Chua Hock Soon James v Public Prosecutor and other appeals  SGHC 230
The decision arose from an appeal against the order of conviction recorded by the district judge in PP v Chua Hock Soon James, Harriet International Network Pte Ltd & Harriet Education Group Pte Ltd  SGDC 71.
The appellants were Harriet International Network Pte Ltd (HIN), Harriet Education Group Pte Ltd (HEG), and the managing director of both companies, Chua Hock Soon James (Chua) (collectively as the Appellants).
HEG ran the Global Edupreneur Program (GEP) from 2006 to late 2008. The GEP was accredited as an educational programme by the Lyles Centre for Innovation and Entrepreneurship of the California State University, Fresno. Anyone interested in joining the GEP had to pass an interview and could choose different licensing agreements (e.g. Consultant, Global Consultant, Senior Global Consultant and Global Manager). They also had to pay a sum of fees, which included registration, training, licensing and miscellaneous fees, the quantum of which depended on the type of licensing agreement.
GEP participants received commissions when they successfully enrolled new participants in HEG's educational programmes, as well as the GEP (Direct Commissions). The proportion of commission depended on the type of licensing agreement held: Global Managers were entitled to a 15% overriding commission on Direct Commissions, while Country Managers were entitled to 30%.
HEG's business collapsed after its university partners pulled out, following police investigations into reports filed by participants.
The relevant legislation is the Multi-Level Marketing and Pyramid Selling (Prohibition) Act (Cap 190, 2000 Rev Ed) (the Act). Section 3 of the Act provides that it is an offence for a person to promote or participate in a multi-level marketing scheme or arrangement (MLM scheme) or a pyramid selling scheme or arrangement. Section 2(2) of the Act goes on to state that a pyramid selling scheme does not include schemes or arrangements excluded by the Minister (Excluded Schemes). Section 6(1) of the Act provides for secondary liability for corporate officers of the company, while Section 6(2) of the Act also provides for a defence if the individual proves that the offence was committed without his consent or connivance and that he exercised sufficient due diligence to prevent the commission of the offence.
The issues to be decided included the following:
- whether the GEP was a pyramid selling scheme under Section 2(1) of the Act;
- which party bore the burden of proving whether the GEP was an Excluded Scheme;
- whether the GEP was an Excluded Scheme;
- whether Section 3(1) of the Act imports a mens rea requirement;
- whether the evidence shows that HIN had promoted the GEP; and
- whether the Section 6(2) defence is available to Chua.
The High Court (the Court) upheld the orders of conviction made by the District Judge in respect of the Appellants.
The Court held that GEP was a pyramid selling scheme under Section 2(1) of the Act as it fulfilled the three requirements set out in Act:
(i) A recruits B into the scheme and B acquires a commodity, or a right / licence to acquire the commodity for sale, lease or distribution;
(ii) B receives any benefit, directly or indirectly, as a result of the recruitment / acquisition / action / performance of one or more additional participants in the scheme; and
(iii) Any benefit is or may be received by any other person who promotes or participates in the scheme.
In particular, the Appellants contested that GEP did not fulfil the 3rd limb on the basis that part of the commission paid out by HEG was paid due to a Memorandum of Agreement (MOA) between the GEP participants. Even if there was an MOA, the fact that it was an agreement that HEG was party to, and an arrangement which it undertook to carry out personally, means that the payment of the second overriding commission was part of the GEP. The Court held that the payment of the second overriding commission was clearly a relevant benefit that fell under the third requirement because it was a pecuniary reward received by A (a Country Manager/Global Manager) on account of B (a team member under A) recruiting C (a new GEP participant).
Issues 2 and 3
The Court also held that the Appellants bore the burden to prove the GEP was an Excluded Scheme because the aim of the Act was to "eliminate" such schemes (in the Explanatory Statement to the 1973 Bill), and the Appellants failed to discharge that burden of proof. Whether GEP was considered an Excluded Scheme turned on the interpretation of paragraph 2(1)(c)(iii). The learned judge held that the paragraph should be interpreted to mean that, in a scenario where A recruits B and B in turn recruits C, A cannot receive benefits arising from the recruitment of C into the scheme by B (i.e. B's commission) but A can receive benefits arising from both B and C’s performance (not involving recruitment efforts) in relation to the sale, lease, licence or other distribution of the commodity offered. Applying this to the facts, the GEP was not an Excluded Scheme because when C, a new GEP participant, is recruited by B (an existing GEP participant), overriding commissions are payable to A (the Country Manager of B), based on B’s earned income, which earned income included B’s commission for recruiting C.
The Appellants also argued that the GEP was a franchise scheme, which fell under the Excluded Schemes, and therefore was not contrary to the Act. However, the Court declined to rule on this issue, as whether or not the GEP could be considered a franchise scheme, it still would not satisfy the other conditions required for exemption to qualify as an Excluded Scheme.
Although there was no express mens rea requirement in Section 3(1), the Court considered whether the common law presumption that mens rea is an essential ingredient of an offence had been displaced.
In particular, the Court had to consider whether the following physical elements imported a mens rea requirement:
(a) the act of promoting, participating or holding out that one is promoting or participating (the first physical element); and
(b) this act must be in connection with a MLM scheme or a pyramid selling scheme (the second physical element).
With regard to the first physical element, there was no dispute that the notion of promotion or participation means that there is some mental element on the part of the accused.
With regard to the second physical element, the Court found that the requirement for a mental element was displaced for 2 reasons. First, the public interest protected by the Act outweighed any such need. Second, it was possible for accused persons to avoid committing such offences. The Court held that even if there was a mens rea requirement for the second physical element, it would not accept the Appellants' argument that the requisite mens rea was knowledge that the scheme amounted in law to a MLM scheme because ignorance of law could not be a ground of exemption on pragmatic and utilitarian grounds.
The issue of whether HIN had promoted the GEP was relevant to whether HIM should be found liable for an offence under Section 3(1), as it disputed that the first element of "promoting" under Section 3(1) of the Act was not satisfied. The Court found that HIN had promoted the GEP, as it had provided financial services through its bank account, which suffices to show some level of engagement in the GEP. "Promoting" did not require a positive act or conduct, as opposed to a merely passive action.
The final issue was whether Chua could avail himself of the statutory defence in Section 6(2) of the Act. In this respect, Chua was faced with secondary liability for the offence committed by HEG, as he was a director of HEG. The Court held that Chua could not avail himself of the defence because he knew and actively promoted the illegal features of multi-level and overriding commissions, and did not exercise diligence to prevent the offence (such as by seeking legal advice).
This case is significant as it is the first case under the Act to be heard by the High Court in over 20 years. The Court noted that MLM schemes are undesirable and unsustainable business models, and emphasized that it is an offence to promote, as well as join a MLM or pyramid selling scheme as a mere participant. In this regard, the Court also stated that the aim of the Act was to eliminate such MLM schemes, and thus, the definitions and provisions of the Act would be interpreted broadly. The decision serves to reaffirm the law's hardline stance against MLM schemes and pyramid marketing schemes.
Companies with referral schemes or franchise programmes should conduct audits and reviews of their enrollment plans to ensure that the programmes do not flout the requirements set out in the Act above. Directors should exercise diligence to prevent the commission of an offence by the company, as they may also be found liable.