges in the Digital Era: Where Should the Boundaries of Multi-Level Marketing Be Drawn?
Article 3 of Taiwan’s current Multi-Level Marketing Supervision Act defines multi-level marketing as: “a marketing practice through which a multi-level organization is established by introducing others to participate through distributors, in order to promote or sell goods or services.” 1 This definition focuses primarily on the structural characteristics of marketing activities—namely, the existence of a multi-level organization and the introduction of participants—rather than the means or channels through which marketing is conducted. At the time of its enactment in 2014, such an abstract definition provided regulatory flexibility. However, with the rapid expansion of digital business models, this flexibility has increasingly created uncertainty in legal classification.
For example, in business models such as social commerce groups operated by “group-buying leaders,” multi-tier referral commissions on livestream shopping platforms, hierarchical commission structures in influencer affiliate marketing, and the increasingly prevalent “social viral distribution” models, questions arise as to whether such activities fall within the statutory definition of multi-level marketing. Enterprises may be uncertain whether they are subject to reporting obligations, while enforcement authorities may face difficulties in determining whether specific business models constitute regulated multi-level marketing.
By comparison, China’s 2026 Draft Amendments seek to address this issue by retaining the three traditional elements for identifying pyramid selling activities while, for the first time, expressly defining “online pyramid selling” as a separate legal category, thereby bringing various pyramid selling activities conducted through telecommunications networks and digital technologies within the regulatory scope2. Taiwan does not necessarily need to adopt an identical legislative approach. However, the FTC could consider issuing administrative guidelines to provide a clearer analytical framework for determining whether emerging online distribution models constitute multi-level marketing. Such guidelines could address issues including: What types of commission structures trigger reporting obligations? How should the requirement of “introducing others to participate” be interpreted in the context of social media platforms? Do technological tools provided by digital platforms—such as automated referral links and tracking codes—constitute elements of establishing a “multi-level organization”?
Clarifying these boundaries would not only enhance consumer protection but also allow legitimate businesses to operate with greater certainty within a clearly defined regulatory framework, reducing unnecessary compliance risks arising from legal ambiguity.
II. Supervisory Obligations of Multi-Level Marketing Enterprises: From Contractual Allocation of Liability to Statutory Accountability
Under Taiwan’s current regulatory framework, the obligations of multi-level marketing enterprises to supervise the conduct of their distributors are primarily set forth in Article 15 of the Multi-Level Marketing Supervision Act 3. This provision requires multi-level marketing enterprises to specify certain prohibited conduct—such as deceptive sales practices or fundraising activities conducted under false pretenses—as grounds for contractual violations by distributors, establish effective measures to prevent and remedy such conduct, and ensure the actual implementation of those measures. In addition, Article 25 requires multi-level marketing enterprises to maintain monthly records regarding organizational development, bonus payments, and other relevant matters, with such records preserved for a period of five years4.
However, the underlying regulatory logic of these provisions remains largely based on contractual governance. The obligations imposed on multi-level marketing enterprises primarily involve incorporating prohibited conduct into distributor agreements, establishing internal handling procedures, and taking contractual enforcement actions after violations occur. The current law does not expressly require enterprises to proactively monitor distributors’ marketing activities—for example, by periodically reviewing recruitment messages posted by distributors on social media platforms, detecting exaggerated income claims or disguised entry fees, or reporting suspected violations to competent authorities.
In practice, this regulatory structure may allow multi-level marketing enterprises to rely on the argument that distributors are independent business operators, thereby separating themselves from liability for distributors’ misconduct through contractual arrangements. When consumer disputes or fraud incidents arise, enterprises may contend that they have fulfilled their obligations under Article 15 by including prohibited conduct clauses in distributor agreements, while attributing responsibility entirely to the individual distributor’s “personal conduct.”
By comparison, Taiwan has already begun adopting a different regulatory approach in other fields. The Fraud Crime Hazard Prevention Act, enacted in 2024, imposes proactive anti-fraud cooperation obligations5 on seven major sectors, including financial institutions, online advertising platforms, e-commerce operators, and third-party payment service providers. These obligations include monitoring abnormal transactions, establishing joint prevention and reporting mechanisms, verifying advertisers’ identities, formulating anti-fraud plans, and preparing transparency reports 6 7.
However, multi-level marketing enterprises are not included among the seven sectors covered by the Act. This creates a regulatory gap: Taiwan has recognized that, in the digital economy, platform operators cannot avoid supervisory responsibilities merely by claiming that they “only provide services.” Yet multi-level marketing enterprises, which serve as the organizational source responsible for establishing and maintaining distribution networks, continue to bear primarily contractual rather than statutory obligations regarding the supervision of distributor conduct.
From a legal perspective, a multi-level marketing enterprise creates and maintains the operational structure of its distribution network and derives commercial benefits from that structure. It should therefore assume corresponding management responsibilities for risks arising from that organizational framework. This reflects the fundamental rationale of the concept of “organizational risk responsibility.” Accordingly, Taiwan may consider amending the Multi-Level Marketing Supervision Act to impose statutory supervisory obligations on multi-level marketing enterprises, including requirements to: establish internal compliance monitoring mechanisms; conduct periodic reviews of distributors’ online marketing content; proactively report violations of Article 15 to competent authorities in addition to taking contractual measures; and assume independent administrative liability where the enterprise fails to fulfill its supervisory duties, rather than leaving liability solely with individual distributors.
III. Regulatory Gaps in the Gray Area: Between Severe Criminal Penalties and Minor Administrative Fines
Taiwan’s current penalty structure under the Multi-Level Marketing Supervision Act presents a notable regulatory gap. At one end of the enforcement spectrum is the prohibition against “degenerated multi-level marketing” under Article 18, which provides that a distributor’s income must not primarily derive from recruiting others to participate 8. Violations may result in imprisonment of up to seven years and a fine of up to NT$100 million under Article 29, with corporate entities also subject to fines 9. This represents a form of severe criminal sanction.
At the other end of the spectrum are ordinary administrative violations, such as breaches of disclosure obligations or prohibited conduct provisions, which are subject to administrative fines ranging from NT$50,000 to NT$1 million under Article 34 10. Even more serious administrative violations, such as failures relating to reporting obligations or return-of-goods obligations, are subject to fines of up to NT$5 million under Article 32 (which may increase to NT$10 million through repeated penalties) 11.
The problem lies in the substantial gray area between these two extremes. Certain business practices may have clearly deviated from compliance standards—for example, where bonus payments continue to represent an increasing proportion of revenue, organizational growth significantly exceeds product sales growth, or distributor recruitment practices become materially misleading—yet may not be sufficiently serious to constitute degenerated multi-level marketing under Article 18, where income is primarily derived from recruiting participants. Within this gray area, a critical question arises: do existing administrative fines provide sufficient deterrence? For large multi-level marketing enterprises generating annual revenues of hundreds of millions or even billions of New Taiwan dollars, is an administrative fine capped at NT$1 million proportionate to the scale of the violation?
In this regard, the 2026 Draft Amendments offer two approaches that merit consideration. The first is the introduction of multiplier-based administrative fines, under which penalties are calculated as up to three times the amount of unlawful gains 12, rather than as fixed monetary amounts, thereby directly linking the severity of the penalty to the scale of the unlawful conduct. The second is the adoption of a system of graduated penalties coupled with compliance incentives. Under this approach, parties that voluntarily eliminate or mitigate the harmful consequences of their violations may receive mitigated or reduced administrative penalties, while first-time offenders who promptly rectify minor violations may be exempted from administrative punishment altogether 13.
The latter approach is particularly instructive for Taiwan. Under the current system, when a multi-level marketing enterprise identifies potential compliance risks in its business model, its rational choice may be to conceal the issue rather than voluntarily disclose it, because proactive disclosure does not necessarily result in reduced penalties. Introducing a compliance incentive mechanism—for example, granting mitigation to enterprises that voluntarily report internal violations and implement corrective measures—could foster a compliance culture of “self-reporting rather than concealment.” Indeed, this approach is consistent with the underlying philosophy of the “whistleblower incentive” provisions under Taiwan’s Fraud Crime Hazard Prevention Act, which allow offenders who voluntarily surrender or confess and assist in tracing criminal proceeds to receive reduced or exempted punishment 14.
IV. Cross-Agency Coordination: Breaking Regulatory Information Silos
Taiwan’s competent authority for multi-level marketing regulation is the Fair Trade Commission (FTC) 15. However, modern multi-level marketing activities increasingly involve areas beyond the FTC’s sole jurisdiction: bonus payment structures involve financial flow monitoring by the Financial Supervisory Commission (FSC); online marketing involves digital content governance by the Ministry of Digital Affairs (MODA); and fraud-related conduct involves criminal investigation by prosecutors and judicial police authorities.
China’s 2026 Draft Amendments address this issue by expressly requiring telecommunications operators, financial institutions, and payment institutions to cooperate with investigations into pyramid selling cases and provide technical assistance 16. Taiwan’s Fraud Crime Hazard Prevention Act has already established a similar cross-sector cooperation framework. Financial institutions may take control measures against suspicious accounts, report such accounts to judicial police authorities, and utilize inter-bank consultation mechanisms to prevent unlawful fund transfers 17.
However, this cross-industry prevention framework has not yet been systematically integrated with the regulatory regime governing multi-level marketing. Specifically, several gaps remain:
- When the FTC investigates a multi-level marketing case and needs to obtain or analyze records of bonus payments processed through third-party payment providers or bank accounts, the legal basis and procedures are not as clear or efficient as the joint prevention mechanisms established under the Fraud Crime Hazard Prevention Act.
- If payment institutions (such as banks or electronic payment providers) detect abnormal bonus payment patterns—such as continuously increasing bonus-to-revenue ratios or frequent large transfers to numerous individual accounts—there is currently no institutionalized reporting mechanism requiring notification to the FTC for early intervention.
- The anti-fraud supervision of online advertising platforms conducted by MODA and the FTC’s supervision of online marketing activities conducted by multi-level marketing enterprises operate largely independently, without a routine information-sharing mechanism.
Establishing an information-sharing and joint early-warning mechanism among the FTC, FSC, and MODA regarding multi-level marketing activities would enable regulators to identify abnormal fund flows and problematic online marketing practices at an earlier stage, rather than initiating investigations only after degenerated multi-level marketing activities have already caused widespread harm.
Conclusion
Taiwan’s adoption of a registration-based system represents a regulatory choice based on trust in market participation. The foundation of this trust, however, is that regulatory authorities must possess sufficient tools to intervene promptly when risks emerge and effectively prevent harm from escalating.
Drawing upon the regulatory issues addressed by China’s 2026 Draft Amendments to the Regulations on the Prohibition of Pyramid Selling, this article examines four potential gaps in Taiwan’s Multi-Level Marketing Supervision Act: the need for clearer standards in identifying online multi-level marketing activities; the continued reliance on contractual autonomy rather than statutory proactive monitoring obligations regarding distributor conduct; the existence of a regulatory gray area between severe criminal penalties and relatively minor administrative fines; and the absence of a comprehensive cross-agency information-sharing and joint early-warning mechanism.
China’s reform experience cannot be directly transplanted into Taiwan. Nevertheless, it provides a valuable reference point for reassessing whether Taiwan’s regulatory tools have kept pace with the evolution of the industry. These proposals should not be viewed as definitive solutions, but rather as starting points for further discussion among industry participants and regulatory authorities. In an era of increasingly sophisticated fraud schemes and rapidly evolving digital business models, Taiwan’s regulatory framework for multi-level marketing must continue to adapt. Only by achieving an appropriate balance between protecting consumer interests and supporting the legitimate development of the industry can the institutional advantages of the registration-based system be fully realized.
1 Article 3 of the Multi-Level Marketing Supervision Act defines multi-level marketing as "a marketing practice through which a multi-level organization is established by distributors introducing others to participate for the purpose of promoting or selling goods or services."
2 Article 9 of the Draft Amendments to the Regulations on the Prohibition of Pyramid Selling (2026 Draft for Public Comment), for the first time, provides an independent statutory definition of online pyramid selling, expressly bringing within its regulatory scope all pyramid selling activities conducted through telecommunications networks and internet technologies.
3 Article 15(1) of the Multi-Level Marketing Supervision Act requires multi-level marketing enterprises to designate specified conduct as grounds for contractual breach by distributors—including deceptive marketing, fundraising under false pretenses, activities contrary to public order or good morals, improper door-to-door sales practices, and violations of the Act, the Criminal Code, or other applicable laws—and to establish effective measures for preventing such conduct. Article 15(2) further requires enterprises to effectively implement those measures.
4 Article 25(1) of the Multi-Level Marketing Supervision Act requires multi-level marketing enterprises to maintain monthly records concerning organizational development, the sale of goods or services, bonus payments, and product returns within Taiwan, and to keep such records at their principal place of business for inspection by the competent authority. Article 25(2) provides that these records shall be retained for five years, including after the enterprise ceases conducting multi-level marketing activities.
5 Article 2, Subparagraphs 5 through 8 of the Fraud Crime Hazard Prevention Act designate online advertising platform operators, third-party payment service providers, e-commerce operators, and online game service providers as regulated entities under the Act.
6 Articles 29 through 33 of the Fraud Crime Hazard Prevention Act impose obligations on online advertising platform operators, including appointing a designated legal representative, verifying the identities of advertisers and sponsors, formulating anti-fraud plans, and preparing transparency reports.
7 Articles 34 through 36 of the Fraud Crime Hazard Prevention Act impose anti-fraud obligations on third-party payment service providers, e-commerce operators, and online game service providers, including taking appropriate measures in response to suspected fraud-related activities.
8 Article 18 of the Multi-Level Marketing Supervision Act provides that the income of distributors shall primarily derive from promoting or selling goods or services at reasonable market prices, rather than from introducing others to participate in the marketing organization.
9 Article 29(1) of the Multi-Level Marketing Supervision Act provides that any person who violates Article 18 shall be subject to imprisonment for a term not exceeding seven years, and may also be fined up to NT$100 million. Article 29(2) further provides that where a representative, agent, employee, or other personnel of a juridical person commits such a violation in the course of performing business duties, the individual offender shall be punished, and the juridical person shall also be subject to the same fine.
10 Article 34 of the Multi-Level Marketing Supervision Act provides that violations of Articles 7(1), 9 through 12, 13(1), 14, 15, 17, 19, 25(1), or 26 are punishable by administrative fines ranging from NT$50,000 to NT$1 million, which may be increased to NT$100,000 to NT$2 million for repeated violations.
11 Article 32 of the Multi-Level Marketing Supervision Act provides that violations of Articles 6(1), 20(2), 21(2), 22, or 23 are punishable by administrative fines ranging from NT$100,000 to NT$5 million, which may be increased to NT$200,000 to NT$10 million for repeated violations. In serious cases, the competent authority may additionally order dissolution, require the enterprise to cease operations, or suspend its business for a period of up to six months.
12 Article 26 of the Draft Amendments to the Regulations on the Prohibition of Pyramid Selling (2026 Draft for Public Comment) replaces fixed-amount fines with multiplier-based administrative fines calculated as up to three times the amount of unlawful gains, thereby directly linking the amount of the fine to the scale of the unlawful conduct.
13 Article 32 of the Draft Amendments to the Regulations on the Prohibition of Pyramid Selling (2026 Draft for Public Comment) provides that where a natural person, legal person, or unincorporated organization voluntarily eliminates or mitigates the harmful consequences of a violation, administrative penalties may be mitigated or reduced in accordance with the law. Where the violation is minor, is corrected promptly, and causes no harmful consequences, no administrative penalty shall be imposed.
14 Article 46 of the Fraud Crime Hazard Prevention Act provides that a person who voluntarily surrenders after committing a fraud offense and, within six months of surrender, fully performs a mediation or settlement agreement with the victim may receive a mitigated sentence or exemption from punishment. Where such voluntary surrender also leads to the identification of the organizer, leader, controller, or director of a fraud organization, or enables the seizure of all property or unlawful benefits obtained by the organization from victims, the offender may be exempted from criminal punishment.
15 Article 2 of the Multi-Level Marketing Supervision Act designates the Fair Trade Commission (FTC) as the competent authority responsible for administering the Act.
16 Article 18 of the Draft Amendments to the Regulations on the Prohibition of Pyramid Selling (2026 Draft for Public Comment) provides that, when market regulation authorities or public security authorities lawfully obtain or preserve evidence in the investigation of pyramid selling cases, telecommunications operators, internet information service providers, banking financial institutions, and non-bank payment institutions shall cooperate and provide the necessary technical support and assistance.
17 Article 8 of the Fraud Crime Hazard Prevention Act requires financial institutions to strengthen customer due diligence with respect to accounts suspected of involvement in fraud and authorizes them to adopt control measures such as suspending transactions or refusing to provide services. Article 10 further establishes a joint reporting mechanism between financial institutions and judicial police authorities for fraud prevention and investigation.
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