The brevity of the few standard paragraphs the Financial Sector Conduct Authority (FSCA) issued a few days ago to warn the public against doing business with Karatbars International belies its importance.
In fact, the warning can apply to all the agents and representatives currently marketing Karatbars products – if the products are marketed to the public as investments.
Neither Karatbars International GmbH or a local office of the company, nor any of its representatives, are registered to sell financial products in SA or offer members of the public financial advice. Any agent or representative that sells Karatbars as investments will need to register with the FSCA and adhere to all the requirements of the relevant legislation.
Brandon Topham, divisional executive for investigation and enforcement at the FSCA, says Karatbars and its agents are prohibited from selling or promoting investments which fall within the definition of a financial product. “Questions exist as to whether or not this is the case,” he says. “We await further information from the company.”
Topham adds that the FSCA did not receive any additional information from Karatbars as claimed by its legal representatives in media reports following the publication of the warning by the financial services watchdog.
“We are not able to conclude at this stage whether the company is selling or advising on investments which qualify as financial products or providing financial services as defined by our financial sector laws. If it is, it would be in contravention of the Financial Advisory and Intermediary Services [Fais] Act and the Financial Sector Regulation [FSR] Act.
“We can only advise the public that Karatbars is not a registered financial service provider and cannot sell or advise on investments,” says Topham.
However, the fact that the FSCA issued a warning mentioning Karatbars by name indicates that it is worried about the organisation.
“We are extremely concerned by the number of people who apparently are acquiring some form of investment as this organisation is not domiciled or registered in any form in SA or with the FSCA as the relevant authority,” says Topham.
“This is a red flag that people’s money may be at risk.”
And it is not the only red flag. Another, bigger red flag is that Karatbars shows all the features of a pyramid scheme.
The Namibian central bank, Bank of Namibia, investigated Karatbars and came to the conclusion that it is nothing more than a pyramid scheme that preys on vulnerable people. “Members’ income is based on the successful recruitment of new participants to purchase new gold embedded cards for which money is accepted as a regular feature of joining the business,” reads part of the bank’s statement issued in May 2019 when it banned Karatbars. “The fees paid for the small gold embedded card is used to render legitimacy to the business practice.”
It further said that the business practice is questionable in that commissions are paid on the recruitment of new members rather than on the sale of products.
Update: Karatbars has been investigated by financial authorities in several countries around the world, including its home country, and received stern rebukes from most. The Netherlands banned Karatbars’ activities totally, with Canada’s financial authorities warning against the organisation in 2014 after concluding that its affiliate and referral program operates like a pyramid scheme.
At that stage the business has attracted 5 300 affiliates in Canada. The authorities found their primary aim was to recruit more members by offering staggering returns of up to more than 2 000% over 12 months.
The authorities found their primary aim was to recruit more members by offering staggering returns of up to 2 000% over 12 months.
It also had doubts over Karatbars’ claims that it used an international security company to store gold on behalf on investors, while the government of Madagascar rubbished its claims that it owns the largest gold mine in Madagascar.
In the Netherlands, financial authorities warned people against investing in a Karatbars gold investment product that also promised investors in gold bars that Karatbars would store their gold safely.
The gold ’embedded’ in plastic cards
Investors are not better off when they opt to buy small quantities of gold from Karatbars and get it embedded in a plastic card similar to a credit card either.
The price Karatbars sells these gold cards for was another factor that the FSCA highlighted when Moneyweb asked for further information about its stance on Karatbars. Topham says that agents profess to sell gold (which is not a financial product and is thus outside of the authority of the FSCA), but that the selling price “is substantially higher” than what one would normally pay.
“We are informed that this is as a result of the multi-level marketing methodology applied by the company from Germany,” says Topham.
The Karatbars website offers its classic card containing one gram of gold at €67, equal to R992 at the current exchange rate of R14.82 per dollar. The international gold price is currently around R701 per gram.
‘Investors’ are thus paying a premium of nearly 42% for their gold, which lends credibility to suspicions that the role of the gold cards is merely to dress up the pyramid scheme as a multi-level marketing network in order to legitimise it.
Karatbars offers several products, which its founder Harald Seiz says is aimed at helping millions to find financial freedom from the current system of debt. He is highly critical of the world financial system, central banks and fiat money (although he accepts euro when selling gold).
As such, Karatbars produces its own currency, CashGold, with bank notes that contain small amounts of gold in denominations of 0.1 gram to 1 gram.
The notes do not have a face value, but the value is linked to the gold price. Or not, depending on which section of the website one reads.
Karatbars says the value of the CashGold notes is not directly linked to the gold price and promises to update the value of CashGold notes several times a day on its website. The update was not found when looking for it a few days this week.
Karatbars hails its cryptocurrency, KaratGold Coin, as the first and only cryptocurrency that is backed by physical gold. Its website and all marketing material put out by Karatbars promotes gold as the ultimate store of value, usually followed by a long list of political and economic risks that will make fiat money worthless.
However, its cryptocurrency is close to worthless despite the promises that it is backed by gold. It is trading at around $0.01835 on different electronic exchanges, equal to R0.273. Information on the Karatbars website is sketchy but it seems that 10 000 coins were backed by 0.1 grams of gold at the time of its initial coin offering.
Gold vs crypto – investors ‘no longer have to ponder’
The gold supposedly backing the currency is worth less than one cent per crypto, making a mockery of Karatbars’ claims that “when you choose KaratGold Coin, you invest in gold as well as in a cryptocurrency and no longer have to ponder which investment suits you best”.
A goal was set to grow the value of the coins to 0.1 grams each by using 20% of the profits from Karatbars’ payment platform (KaratPay) and from worldwide sales of gold to buy more gold to back up the currency. “The price increase is assured, as can be seen in the value stability of gold and increasing crypto rate,” according to the Karatbars website.
A video promoting Karatbars makes for interesting watching, with the company apparently admitting that there are risks that authorities will close down its operations.
Its solution to being banned in certain countries is to establish operations in as many jurisdictions as possible.
Karatbars also launched its own encrypted cellular phone to aid members in conducting conversations safely and to leave no trace of financial transactions, which begs the question: Why is this necessary if everything is legal and above board?
The FSCA says that action will be taken if Karatbars and its agents keep on selling investment products in SA, whether through public meetings, the internet or social media platforms.
Meanwhile, other regulatory bodies that enforce other laws might also have grounds to investigate Karatbars further, especially to determine whether or not it is a pyramid scheme.