Norwegian Lyoness investigation half-assed?
A few weeks back news broke that the Norwegian Gaming Board had concluded their investigation into Lyoness.
Known for their thorough regulatory analysis of MLM companies in the past (see Wealth Masters and World Ventures), it was hoped that the Gaming Board’s conclusion would shed light on some of the figures behind the scheme. In particular, how much of the company’s revenue was derived from investment in account units, and how much of it was from non-investing shopper members.
Unfortunately when the Gaming Board announced their decision, not much was made public.
(The) Gaming Board has considered the business of our company Lyoness in Norway.The conclusion is now clear.
The Company does not engage in illegal activities in Norway.
The (Gaming Board’s) preliminary audit report concludes Lyoness (is) not engaged in an illegal pyramid sales system in Norway in violation of the Lottery Act § 16 second paragraph.
This conclusion is based on the information that the Gaming Board has about Lyonness operations in Norway today.
We’ll be back with more detailed information on the matter later.
That was it.
While we’re still waiting for an official breakdown of the decision, Norwegian newspaper VG has managed to score an interview with the Gaming Board’s Monica Alisøy Kjelsnes.
Kjelsnes’ interview is of course no substitute for the Gaming Board’s full report, but it does provide some insights into why this investigation differs from the Gaming Board’s prior regulatory examinations.
At the center of the difference is the unavoidable fact that
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.
The numbers the Gaming Board’s investigation is based on were supplied by Lyoness International.
Obviously aware of concerns that the figures they sent the Gaming Board might not be entirely the truth, the whole truth and nothing but the truth, the Kjelsnes told VG:
We have found no reason to doubt the figures we have received.
Forgive me for pointing out the obvious, but here’s one (taken from the same article):
Lyoness has consistently denied allegations of pyramid operations.
Given that we’ve seen all sorts of erroneous claims out of the Lyoness camp over the years (such as downpayments made to Lyoness being equivalent to shopping at a third-party retailer), the lack of independent verification is concerning.
One BehindMLM reader from Norway delved further on the numbers themselves:
2,000 premium members paying 16,000 NOK ($2,592 USD) is 32 million NOK ($5,185,660 USD).
If this is a small part of the income, a much bigger part should come from cashback (say 100 millions of NOK). As the cashback is from 2 to 11 % they must have handled transactions for about 2 billion NOK ($324,212,200 USD).
With just 60 Lyoness partners in Norway (and most of them small shops) this doesn’t make sense at all.
$324 million from 60 local partners equates to $5,403,536 per partner. That the figures don’t make sense is an understatement.
Also of note is the apparent lack of regulatory concern over Lyoness’ Accounting Unit (AU) investment scheme.
One of the objections against Lyoness was selling so-called premium membership. It costs 20,000 to become a premium member, which immediately triggers gift card worth 4000 dollars.
We asked questions about what they had left for the remaining 16,000 crowns. Whether it be counted as a participant payment has been a key element in our assessment, says Kjelsnes.
For those unfamiliar with the term, Lyoness’ “Premium Membership” is the name given to affiliate-investors who invest in AUs, and then eventually receive a cash ROI once enough new AU investments have been made.
Focusing not so much on whether or not the AU investment scheme functions as a Ponzi scheme (it does), the Gaming Board instead seems satisfied, based on numbers provided to them by Lyoness, that the number of Lyoness affiliate-investors sits at just under 10% of non-premium affiliates.
When VG wrote about Lyoness in February, they reported to have 6,000 members in Norway where 1600 premium members. Now the state to have around 25,000 members, including 2,000 premium members.
Few problems. Firstly is that the number of Premium affiliates versus non-Premium affiliates was never an issue. Of far more regulatory importance is the revenue that these 2000 premium members pumped into Lyoness (by way of AU investment), and what they’ve since withdrawn by way of ROIs.
It’s no secret that unless you’re retailer signing up your unsuspecting customers, that regular shopping in Lyoness results in unrealistically long AU maturity periods. If you’re lucky, you’re great great grandchildren might see an AU position created by shopping today eventually mature.
Secondly is the fact that non-Premium affiliates can still invest in AUs. The label “Premium Member” only applies to those who invest with a lump sum upon joining the company. Regular members can still directly invest in AUs, depositing as much or more than a Premium Member initially invests with Lyoness themselves.
Yet despite this, we’re yet to see any mention of revenue generated from AU investment compared to AU positions created by shopping. Nor have we seen any mention of the ROI ratio paid out on directly invested AUs versus those generated by shopping.
Whether or not these figures were even provided to the Gaming Board by Lyoness International remains unclear.
If not, then it’s difficult not to take their findings with a large dose of salt.
To be fair though, the Gaming Board did only state that Lyoness ‘(is) not engaged in an illegal pyramid sales system in Norway in violation of the Lottery Act‘.
Even with the whole AU Ponzi investment scheme that still might very well be the case, in which case faulting the Gaming Board would be premature. Whether or not there’s a regulatory body in Norway that examines Ponzi schemes I’m not sure.
Lyoness, by virtue of their business model, has elements of both a Ponzi and pyramid scheme. If you focus solely on the pyramid scheme aspect of the business though, hard numbers alone would suggest Lyoness are in the clear.
It’s hard to make a pyramid scheme case when, as Lyoness International figures suggest, less than 10% of the company’s affiliates have invested in AU positions as Premium Members.
Conclusive analysis would require consideration of the AU investment scheme and it’s contribution to Lyoness’ overall revenue and AU position payouts. This appears to be where the Gaming Board has failed.
Again, surprising given the Gaming Board’s past due diligence ventures, but admittedly they nailed pyramid schemes. Whether or not Norway is able to properly regulate Ponzi schemes remains to be seen. Ditto whether the Lottery Act (enacted in 1995), is comprehensive enough to deal with modern-day online Ponzi schemes.
According to the Gaming Board, the “final report” on the their Lyoness investigation is expected to be published around “mid-September”.
Update 21st September 2014 – The Gaming Board has now published a report on their Lyoness decision.
The VG interview with Lotteritilsynet’s Monica Alisoy Kjelsnes revealed something I partly had expected = Lyoness isn’t registered in Norway (the AU part of it), it only has a daughter company. That’s rather important, because it will make it more difficult to control the information.
That explains “Why didn’t they detect the Ponzi scheme?” = they didn’t have access to that type of detailed information, e.g. from yearly reports.
The same was mentioned in a translated article on BusinessForHome, from a Swiss newspaper L’Hebbe. That translated article is only open to Platinum members (of BusinessForHome), but I copied a part of it in June 2013.
Post #105:
behindmlm.com/companies/lyoness-us-review-cashback-and-investment-returns/#comment-80492
“All contracts of overseas members are signed with the Swiss entity.
Swiss members sign a contract with the Austrian group. The reason: they seek to complicate legislative procedures in the event of a trial.
“The down payments have been a core element in our assessment” mean they have seen it as a consideration, a potential illegal part. It hasn’t failed there.
If it has failed or worked somewhere, it’s in the interpretation of laws, in the “50% rule” interpretation. A 50% rule is normally not a core element that can be used to decide whether something is illegal or illegal, it’s an exemption rule designed to protect MLM companies rather than an element to prove illegality.
In legal logic, a “50% rule” would be classified as “exculpatory evidence”, a proof for that the primary function of the business is to distribute goods or services.
AMENDMENT OF THE LOTTERY ACT
MLM companies are “protected” in the Proposition to change the Lottery Act:
* in point #1 “Main content” –> point #8.2.4
That protection doesn’t automatically apply. The primary function of the law is to protect individuals and society against harmful activities (point #8.3.1). How the activities have been organized is irrelevant, all types of organizational structures will be included (point #8.3.1).
Point #8.2.4 is about MLM. The pyramid effect is closely connected to income derived from considerations from other participants. The income mentioned there is the income to participants, not the company’s revenue.
Point #8.1.2 is about promotional pyramids. It points out that companies easily can adjust to rules by making changes to how something is presented in marketing, but without changing the realities (the illegal activities can simply be disguised).
Point #8.4 is the conclusion. One of the highest prioritized goals is to prevent “bending the rules”.
NOTE:
I have only analysed one of the legal sources, a fraction of it. This time I focused mostly on “Proposition. No. 97 (2004-2005)”, “About the Law amending the Law of 24 February 1995 No. 11 relating to lotteries, etc.”, Section 8 “Ministry’s Proposal”.
The translated version is here (Section 8). I will normally not study details like that, the purpose is to make sure I’m not too far away from how it has been interpreted by the legislators.
Section 8, Ministry’s proposal is organized like this:
More about point #8.4 “Conclusion”.
The 4 cumulative criteria for pyramid scheme (google translated):
The translation was rather poor in some parts. Those rules are absolute, i.e. we can’t construct new rules based on personal theories.
Payment from participants is a core factor, but the rules should also affect other activities / other operators (people organizing it, people promoting it, people assisting to the promotion, etc.):
PRIMARY OBJECTIVE
Why the rules are relatively vague:
“Specific and not merely descriptive criteria”. That’s probably about “thumb rules” and hypothetical scenarios, and about “constructed systems” used to disguise illegal activities.
My rule “Laws are about realities, not about constructed law theories” is about the same.
Rules describing the illegality in more details will be easier to circumvent, and it will also be contrary to the EU Directive.
“Reality is about chasing mice.” —- the cat.
“About the same” would be nebulous and contradictory. Is that what you mean?
Some information I believe may be missing in Lotteritilsynet’s report is detailed info about money IN / money OUT / internal transactions (Credits) for the different AU-programs (there’s actually 4 programs).
Money IN:
I believe Lyoness only have provided information about the number of Premium Members, not the number of people who actually have made down payments.
Money OUT:
Lyoness do probably use “creative tax logic”, not counting cashbacks and friendship bonus as “taxable payouts”. That logic is correct for cashbacks on personal purchases but it’s not correct for the friendship bonus.
Internal transactions:
Loyalty Credits are probably not registered as “payouts”. That’s partly correct, those payouts are not about money. However, those payouts are taxable if people use them to buy gift cards, and they may be taxable if people are reinvesting them in additional AU units.
The actual function of the AU-units:
* are down payments stored / set aside in a bank account?
* or are all down payments put into a “pool of money”?
* or are the down payments used to buy partially paid gift cards?
* are some of the money coming IN through down payments used to pay money OUT to other members?