Nu Skin Inc. was fined $540,000 by the Shanghai Administration for Industry and Commerce for selling items 'illegally', as part of a government probe.
Six employees were additionally fined $241,000 for unauthorised activities (where individuals sold products that hadn't been registered for direct sales), two months after an investigation was announced by the Chinese government.
Nu Skin, the world's fourth biggest direct seller, said it will seek direction from the Chinese government on resuming normal business activities.
China's Ministry of Commerce says it will now amend its regulations on direct selling and step up supervision of the business.
New rules will regulate sales-force training, monitor marketing meetings and tighten application procedures when direct sellers seek to enter new regions in China and offer new products.
China's department of Industry and Commerce began investigating Nu Skin after the People’s Daily newspaper reported the company operated a "suspected illegal pyramid scheme, brainwashed trainees and sold more products than allowed".
Direct selling has long been under the Chinese government's watchful gaze, with Nu Skin's 40,000-person sales-force - including direct sellers - drawing official attention.
China banned door-to-door sales in 1998 after a decade of rampant pyramid sales abuses - amid state concern that direct selling disturbed the social order by creating closed and tightly knit gangster-type organisations that would sell illegitimate or low-quality products - but lifted the ban seven years later.
Shortly thereafter, the Chinese government issued another notice requiring foreign-invested direct selling enterprises to operate only through fixed stores.
China promised to remove restrictions on direct selling within three years of its WTO accession; which would have seen such restrictions dropped by 2004.
In 2005, the world's (excluding China) direct selling market was estimated to generate an annual turnover of over US$89bn with nearly 50 million sales personnel. By that time only 10 foreign-invested enterprises (FIEs) had been approved to engage in direct selling, including Amway and Avon.
China’s direct-selling industry market size has more than doubled since 2008, rising to nearly 90bn Yuan in 2013.
Many foreign companies are keen to engage in direct selling in China; potentially the largest market ever to be developed.
