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CIRCULAR OF THE GENERAL OFFICE OF THE STATE COUNCIL CONCERNING HALTING THE DEVELOPMENT OF PYRAMID RETAILING

    In August of 1994, the State Administration for Industry and Commerce, in
accordance with State Council directives, issued the Circular Concerning the
Curbing of Illegal Activities within Pyramid Retailing. The localities have
not conscientiously implemented this, failing to put in order and examine the
pyramid retail industry, and some localities are still developing some pyramid
retail enterprises, allowing illegal pyramid retailing activities to spread
once again. In view that China's laws and regulations concerning pyramid
retail operations remain as yet incomplete, that the standardization and
management of pyramid retailing is very difficult, and that the consumer
psychology of the vast majority of consumers is not fully mature, conditions
are not yet present for the development of the pyramid retail industry. A
minority of lawbreaking merchants have taken advantage of this to engage in
deceitful practices which seriously infringe on the legal rights and interests
of the consumers, constituting unfair competition towards legal operators,
resulting in financial losses to the majority of retailers engaged in pyramid
retailing, arousing social problems, and disturbing the economic order. In
order to halt unfair pyramid retailing activities, strike out against the
deceitful behavior of lawbreaking merchants, protect the rights and interests
of the consumers, protect fair competition, and preserve the order of the
socialist market economy, the State Council has decided to halt the opening
and development of all pyramid retail enterprises, in accordance with the
provisions below:

    1. Immediately cease approving and establishing pyramid retail
enterprises. From the date of promulgation of this circular, the industrial
and commercial administrative organs and other relevant administrative organs
in every locality shall cease to approve and register any enterprise or
private industrial or commercial outlets which intends to operate through
pyramid retail.

    2. Inspect and rectify already existing pyramid retail enterprises.
Pyramid retail enterprises which are already registered must, within one
month, report step-by-step to the State Administration for Industry and
Commerce for re-inspection by passing evaluation and approval by the original
office which issued the registration; those enterprises which do not pass
evaluation shall have their retail business licenses revoked by the office of
industrial and commercial administration in that locality. During the period
of evaluation, pyramid retail enterprises must stop developing retail
personnel and may not expand business activities. For those retail personnel
who have handed over money but have not yet received goods from the pyramid
retail enterprise, the pyramid retail enterprise shall return their money
under the supervision of the office of industrial and commercial
administration. Pyramid retail enterprises which pass evaluation shall develop
only within the administrative area of the original place of registration;
trans-regional pyramid retailing is strictly forbidden; pyramid retailers
developing operational activities must be approved by the office of industrial
and commercial administration, be subject to supervision, and pay taxes
according to law. Foreign businesses may not engage in pyramid retail
operational modes for professional commercial retailing. Registered pyramid
retail enterprises which do not pass evaluation shall conscientiously clean up
their operational mess and settle any credit and debt obligations.

    3. Enterprises which have not been approved by the office for industrial
and commercial administration and which have developed without authorization
pyramid retail operations, or which have violated the Circular Concerning the
Curbing of Illegal Activities within Pyramid Retailing or any of the above
regulations shall be resolutely suppressed by office of industrial and
commercial administration in that region, have the retail commodities and any
illegal gains from the sale thereof confiscated, and be subject to a fine
according to the Consumer Protection Law and other relevant stipulations. Any
individual in a pyramid retail enterprise or group participating in pyramid
retailing who withholds or evades taxes, engages in the smuggling or sale of
contraband goods, manufactures or sells counterfeit or shoddy goods, or
engages in other illegal activities shall be dealt with according to law by
the relevant law enforcement offices; actions which constitute crimes shall be
transferred to offices of justice administration in accordance with the law.

    4. The people's governments at all levels shall strengthen practical
leadership work in stopping the development of pyramid retail enterprises; the
industrial and commercial administrations, public security offices, tax
offices, customs, domestic trade administrations, and other offices shall work
in close coordination to handle all problems arising from this work.

    5. The State Administration for Industry and Commerce and related offices,
in the spirit of this circular, shall quickly draw up examination and approval
guidelines for pyramid retail enterprises and methods of supervision for
pyramid retail personnel.