Lyoness: innocent shopping community or pernicious scam?
In 2003, Hubert Freidl and his accomplices founded Lyoness. Presenting the company as a mutually beneficial shopping community to possible participants and casual observers, when digging a little deeper, an obvious pyramid scheme appeared. Freidl has previous experience with founding pyramid schemes disguised as shopping communities from his instigation of 'Global Trading System' (Erin Trade) and 'Galvagin'. While starting Lyoness, he surrounded himself by people he had previously done similar business with, such as (the currently-turned whistle blower) Bernhard Wagner, with whom Freidl, amongst others, founded his first company.
Smartly, Freidl aimed his current scam at small business owners, a group that has been rapidly growing over the recent years within the EU, due to looser overall regulations on starting a company, and which has not often been targeted by pyramid schemes before. This group is, unfortunately, significantly less protected by EU regulation than consumers, which can count on the regulations on 'unfair commercial practices'. There has been a considerable lobby to include at least entrepreneurs without personnel into the target group of these regulations, however, so far without success. Another thing the Lyoness instigators have intelligently used is the current global economic situation. Many companies are faced with lower sales, less customers and consequentially less turnover and profit. Record amount of small businesses have gone bankrupt in the last few years, and Lyoness offered them a way out, with his dream of prosperity.
Lyoness presented its system as a way to considerably increase the sales of companies by offering relatively small discounts to Lyoness members. The system would per country develop in three stages. Phase 1 comprised a legal check, performed by experts hired by Lyoness, to check whether the Lyoness business model corresponded with local regulations. Although this was often paraded around in an attempt to convince prospects and to silence critics, no-one I have spoken to has ever been able to provide me with either of the three core elements of any 'legal check':
- Who has performed this check?
- What were the criteria?
- What were the outcomes?
However, according to Lyoness, if phase 1 was successfully completed, phase 2 would be entered. Within phase 2, a target number of participants (varying based on the country's population size) would have to be recruited in order to successfully build a solid organisation in that country. During phase 2, participants would be told that as soon as phase 3 would be entered, large advertising campaigns would be started, and the amount of participants would exponentially grow - rewarding the patient and faithful who had invested in a membership during phase 2. Contrary to what the Lyoness instigators and adherents have argued, a Lyoness membership was not free during the first two phases. Instead, to become a Lyoness member one had to invest 2000 euros into the 'magical' Lyoness position system. This three layer system consists of positions of 50, 150 and 400 euros. If enough positions are on one layer, the first position in would cash out, producing 9 times the original value of the position. Following that logic, Lyoness promised participants that after a short while, they would have turned their 2000 euro investment into more than 16000 euros. Also, participants would get one time bonuses for every new member they would enroll (something that is illegal in most European countries).
The investments are masked as advance payments on future discounts. However, why would one have to buy discounts, when in the undoubtedly soon coming phase 3 everyone gets free cashback cards and will get all these discounts for free? The answer to that question is rather simple. What Lyoness is selling here is not discounts, but the right to enroll new, 2000 euro paying, members, who in turn would do the same - generating more turnover, resulting in more positions in the position system, of which the first in line would benefit. Thus, a pyramid scheme.
Official Lyoness Presentation USA
While confronted with these allegations, Lyoness adherents (instructed by their leaders) would typically pull out the big guns immediately. Countless reasons were brought to the table to divert the attention from the obviously controversial parts of the Lyoness business model. Firstly, the incredible amount of partnerships with huge corporations would be mentioned. As all these large companies all have excellent legal divisions, there is no way they would do business with Lyoness if it was in some way not legitimate. However, companies generally do not care so much who gives away or sells discounts on their products or services. Additionally, a large amount of the concerned companies had never even heard of Lyoness, or was at least unfamiliar with their business model, as they had been trading through a 'third party'. Also, unlike the major corporations featured on the slides of the Lyoness presentation and website, small and medium-size enterprises would have to become a 'premium member' (i.e. pay 2000 euros) to be able to give discounts to other Lyoness members.
Secondly, a list of certificates and official documents would be thrown in the face of sceptics. This list includes a certificate from the Chamber of Commerce, a TUV certificate and an ISO 9001 certificate. As most of you will know, anyone (unless explicitly blacklisted) can start a company, and can therefore obtain a certificate from the Chamber of Commerce. An ISO 9001 does not seem too relevant for Lyoness, as none of its criteria guarantuee that a company is legitimate. No Lyoness member I have spoken to has ever been able to provide me with the type (and corresponding criteria) of TUV certificate that is in Lyoness' possession, deeming it irrelevant to this analysis.
Following some nonsense arguments that companies that are not explictly forbidden are legal, etc., finally, if the sceptic had not given up yet, the participants (independently of each other) would produce their Lyoness income statements, proving that they had in fact made money. However, what they did not realise was that those statements actually showed from which category of the Lyoness system their income was derived. In all cases I have seen, the vast majority of the income was made through the system commission (i.e. from recruiting other 2000 euro paying participants).
It was also told that in order to comprehend the system, one would have to attend an information meeting. The reasoning behind that is not difficult to grasp while looking at current events. These 'information meetings' were of a truly cultic nature, aimed precisely at deceiving people into believing that Lyoness was about to change there future, if only they would become a member and invest 2000 euros. In the few countries that actually reached the mysterious phase 3 (like Austria), members that obtained the cashback card for free would be first asked to provide a considerable amount of personal information, as well as to attend one of these meetings. In retrospect, all Lyoness has ever wanted was as many as possible people to join (and pay). The people who did join were encouraged to enroll others, as they would benefit from their advance payments (and saved up discounts, but those are and will always be neglectable). A share of the participants has also been persuaded to invest tens of thousands of euros in advertisements campaigns in several countries. Only a small percentage of this money was in fact used for this purpose, the rest has vanished into the system.
In conclusion, Lyoness has run (and is still running) an illegitimate and illegal pyramid scheme and has duped an incredible amount of people out of an even more incredible amount of money. It is facing criminal charges in several countries, most notably in Austria, Switzerland and Hungary. However, even in Australia the authorities have launched an extensive investigation into the business model of Lyoness, the result of which might not be publicly known yet, but to everyone who has read this post and/or has looked at Lyoness' business model it will be obvious.