USANA May Have Made Half a Billion Dollars In Sales From Conducting Illegal Multi-Level Marketing In Mainland China

USANA May Have Received at Least $440 million From Illegal Sales in Mainland China Since 2007

It may be that by secretly recruiting hundreds of thousands of Chinese Nationals as USANA distributors, which violates China's direct selling laws and possibly the Foreign Corrupt Practices Act (FCPA), USANA may have received $440 million from illegal sales in mainland China since 2007. USANA is a Multi-Level Marketing (MLM) company that makes most of its revenue from the product purchased by their sales reps also known as distributors. Mainland China has banned MLM, but that has not stopped USANA from recruiting China's citizens. USANA has hidden this information from investors, auditors, and regulators.

USANA is allowed to conduct MLM business in Hong Kong, which has a population of about 7 million. USANA has also purchased a company called Babycare, which has a direct selling license in mainland China through Single-Level Marketing, which means there are no downlines or commissions paid to any upline members. Since 2009 USANA's revenue for Hong Kong began increasing at a very rapid pace, which outpaced any of their other markets. The number of distributors they reported each quarter was such that 1 in every 100 Hong Kong citizens would have to be a USANA distributor, which was absurd since the ratio of USANA distributors in the United States is about 1 in every 3600 people. USANA's sales in Hong Kong peeked to $48.5 million in the fourth quarter of 2012. Since then, there has been a sharp decline in Hong Kong Sales at the same time a sharp increase in Babycare sales. As of last quarter (Q2-2012) USANA made only $15.4 million from Hong Kong. This is a substantial decline in sales, yet USANA has simply brushed it off as an expected decline as members join Babycare in mainland China rather than USANA in Hong Kong.

What's the big secret you may ask? In order to circumvent foreign laws, USANA recruited Chinese Nationals into USANA and had them register using a fake address in Hong Kong ("Room 1906 Kwong Yat House" for example). This way all of the Chinese citizens appear to be residing in Hong Kong when in fact they lived in areas such as Beijing. They did not join to spend $1000 USD (¥ 6100 CNY) on vitamins because they simply wanted the product (otherwise they would have been Preferred Customers), but joined as distributors so they can participate in MLM, which China considers is a pyramid scheme. Many if not most of them joined with a "3-business center" plan, which means they were sold the idea that they can maximize their profits if they start with the ability to create a bigger downline. Again, all of this is outlawed in mainland China, but that didn't stop USANA from swindling about $440 million from China. But remember, according to USANA these Chinese distributors reside in Hong Kong using the same phoney address!

The evidence that Chinese Nationals signed up as USANA distributors in Hong Kong can be found within the genealogy reports from those distributors who are their upline. The following link was a genealogy report from an upper level USANA distributor who had thousands of Chinese Nationals in their downline. USANA has since blocked the link, but here it is for historical record.
http://www.usana.com/DlmXlsServlet.xls?savedReportId=32397555
I have retained a copy of this document however:  www.mlmpyramid.com/USANA_32397555.xls

The Appearance That Babycare Has Been Growing at a Rapid Rate During The Last Several Quarters May Be Nothing More Than The Manipulation of Number.

USANA has claimed Babycare is growing in mainland China. However, it may be nothing more than the transfer of sales from Hong Kong to Mainland China. Sales that were once attributed to USANA's Hong Kong market is now simply being reported in Babycare. USANA's auditor KPMG LLP should investigate the sales that were once reported as Hong Kong and now seem to be reported as Babycare. So the whole notion that USANA is “growing” its Babycare subsidiary may not be true.

On USANA's last quarter's conference call, Dave Wentz was asked where he projects Hong Kong's sales should stabilize (in light of the rapid decline in sales). Dave Wentz responded with the following (my emphasis in bold highlight):

"Well, Hong Kong's a fairly small market, population wise. And so we believe it will be -- I mean, if you were to compare it to other markets at the same population size, we expect it to be more successful than a number of them. But there will be a level that hits it right, that matches the market size and the number of leaders that we have there. But a lot of focus has moved from Hong Kong to China, as we all know, and that's where a much bigger opportunity is." - Seeking Alpha Transcript

It would seem to me that Dave is trying to justify Hong Kong's declining sales and distributor numbers. He should have simply told investors the truth that Hong Kong's numbers have been grossly overstated for the last several years because the sales were actually from mainland China instead of Hong Kong. Now what if we interpolate the sales from 2007 to the last quarter and consider anything above that line to be from mainland China? I choose 2007 because of evidence that shows Chinese Nationals being recruited into USANA since 2007 using a phoney address as seen in the genealogy report I referenced above.

USANA has been telling investors and stock analysts that Babycare has picked up business in China. However, this might not actually be true. I believe USANA is simply transferring the reported sales from one territory to another to make it appear as if business is growing in China. As you can see, Q1-2013 is the start at which Babycare sales started to sky rocket. This may actually simply be the transfer of reported sales from one market to another. Notice that Hong Kong decreases by almost the same amount Babycare China increases.

Many years ago USANA began recruiting Chinese Nationals from mainland China into their multilevel marketing compensation plan in Hong Kong. China's direct selling law forbids multilevel marketing from being conducted. So what USANA did is have those from China's mainland sign up using a phoney residential address in Hong Kong.

It's one thing if a few rogue USANA associates were breaking the law by signing up people from mainland China. It's another thing for USANA to knowingly circumvent China's laws and have them all share the same phoney address in Hong Kong when they sign up. This may be a violation of the Foreign Corrupt Practices Act. The extent of this violation isn't about a couple dollars from a few bad associates. In fact, it may be closer to $440 Million over the last 6 years that actually is the direct result of Chinese Nationals in mainland China who were illegally participating and conducting a multilevel marketing scheme within their country.

USANA has in the past stated that an undisclosed amount of people from mainland China are purchasing product from Hong Kong for their own personal use and not building a USANA business. Then over the last year, USANA has stated that they have a new policy that restricts people from purchasing USANA product from outside their own market. So those from mainland China are not suppose to purchase USANA product from Hong Kong anymore. USANA has also stated that they are shifting their focus from Hong Kong to Babycare in China. They also admitted that some of those who were signed up in Hong Kong will now be signed up in Babycare in China.

Why Did So Many of USANA's Hong Kong Full-Time Leaders Vanish?

USANA distributors who are able to obtain at least 10,000 sales volume FROM their downline (5000 points on their left leg and 5000 on their right leg) each week for 4 consecutive weeks are given titles such as Gold Director, Ruby Director, Emerald Director, Diamond Director, and Star-Diamond Director. USANA labels this class of distributors as “FULL-TIME DISTRIBUTORS”. Anyone beneath this ranking USANA classifies as only “PART-TIME DISTRIBUTORS”.

Reading USANA's recruiting material one may believe there are a lot of distributors with these high rankings. Those that reach this level can be making $50,000 in commission to over $1 million in commission per year. USANA has had over 2,000,000 distributors since they began in 1992. Over the last several years I have collected data of USANA distributor leadership rankings. As of June 2014 there are only about 3141 USANA distributors in the world that are a rank of Gold Director or higher (full-time), which is an unknown fact that is not disclosed to investors or even new distributors before or after they sign up. Interestingly, over the last two year 531 FULL-TIME USANA distributors have dropped out or have been terminated. Remember, these are distributors who are highly ranked, collecting thousands if not millions in commissions from USANA (approximately $38 million each year according to 2006 US Associate Earnings Documents).

The bigger eye opener is that out of the 531 Full-Time distributors that have left, 378 of them are from Hong Kong alone! 12 Diamond, 7 Emerald, 59 Ruby, and 300 Gold Directors have been removed from Hong Kong and possibly transferred to Babycare. If these members were making the kind of commissions their USANA rank suggests, and they were kicked out of USANA and turned into Babycare Distributors, what incentive would keep them as Babycare distributors if they are all of the sudden going to be collecting no commission at all? Remember, Babycare distributors cannot make a commission from other participants purchases because they cannot have a downline. Yet, Babycare sales and associates have been skyrocketing along with the fact the percent of distributor incentives to net sales did not dramatically change from the loss of all these high ranking USANA distributors that USANA would no longer supposedly be paying commissions to.

Where Are The Regulators?

So what's going on here? I believe USANA auditors need to investigate this issue and get to the bottom of it. I believe the Federal Trade Commission (FTC) needs to also open an investigation into the “PAYMENT FOR REFERRAL” plan USANA has implemented world wide which pays a referral commission to anyone who recruits Chinese Nationals into Babycare and receives commissions from their purchases, even though Babycare distributors are forbidden to participate in MLM. I also believe the SEC needs to open an investigation into USANA's possible violation of the Foreign Corrupt Practices Act by circumventing China's laws by having thousands their citizens sign up using a phoney address to participate in USANA's Multilevel Marketing scheme which may be responsible for over $440 million dollars in funds from the citizens in mainland China.

An Untrue Statement in USANA's 2012 10-K Financial Statement - "Target of False and Misleading Statements Regarding China"

USANA makes untrue statement in their 2012 Form 10-K SEC filing. USANA stated the following:

"More recently, in November 2012, we were again the target of false and misleading statements concerning our business practices, particularly in China and Hong Kong. This adverse publicity also adversely impacted the market price of our stock and caused insecurity among our Associates. There can be no assurance that we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or results of operations."

USANA's claim about being the target of “false and misleading statements concerning our business practices, particularly in China and Hong Kong” is a lie. USANA does in fact illegally recruit Chinese Nationals from mainland China into USANA's multilevel marketing compensation plan through Hong Kong (and possibly other USANA territories), which is a direct violation of China's law. Dave Wentz even admitted Chinese Nationals are signing up in the MLM compensation plan during the July 27, 2011 financial conference call:

John San Marco at Janney Montgomery Scott LLC asks:

“Do you know what the percentage of your Hong Kong associates that are actually Chinese nationals?”

Dave Wentz, CEO of USANA Health Sciences responds after trying to avoid answering the question:

“We definitely have a number of people who are building in Hong Kong. We do not have a percentage or have a number that we could point to with any accuracy.”

This violation of the law is not just the problem from a couple associates, but an organized circumvention of Chinese foreign laws conducted by USANA. This violation could (and should) cause USANA to lose their direct selling license in mainland China and possibly face serious fines by regulatory agencies both domestic and foreign. Again, USANA's CEO Dave Wentz already admitted the fraud exists.

USANA Purchases BabyCare Ltd for its Direct Selling License in China for $62,716,000

USANA recently purchased a company based in Beijing China that has been unprofitable. However, this company had something USANA has not been able to obtain; a direct selling license in mainland China. USANA paid a whopping $62,716,000 for a company that only had $15,000,000 in annual net sales and $19,000,000 in total assets. The transaction took place in the Cayman Islands, so it is questionable whether or not either party had to pay any US or Chinese tax.

USANA Health Sciences, Inc. is successful for one reason, Multilevel Marketing (MLM). USANA distributors can recruit more distributors, and because any distributor who wants to participate must personally purchase over $100 worth of product every 28 days, there is no need to retail product. Commission is paid to upline distributors from those mandatory product purchases made by their downline. So in MLM, selling the dream of making money and recruiting new distributors is what makes 1% of distributors a lot of money and make USANA very profitable. However, mainland China does not allow MLM compensation plans!

Mainland China only allows single level marketing compensation plans. So the only means for a distributor to make any money would be to retail product to real customers, which is really what direct selling is suppose to be about. For USANA to bring their product into China, USANA must at least drop the price of their product line in half (or more). This would allow its distributors in mainland China to retail the product and make a “Profit Margin”. This profit margin in currently unheard of with USANA's products around the rest of the world because the distributors already pay a premium retail price for the product and cannot resell it for more than they paid. Also, USANA's preferred customers pay the same price as the distributors. USANA would also have to reward those Chinese Nationals that actually retail product unlike those around the rest of the world which are rewarded for recruiting more distributors instead of retailing product. In case this isn't clear, distributors in mainland China would not have a downline! These distributors would also only be recruited by USANA's corporate office (or BabyCare for now) and not by distributors inside or outside the country.

There are good reasons for USANA to make this move however. They will try to use it to encourage the rest of their markets to recruit like crazy. USANA can put in their promotional material that they are only 1 of 25 companies in the world that have a direct selling license in mainland China, which is now the second largest economy in the world. If USANA distributors thinks USANA will be able to grow a large distributor base in China and maintain those distributors, then those distributors are in for a surprise. Again, what incentive is there for Chinese Nationals to join a distributorship with BabyCare/USANA? Unlike MLM where distributors think they work as a team, single level marketing means that each distributor is a competitor to one another. So the more distributors in a single level marketing plan, the less each distributor has to potentially make. Because of this, the number of Chinese distributors not rise as much as some believe. If the numbers grow too big, Chinese distributors will not last very long and will drop out even quicker than MLM distributors do.

Goodluck to USANA though. If USANA brings their product line into mainland China, they'll be forced to drastically lower the price of their products. Then the Chinese National distributors will pay about $50 USD or less for a USANA HealthPak100 and resell it for about $70 USD and make a $20 profit from each box sold, unless USANA refuses to lower the price. Oh, and if you think the product sent to Chinese Nationals would only be resold in China, think again. USANA has been unable to police Ebay and other auction sites for USANA distributors who have been reselling massive amounts of product at half the price that it costs distributors to purchase; all for the sales volume points (MLM point game)! What would stop Chinese Nationals from using ebay to resell all their product world wide and do it for a real profit while still reselling it for a cheaper price than any other USANA distributor elsewhere in the world could even buy it for.

Bottom line, MLMs have not been successful in mainland China and that is because MLMs were never about retailing product. MLM's like USANA are in business to sell the opportunity to make money (the dream). China is smart because they know a pyramid scheme when they see one; MLM. Companies in mainland China with a direct selling license can only succeed if the product is very affordable and competitive against those on store shelves. With a LIMITED distributor base, the product line can make the company and its distributors a lot of money. But if the product is too expensive, customers will not buy, and distributors will leave.