Go forth and plunder

SA’s Ponzi pandemic.

JOHANNESBURG – Financial regulators would do well to take a look at findings from Old Mutual’s Savings and Investment Monitor, especially in light of government’s drive to get South Africans to save and the urgent need to do so in order to narrow a widening budget deficit.

One quote from the Monitor in particular speaks to what seems to be a growing problem in South Africa: Ponzi schemes.

It was proffered by an individual with a household income of less than R6 000 a month: “I’m saving less because I feel that it is a risk to save. Last year we were saving for groceries via a grocery club and come the end of the year, we didn’t get anything out. So I have decided not to save too much this year.”

While it’s not clear whether the above was a Ponzi scheme, if this is in any way indicative of the impact that a growing number of homegrown “illegal deposit taking schemes” are having on the inclination of South Africans to save, we have a serious problem on our hands.

And it’s not clear how to stem the tide of financial crime in this country or whether our world-class regulators are effectively stemming it. High-end, white-collar crime aside, these lower level schemes are a dime a dozen and often prey, although not exclusively, on the destitute and desperate (you should read the genuinely tear-jerking emails I receive from consumers who’ve been scammed out of much-needed money).

Since writing about micro-retailer SuraPure Drinks, which the National Prosecuting Authority (NPA) alleges is a Ponzi scheme, I have received some ten emails asking me to look into other companies in which people have invested and lost money, or in which their friends and family members are invested.

Slow to act

Recently, Ponzi schemes Zantech Trading and Chris Walker’s DefenceX (trading as Net Income Solutions) made Moneyweb headlines, covered by investigative journalist Julius Cobbett.

In a June 2013 article, Cobbett writes that the Financial Services Board (FSB) and South African Reserve Bank (Sarb) were aware of Zantech’s activities for at least three months before they did anything about it.

Four months after the scheme was brought to its attention, the FSB eventually warned the public not to conduct financial services business with Zantech. The Reserve Bank appointed investigators to inspect Zantech on August 7 2013, five months after the scheme was first flagged with the Bank.

DefenceX accumulated about R800 million from nearly 200 000 investors before its bank account was frozen by the Sarb, with just R320 million remaining. A repayment process is now underway, but is “still ongoing”, according to scheme administrators PwC. It is not clear whether the Sarb has recently lodged a complaint against DefenceX with the Hawks, but in February this year the Hawks confirmed that it was not investigating DefenceX.

So the regulators are slow to act and when they do act (the Sarb creditably investigated 132 schemes between 2009 and 2013, finalising 76 cases), these criminals are seldom brought to book.

DefenceX’s Walker is allegedly living in a house on the Atlantic seaboard and is now promoting the Ubuntu Party, while the Western Cape High Court’s judgment against Fidentia’s J. Arthur Brown was tantamount to him getting off scot-free (a R150 000 fine and a suspended jail sentence). The FSB vocalised its disappointment with the sentence.

Too big to be ignored

I appreciate that these investigations are complex and time-consuming. This was recently pointed out by the Registrar of Banks, Rene van Wyk, who said that actions taken by the Reserve Bank would not necessarily lead to a reduction in Ponzi schemes for precisely these reasons.

But where does that leave us? Certainly it does nothing to improve the already strained financial fortunes of our country. Even more of a concern is that some people take personal loans to invest in these schemes, which the Sarb itself admits absorb savings that would “otherwise be invested in the country’s financial system”.

It is commendable that the Bank ran a national awareness campaign against ‘get-rich-quick’ schemes late last year, but it’s problematic that the schemes perpetrating these illegal activities are only investigated when they unravel. By that stage, the damage is already done.

I realise that regulators do not have capacity to investigate every single Ponzi scheme, and are no doubt inundated daily with the kinds of emails I receive on a weekly basis. Nor can they investigate on a whim, but these excuses do nothing to solve the proliferation of Ponzi schemes on our shores.

If the regulators can’t do it, they should seek a mandate from government to establish a body that can, lest the following summary of the situation by Cobbett hold true for much longer: “There’s never been a better time to be a financial criminal in South Africa. Go forth and plunder.”

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