Investigators will begin looking into allegations that company Nu Skin Enterprises was operating an illegal pyramid scheme on skincare and nutritional products, the State Administration for Industry and Commerce (SAIC) said yesterday.
SAIC said it is taking the allegations of illegal behavior very seriously and that it had ordered local authorities to begin immediate investigations to determine if any laws have been broken.
"If the situation proves to be true," the statement read, "the commerce department will deal with it according to the law and regulations."
The allegations came to light after local media began questioning the Provo, Utah-based company's business practices. According to the media reports, Nu Skin, among other questionable activities, was distributing false information, passing advertisements as news, exaggerating its creditworthiness and brainwashing its trainees.
Nu Skin's business in China is predominantly done via direct-sales. Nu Skin has license to run direct sales operations in more than half of the country's provinces.
Media reports claim that the system forces trainees to buy a certain amount of the product themselves before they are allowed to distribute. What's more, once a trainee becomes a distributor, they are asked to find trainees and develop them into distributors using the same buy-to-distribute manner. If true, Nu Skin's direct sales business would be illegal under Chinese law.
News of the investigation was a blow to Nu Skin's market value which shrank by a third in Thursday's trading to US$ 77.61 per share. This was the largest decline in the company's shares since 2004.
In response to the allegations, Nu Skin said that the media reports on its activities "contain inaccuracies and exaggerations" that have nothing to do with how the company does business in China. Nu Skin further emphasized that the company is "dedicated to operating in full compliance with applicable regulations by the Chinese government."