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Defencex activity resembled pyramid scheme

Affidavit explains why action was taken, reveals account balance of R320m.

JOHANNESBURG – Transactions in the bank account of Net Income Solutions looked suspiciously like those of a pyramid scheme. This is one of the reasons why the Registrar of Banks applied to the Western Cape High Court to freeze the account.

Net Income Solutions, or Defencex, is a scheme that has attracted hundreds of millions of rands from a yet-unknown, but certainly large, number of people. Defencex sold ‘points’ that paid a very generous return of 2% a day. It has been promoted as a way of lifting people out of poverty.

On February 5 this year the Reserve Bank appointed inspectors from audit firm PWC to inspect the business affairs of Defencex, Cycle4Dollars, Net Income Solutions, and its director Chris Walker.

The inspectors, Louis Strydom and Malcolm Campbell, were asked to determine whether Defencex and Walker were contravening the Banks Act.

Based on the inspector’s preliminary findings, Deputy Registrar of Banks Michael Blackbeard submitted an affidavit to the court asking it to freeze Net Income Solutions’ account held at Standard Bank.

When the freezing order was granted, the account held about R320m. The total amount deposited by Defencex members has not yet been revealed. This means it is not clear whether Net Income Solutions has enough money to repay all of its members.

According to Blackbeard’s affidavit, the inspectors found that Standard Bank had already reported suspicious activity in the Net Income Solutions account. This report was made to the Financial Intelligence Centre.

Standard Bank’s report indicated that transactions in the Net Income Solutions account were identical to patterns of activity associated with so-called pyramid schemes.

Furthermore, the activity suggested that Net Income Solutions and Chris Walker were not reinvesting the funds deposited and outflows from the accounts did not appear to be into investment accounts.

What this means is that it was not obvious how Walker was generating such great returns for Defencex members.

Blackbeard’s affidavit says he has reason to suspect that Net Income Solutions and Chris Walker were entering into agreements with depositors in terms of which they would repay the amount deposited together with a ‘profit’ within a 75-day period.

On the face of it, this is a contravention of the Banks Act.

Blackbeard told the court it was important that the respondents, including Walker, not be warned in advance that he was asking for a freezing order. This was because money held in the bank accounts could easily be removed and disposed of.

Blackbeard was also worried that if news of the freezing application was leaked, it would cause Defencex members to panic and withdraw funds, creating a run on the scheme.

A Net Income Solutions bank statement for a single business day gives an indication of the size of the Defencex scheme. The statement, for February 26, shows that Net Income Solutions received deposits totalling R147 000 from 50 depositors. Depositors use their user names and cell numbers as a reference.

Preliminary investigations by the PWC inspectors show that in one month, between November 8 and December 7, 2012, a total amount of R52m was paid to a Standard Bank account held by Netcash Pty Ltd.

Netcash is a legitimate business that provides payment services to about 8 500 clients in South Africa, including Net Income Solutions.

Netcash managing director Charles Pittaway explains that his company makes payment to third parties on behalf of clients. “Our role would therefore have been the equivalent of a bank making the payments for Net Income solutions. As with all the other payments we make for clients our agreement is that if they authorise the payments and have available funds to cover these, we will ensure that the third parties bank accounts are credited with the authorised amounts.”

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