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.