Lyoness must stop illegal pyramid activty!

On 31 May 2018, the Norwegian Gaming Authority made the decision in which Lyoness was notified that it must immediately cease all operations of, participation in and extent of its activity in Norway, as it is in violation of Section 16 second paragraph, cf. first paragraph, of the Lottery Act.

In a supervisory case against Lyoness, the Norwegian Gaming Authority has assessed whether its business activity in Norway is a pyramid-like sales scheme in which consideration is paid for the possibility of gaining an income specifically derived from the recruitment of others to the scheme, and not to the sale or consumption of goods, services or other benefits, cf. the Norwegian Lottery Act Section 16 second paragraph.

The Norwegian Gaming Authority concludes that Lyoness is an illegal, pyramid-like sales scheme pursuant to Section 16 second paragraph of the Lottery Act.

The Norwegian Gaming Authority has based its assessment on the fact that Lyoness’s earnings in Norway are specifically derived from the recruitment of participants and not the sale or consumption of goods, services or other benefits. Participants who purchase discount vouchers, shares in customer clouds, gift vouchers, marketing material and seminars from Lyoness do not receive goods, services or other benefits that correspond to the value that has been paid, and the payments can in reality be seen as consideration in return for participant status. Lyoness has not been able to document that the company’s earnings are specifically derived from the sale or consumption of goods, services or other benefits, rather than the recruitment of others to the scheme, cf. Section 16 third paragraph of the Lottery Act.

The unlawful conditions have not ceased after the Norwegian Gaming Authority sent notice of its decision to order the activity to cease. Lyoness has made objections to the preliminary notice, but the Norwegian Gaming Authority does not find that these objections give grounds for changing our assessment of Lyoness as an illegal, pyramid-like sales scheme.

On this basis, the Norwegian Gaming Authority made the decision in which Lyoness was notified that it must immediately cease all operations of, participation in and extent of its activity in Norway, as it is in violation of Section 16 second paragraph, cf. first paragraph, of the Lottery Act.

This decision is aimed at myWorld Norway AS (previously Lyoness Norway AS) and Lyoness Europe AG, but it will also affect around 152,500 Norwegian participants and 1,000 Norwegian loyalty companies that Lyoness has stated are included in the sales scheme.

The decision entails that Lyoness must immediately case all its activities in Norway, except for the part of the decision that is given suspensive effect until the deadline for appealing expires (see below). The decision entails that all recruitment by and all payments from Norwegian participants and loyalty companies to Lyoness, Lyconet, Cashback World and myWorld must cease. Furthermore, marketing of the business, use of advantage cards and sales of discount vouchers, shares in customer clouds, gift vouchers, marketing material, seminars etc. must cease. Lyoness must also suspend all payments of discounts, bonuses and commissions to Norwegian participants.

This decision does not prevent Lyoness from paying back what the participants have paid up to the time of the decision in return for discount vouchers and shares in customer clouds, and that have not actually been paid back in the form of redeemed discount vouchers. Neither does the decision prevent Lyoness from paying back what the participants have paid in return for marketing material and seminars up to the time of the decision. Lyoness may also pay out discounts that the participants have earned from their own purchases from loyalty companies up to the time of the decision.

The Norwegian Gaming Authority has, with hesitation, concluded that parts of the decision will be given suspensive effect until the deadline for appealing expires in three weeks, cf. Section 42 of the Norwegian Public Administration Act. Suspensive effect is granted for existing participants’ use of advantage cards and any actual payment of discounts that individual participants earn through their own purchases from existing loyalty companies. In its conclusion, the Norwegian Gaming Authority has stressed the fact that there is limited administrative practice and case law in the area.

The Norwegian Gaming Authority requires prompt, written confirmation that the violation has ceased, cf. Section 16 fourth paragraph of the Lottery Act. Lyoness must also state whether it will continue the part of its operations for which suspensive effect has been granted until the deadline for appealing expires, and whether it will request that the decision be given further suspensive effect.

The Norwegian Gaming Authority asks Lyoness to inform all Norwegian participants and loyalty companies about the decision and its consequences as soon as possible. We ask in particular that Lyoness send the decision to the 11 Norwegian participants that the Norwegian Gaming Authority has addressed directly in the case, and that Lyoness has assisted in connection with presenting documentation. The Gaming Authority asks Lyoness to confirm that it has informed its participants and loyalty companies, and to inform us of how this has been done. We also ask Lyoness to inform the Gaming Authority of what action the company will take towards Norwegian participants who have paid money to Lyoness and who have not received any goods, services or other benefits equivalent to the value that has been paid.

The Norwegian Gaming Authority finds reason to emphasise that we take a very serious view of this case. From when the Norwegian Gaming Authority first initiated a supervisory procedure against Lyoness in 2014 and up to the time of the decision to order a cease in business activity, the Norwegian Gaming Authority has received many credible tips with troubling information about the business activity that Lyoness and some of its Norwegian participants operate in Norway.

Lyoness has stated that it takes the criticism from the Norwegian Gaming Authority very seriously and that it has implemented measures to ensure that its business is run in accordance with the intention of creating an international shopping network. Lyoness has also implemented measures to prevent individual participants from giving incorrect information about the sales scheme, and some Norwegian participants have also been given a refund.

The Norwegian Gaming Authority recognises that Lyoness has implemented actions to rectify and limit undesirable consequences of its business activity. However, the implemented actions do not change the Norwegian Gaming Authority’s assessment that Lyoness is an illegal, pyramid-like sales scheme pursuant to Section 16 second paragraph of the Lottery Act. Nor have these actions, in the Gaming Authority’s view, been sufficient to rectify the negative financial and social consequences that the business activity has caused several of the participants and their families. We make particular reference to the fact that Norwegian participants have paid hundreds of millions of Norwegian kroner to Lyoness without receiving goods, services or other benefits equivalent to the value that they have paid. Some individual participants have also made payments of hundreds of thousands of Norwegian kroner. A very high number of participants have made such payments after receiving incorrect information from other participants in the sales scheme that these were savings and investments that would generate a ten-fold return in just a few years. Several participants made such payments after being recruited by family members or friends.

Throughout the supervisory process, the Norwegian Gaming Authority has received repeated, credible reports from a significant number of people that young people and vulnerable people with poor finances have spent their savings and taken out loans for the purpose of investing in Lyoness. Young people have left their studies to work for Lyoness, and many family relationships and friendships have suffered because of the business. The Norwegian Gaming Authority also notes that Lyoness in its marketing has tried to make its business appear legitimate by referring to several large, well-known national and international companies and by giving incorrect information about partnership agreements that Lyoness supposedly has with these.

Based on the tips received in this case, the Norwegian Gaming Authority also finds grounds to inform e.g. the Norwegian Consumer Authority, the Norwegian Tax Administration and the Financial Supervisory Authority of Norway of the decision, as we see that this case raises questions regarding breach of the Marketing Control Act, tax legislation and financial legislation.