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The bad guys are getting smarter

Welcome to the masquerade ball: ‘forex robot’ case shows that scams can be given a façade of legitimacy.

For years the Financial Services Board (FSB) has been warning the public not to buy financial products from any entity that is not a licensed financial services provider (FSP). To the regulator’s credit, this campaign has been quite successful.

It has been so successful, in fact, that people with apparently nefarious motives are trying to turn it to their advantage. This is evidenced by the case of the alleged Ponzi scheme, Profit Trading.

The company, which supposedly developed a ‘forex robot’ that trades the currency markets on behalf of investors, actually secured an FSP licence, under the name DMD Capital, before it started operating. As FSB deputy executive officer Caroline da Silva explains, it satisfied all the necessary conditions for obtaining such a licence.

“The licence application of Profit Trading was received on 18 February 2014 and approved on 10 June 2014,” she notes. “In this four-month period the application and business model was interrogated and various engagements were held with Profit Trading and its compliance officer regarding the requirements, until all the necessary information required to satisfy the Registrar (that Profit Trading complied with the requirements to be issued with a licence to conduct business as a financial services provider) was received.”

This included ensuring that it was financially sound, that the activities in its business plan fell within the Financial Advisory and Intermediary Services (FAIS) Act, and that its key individual was fit and proper.

However, it appears that Profit Trading never had any intention to conduct the business for which it was licensed. It was given a category 1 licence for giving advice and rendering intermediary services in derivatives, but instead began marketing itself as a forex trading company offering its ‘forex robot’ software, which the FSB believes was nothing more than a Ponzi scheme.

According to Da Silva, this is something the FSB is increasingly having to deal with.

“We have seen a practice develop recently, because of our campaign warning customers to check for FSP licences, that persons apply for licences for a simple product then use that licence to give credibility to other practices,” she says. “Part of our frustration with this case was that the company was using an FSP licence to legitimise an illegitimate business.”

Without being prompted, two individuals who gave money to Profit Trading told Moneyweb that they only did so after checking with the FSB that it was in fact licensed. The company’s founder, Myles Ndlovu, also emphasised that Profit Trading was a registered FSP during television interviews.

The regulator has therefore had to alter its message that the public should not only check whether the entity they are dealing with is licensed, but also what it is licensed to do. In addition, the FSB is amending the General Code of Conduct to make it an offence to use an FSP licence to market any activity other than that which is covered by the licence.

A second area of concern is what appears to be the ‘renting’ of key individuals. This is a practice not dissimilar to BEE fronting.

In order to obtain an FSP licence a company must have a key individual who is considered fit and proper by the regulator. In the case of Profit Trading, this was Herman Bezuidenhout.

It is however unclear what role, if any, Bezuidenhout actually played in the operation of the business. He resigned in December 2015 when the FSB’s investigation was starting to uncover evidence that Profit Trading was not at all what it seemed.

The FSB was subsequently able to determine, and to get Ndlovu to concede, that he was running the business himself.

“It seems that there are cases that when someone is not themselves fit and proper, they just find someone else who is fit and proper to get the licence,” says Da Silva. “We need to amend the law to tighten up on this issue.”

For investors, the challenge is to appreciate that even businesses that appear legitimate may not be so. The only antidote to this is education.

Whether it has an FSP licence or not, the public should be wary of the kinds of returns offered by Profit Trading – a target of nearly 80% per year. As tempting as they may seem, the reality is that they just aren’t plausible, and that should warn people off.

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No amount of legislation can protect individuals from their own stupidity. Legislation does however add layers of cost for informed investors and consumes precious resources of honest investment managers.

South Africa already has the best-regulated financial market in the world. What more should be done to prevent greedy and careless people to spend their money on schemes they prefer to “invest” in?

The ponzi-scheme will always appear in the community that is susceptible to it. No “registrar” will prevent this. People who don’t read Moneyweb deserve what is coming their way.

The issue is with the licence.
It must be for specific activities only, and there should be penalties and criminal charges for directors and controlling shareholders if the company conducts business for which it is not licenced. They are the ones who call the shots.

This will be the biggest issue with robo-advisers. People tend to forget about data manipulation, hacking, 3rd party terms and conditions. The same way that robo-advisers may eliminate the simple FA crooks, the smarter ones will create robo-advisers for their own means. How do you now regulate and legislate that the robo-adviser would even be selecting accurate information. It is very easy to saturate a data pool with crap data, this happens on many levels and due to many different reasons. I’m not talking about reputable companies who will utilize robo-advisers, they will be held to their own standards and reputation. But one does not need to rent office space and employ staff to create an online business of robo-advisers. There will always be scams, and robo-advisers are not immune to that. We live in a society where shiny and fancy trumps proper due diligence. Think of all the software programs that all claim to be the real deal in stock picks and how they use advanced algorithms to blah blah blah and then you loose your money. Its way more easier to hide your online identify. If history can teach us a surety about humanity is that if it can be corrupted, extorted, and aid fraud then you can bet your life savings it will be done and done well.

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