Confirmed: Gaming Board failed to properly investigate Lyoness
Back in June the Norwegian Gaming Board announced they’d finished their investigation into Lyoness.
Somewhat surprisingly, the Gaming Board decreed that Lyoness ‘does not engage in illegal activities in Norway.‘
The initial announcement was just that, with a detailed report to be forthcoming. In the meantime statements made by Gaming Board staff suggested the investigation was half-assed.
As the Gaming Board’s Monica Alisøy Kjelsnes told Norwegian newspaper outlet VG,
Lyoness is not registered as a national business in Norway, (so) there are no accounts with the Company Registrar that the (Gaming) Authority can compare (Lyoness’ supplied) the numbers with.
Couple this with the Gaming Board revealing in their initial announcement that their investigation was
based on the information that the Gaming Board has about Lyonness operations in Norway today.
And it was starting to look like the Gaming Board had just gone over a few Lyoness marketing brochures before concluding their investigation.
Late last week, a detailed breakdown of the Board’s investigation was finally published.
Did the Gaming Board half-ass their investigation? Read on to find out.
Reaffirming their initial conclusion, the Gaming Board’s report begins in a similar fashion to their earlier summary:
The Gaming Board has investigated Lyoness to determine whether their activities in Norway constitute an illegal pyramid sales system, where the payment of compensation and ability to generate revenues is primarily because others are recruited to the system, with no sale or consumption of goods taking place, or the use of any other services or other benefits.
The Gaming Board’s conclusion is that Lyoness and its operations in Norway, as it stands at present, is not a
illegal pyramid sales system under the Lottery Act § 16 second paragraph.
This conclusion is based especially on information received from Lyoness showing that more than 50% of their income from Lyoness operations in Norway today comes from the sale of goods and services from businesses associated Lyoness loyalty in its trading network, and not from the recruitment of members.
That much we already knew, but then things start to get interesting:
After the Lottery’s assessment of Lyoness in the years 2012 and 2013, it found Lyoness fueled an illegal pyramid sales system in Norway because more than 50% of income during this period was from the recruitment of members.
Lyoness didn’t change their Accounting Unit centric business model between 2013 and 2014, so what changed?
And the even bigger question raised: In 2012 and 2013, did the Gaming Board exclusively rely on information supplied to them by Lyoness, or did they actually go out and investigate the company themselves?
After receiving numerous tipoffs from the general public with concerns that Lyoness was operating as a pyramid scheme, the Gaming Board commenced their investigation in Decmeber 2013.
On December 4th, the Gaming Board requested Lyoness send them documents related to the following:
- general information about the company
- articles of Association of the company
- the ownership and ownership structure
- updated accounting records for a specified period
- any advertising / information material about the business in Norway
- terms and conditions of participation
- enrollment costs and any other running costs for affiliates
- the difference between paid membership and free membership
- the number of total, paying and free affiliates
- Lyoness’ sales structure
- the bonus and commission system, including the turnover of the company split between the revenue types
- information about the products sold
- list of member benefits
- cash Back – conditions and use of the card
- name and contact information of the loyalty businesses involved
- evidence that the turnover of the company in Norway in particular due to the sale of products and not recruiting members
Two points alone should have sunk the investigation from the get-go. Namely that Lyoness itself doesn’t sell any products, and that revenues from Accounting Unit investment decimates whatever trickle is brought in via legitimate shopping through the merchant network.
Lyoness responded to the Gaming Board’s request on January 22nd. Pertinent to the two major criteria identified above, Lyoness sent no information about any products they might have (they couldn’t of course, because they have none).
As for the revenue split between Account Unit revenue (investment) and legitimate merchant shopping, Lyoness did send information regarding this back to the Board. A month later however a second request had to be made, because the Board concluded that the information they had been sent was a “sheltered version” that failed to adequately explain ‘the flow of money in the business‘.
That Lyoness were playing games and trying to mask the flow of revenue through the business should have set off alarm bells.
A second account of revenues passing through the company was provided to the Gaming Board on the 3rd of March.
A few weeks later on March 21st, Lyoness’ attorney Karl Rosén flooded the Gaming Board with various marketing materials and reports that painted Lyoness in a positive light.
This information was not requested by the Gaming Board, and obviously was supplied in an attempt to overwhelm investigator with information (Lyoness’ compensation plan is notoriously confusing enough on its own).
Lyoness’ attorney continued communications with the Gaming Board throughout April and May, culminating in his giving of a Lyoness marketing presentation to the Board on the 15th of May.
Three weeks later the Gaming Board concluded their investigation and filed a preliminary report.
In the preliminary audit report it was concluded that Lyoness and its operations in Norway, as it appeared for the Gaming Board at the time of the report, was not an illegal pyramid sales system under the Lottery Act § 16.
During the assessment, decisive weight was given to information received from Lyoness which showed that more than 50% of proceeds to Lyoness in Norway for the period January to May 2014 came from sales of goods and services and not recruiting members.
What goods and services Lyoness sold during January to May 2014 is a complete mystery, given that the company itself sells no products and services to the general public.
Requests for detailed receipts and inventory reports of sales of products Lyoness claims to have made, matched up against total revenues flowing into the company for the specified time-period would have easily confirmed something fishy was going on.
Why the Gaming Board did not request this information is a mystery. Had the Board pressed the company on their claims that goods and services were being sold, perhaps the outcome of the investigation might have been different.
Also questionable is the use of terminology by the Board such as “proceeds… came from sales of goods and services”.
Statements like this are straight out Lyoness’ own marketing material. These statements are often parroted by Lyoness affiliates in attempts to discredit the fact that affiliates are able to invest in the company directly with no shopping taking place.
The Gaming Board’s explanation as to why for the years 2012 and 2013 Lyoness in Norway was a pyramid scheme, but in 2014 they aren’t, cements the fact that, unfortunately, this time around the Board was swayed by Lyoness marketing material – rather than actual facts and logic that had previously been used in their analysis.
In the preliminary audit report, it was found that Lyoness ran an illegal pyramid sales system in Norway for the years 2012 and 2013 because more than 50% of revenues generated in this period came from the recruitment members and not the sale of goods and services.
The decision was made on the basis that payment of N$ 16,000 was made by Lyoness affiliates to achieve the status of “premium member”, was regarded as income from recruiting members, and that the received sales figures showed that more than 50% of proceeds from the Lyoness business in Norway in the years 2012 and 2013 came from such duties income and no sales of goods or services.
Logically speaking, for the Gaming Board to arrive at a different conclusion in 2014, one would assume Lyoness either got rid of their account unit investment scheme.
Or for the first time in the company’s decade long history, revenues from the merchant network eclipsed that of direct AU investment.
Lyoness’ attorney Karl Rosén’s response to the audit report was to flood the Gaming Board with even more marketing materials and reports.
The end result?
The Gaming Board modified their definition of what constitutes the sale of goods and services.
Lyoness’ attorney Karl Rosén was given until 17 June 2014 to give a statement to the initial audit report.
The Gaming Board received a response to the preliminary audit report within the requested deadline. The response emphasized that the Gaming Board’s conclusions in the preliminary audit report were based on incorrect actual and legal reviews (Ozedit: otherwise known as Lyoness marketing material).
In particular, the response claimed that the Gaming Board’s review was insufficient where the Authority had not considered whether Lyoness and its revenue system had a pyramid effect.
It was also specifically claimed that the payment of $ 16,000 to become a premium member were not regarded as participant payment.
It was also suggested that the Gaming Board shouldn’t restrict the audit to only look at Lyoness’ turnover in Norway, but that they had to look at Lyoness sales total in the world.
It was also emphasized to the Gaming Board that in any case they would not be able to assume that the Lyoness was operating illegally in Norway in 2012 and 2013, because this was an atypical transition that is not affected by the Lottery Act § 16.
In the past the Gaming Board have held fast against the typical nonsense schemes feed it in response to their findings. Remarkably in this instance, the Gaming Board tossed any resemblance of logic and sense out the window and took Lyoness’ suggestions on board.
Just how much of an influence did Lyoness’ attorneys have over the Gaming Board’s investigation?
In their provided summary of Lyoness’ business model, provided by Lyoness themselves, at no point does the Gaming Board address the issue of cash being invested with Lyoness with nothing being bought or sold in the process.
Similarly, no mention is made of the >100% cash ROIs paid out at every Accounting Unit level, subject to a pre-determined amount of new investments being made with the company.
Nor is the fact that affiliates, upon maturity of their AU investments, roll their initially deposited funds into more accounting units (re-investment).
Infact of the twenty-seven pages that make up the Gaming Board’s report, the vast majority focus on the merchant shopping network.
Just as the case was in 2012 and 2013, in 2014 investment from Lyoness affiliates still forms the bulk of revenue going into the company:
When it comes to the number of premium members who have become premium member by paying £ 20,000 the Lyoness where £ 4000 constitutes payment in full of gift cards and $ 16,000 represents partial payment of gift cards, Lyoness stated that the number of such members total 1 751.
This is made up of 175 premium members in 2012, 1402 premium members in 2013 and 174 premium members from January to May 2014. In April 2014 only one such payment was made.
Left out are the figures detailing how many regular Lyoness affiliates have invested in account units outside of the Premium membership option.
But in any event, here’s the kicker:
Approximately 1900 premium members total means this is that most have become premium members by paying £ 20,000 to Lyoness.
Affiliate investment in Lyoness in Norway, just as it is in any market they operate in, is still primarily all about account unit investment and the eventual realization of a >100% ROI, paid out of subsequent investment amounts.
A received example shows that a premium member must pay between $ 250,000 and $ 530,000 before the gift certificate can be considered as full paid and can be triggered.
The Board does not receive data from Lyoness showing how much members receive the membership benefits in the form of payment of bonuses and recognition of receivables as a result of this payment alone, but according Lyoness will be limited.
Instead of cold-hard facts and figures (such as the triggering of AU maturity with results in cash ROIs being paid out (the only reason anyone invests in Lyoness), we get concessions like the above indicating cherry-picked information was sent to the Gaming Board.
Hell, the Gaming Board even acknowledge that affiliates only invest in Lyoness to participate in the AU investment scheme (and eventually collect >100% ROIs):
The payment of $ 16,000 and other partial payments on the gift card is being done to become a premium member.
Ultimately all that changed from the Gaming Board’s perspective was the acceptance that direct investment with Lyoness in accounting units on the expectation of a >100% cash ROI somehow now constitutes “sales of goods and services”.
Naturally this in turn skewers the revenue source figures, with the Gaming Board having to conclude, using their new definition of sales of goods and services, that Lyoness primarily do not generate revenue via AU investment (indirect recruitment).
Clear as mud?
Why the Gaming Board, who previously have a robust track-record of investigating MLMs using methodology grounded in logic, have dropped the ball on their latest investigation I can’t say.
They were right in their analysis of 2012 and 2013, but then by changing the definition of what constitutes the sale of goods or services, decree a different outcome for 2014. Effectively giving Lyoness a free-pass to continue with the exact same business model they were using for 2012 and 2013.
How is this justified? I have no idea. But under no circumstances does money invested directly with Lyoness as part of the accounting unit scheme constitute the sale of products and services.
This money is held by Lyoness, and is only released upon maturity of existing account units, subject to enough new units being invested in over time.
Honestly, if you’re going to permit a company to redefine the definition of the sale of goods and services – why even bother investigating them to begin with?
From a regulatory standpoint analysis of Lyoness is simple. Do affiliates get paid a >100% cash ROI if they invest in an account unity (regardless of whether said investment is made as part of Premium membership or not), and is said ROI paid out of money invested in subsequent account units.
A secondary concern should arise in analysis of Lyoness’ revenues, with accounting unit investment revenue (again, regardless of whether it is made by regular affiliates or those joining as Premium members), weighed up against actual shopping taking place (fees received from merchants as a direct result of shopping and/or their participation in the merchant network solely as merchants).
In conducting their investigation of Lyoness, quite obviously the Norwegian Gaming Board has failed massively on both accounts.
I suppose if it’s any consolation, the Norwegian membership figures provided by Lyoness, if accurate, reveal that the scheme is well on its way to a local collapse.
Perhaps once affiliates who rushed to invest in 2013 find their accounting unit ROIs stalling, because not enough
recruitment of new investors “sale of goods and services” is taking place, subsequent complaints might see the Gaming Board re-visit their decision.