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FSCA enforcement penalties eye R1 billion

15 July 2024 Gareth Stokes

It has been a bumper year for the enforcement team at the Financial Sector Conduct Authority (FSCA) with almost R1 billion in penalties imposed on 33 persons. In its media release accompanying its 2023-24 Regulatory Actions Report, the authority mentions a long list of enforcement activities including 156 debarments; 104 public warnings; 41 enforceable undertakings; the suspension of 1061 licences; and the withdrawal of 75 licences. PS, this in addition to the aforementioned fines, totalling just over R943 million.

25-years for fraud, financial crimes

The report highlights the FSCA’s enforcement efforts between 1 April 2023 and 31 March 2024 as well as singling out the trends and risks that the authority intends tackling over the coming years. It also shares the number of cases the FSCA has fully investigated and handed over to various law enforcement agencies over the year, including highly publicised cases. Per the FSCA: “One of the notable cases is the prosecution of Craig Warriner who received an effective 25-years sentence for fraud and [conducting] unregistered financial services business”. 

The 38-page report offers additional insights into the almost four-year-old BHI Trust / Warriner saga. For some case history, the FSCA reminds readers that it initiated an investigation into “potential contraventions of financial sector laws” back in September 2020. Shortly thereafter, Warriner handed himself over to the South African Police Services (SAPS) on allegations of operating a fraudulent investment scheme. “The FSCA’s investigation showed that Warriner, through the BHI trust, offered three fictitious ‘investment strategies’ to his clients, namely; the BHI Strategy, BHI Plus and the BHI International Strategy,” the FSCA writes in the report. 

It has since emerged that the bulk of investors’ funds were held in money market accounts from which they were used to pay returns to other investors in a Ponzi scheme arrangement and / or to fund Warriner’s lifestyle. An FSCA financial analysis for the period September 2020 to November 2023 showed that of the approximately R2.9 billion received from clients, only around R584 million was invested in a legitimate investment vehicle through a securities trading account held at a brokerage of a JSE authorised user. 

Around and approximately are a trifle vague

As an aside, this writer finds the use of words like ‘around’ and ‘approximately’ when reporting on financial frauds to be quite perplexing. Surely in this day and age the sums of investors’ capital paid into a fraudster’s bank accounts, and any refunds paid back to them, can be easily determined. The writer is also confused by investors who get caught up in these type of Ponzi scams claiming to have lost their capital plus returns whenever the Ponzi goes belly up. The maximum individual exposure to such scam should be the investment amount sans any subsequent returns, claimed or real; hopefully this statement triggers some debate. 

The FSCA’s investigation flagged clear violations of the financial services regulatory landscape starting with Warriner’s failure to obtain the required Category II financial services licence for discretionary investments services. This constituted a contravention of section 7(1) of the Financial Intermediary and Advisory Services (FAIS) Act. Another glaring issues was that Warriner did not meet the criteria for this licence category and would have been denied a licence even had he applied. 

Warriner was sentenced to 10-years direct imprisonment for conducting unregistered financial services businesses in contravention this section of the FAIS Act, which sentence did not run concurrently with the sentence for fraud. “As a result of the cooperation and collaboration between the National Prosecuting Authority (NPA), FSCA and SAPS, Warriner was found guilty of 207 counts of fraud and sentenced to 537 years of imprisonment; but the Court ordered that these sentences run concurrently, resulting in an effective 15-year imprisonment,” writes the FSCA. Time in jail amounted to 25 years: 15-years for fraud and 10-years for conducting unregistered financial services business. PS, the sentence for fraud versus FAIS Act transgressions was another eye-opener. 

Slicing and dicing the penalties pie

It was interesting to slice and dice the R943 million in enforcement penalties reported for the year; after all, this total dwarfed the R100 million in administrative penalties issued in 2022-23. The bulk of the penalties originated from contraventions of the Financial Markets Act (R475 million) and Banks Act, R432 million. Contraventions of the Financial Intelligence Sector Act (FICA) came in third, at just short of R20 million. The FSCA has, however, acknowledged that some of the penalties, including one of R216 million under the Banks Act category, were under review by the Financial Sector Tribunal (FST). 

It turns out the entire R475 million fine under the Financial Markets Act (FMA) category related to a penalty in the Steinhoff / Markus Jooste matter, imposed early 2024. According to the FSCA, Jooste and Dirk Schreiber contravened section 81(1)(a) and (b) of the FMA by publishing misleading annual financial statements and integrated reports. Between 2014 and 2017, the integrated reports contained significant overreporting of operating profits; the balance of cash equivalents; and the goodwill in Steinhoff UK. “The announcement of accounting irregularities and Jooste’s resignation led to a 61.42% decrease in the Steinhoff share price on 6 December 2017, highlighting the market’s reliance on accurate financial reporting”. 

FSCA versus section 14 debarments

One need only mention debarments to send FAnews readers into a spin. This touchy topic was laid out in section 12 of the 2023-24 Regulatory Actions Report. For some context, the FSCA “has the authority to debar individuals if they have materially contravened a financial sector law, an enforceable undertaking or a corresponding foreign law”. To complete today’s compliance lesson, such debarment “prohibits the individual, for a specified period, from providing, or being involved in the provision of, specified financial products or financial services, generally or in circumstances specified in the order; acting as a key person of a financial institution; or providing specified services to a financial institution, whether under outsourcing arrangements or otherwise”. 

The interesting fact there is that just 156 of the debarments in the latest period were initiated by the FSCA, mostly due to dishonest conduct, versus 1 312 debarments initiated by financial services providers (FSPs) under section 14(1) of the FAIS Act. Section 14 debarments prevent affected individuals from providing any financial services as a representative of any FSP, not just the one initiating the debarment. Around 95% of these individuals were debarred for dishonest conduct. The remaining 37 were debarred for non-compliance with competency requirements. 

Future focuses and explainers

The latest report identified copy trading and signals; guarantee policies being issued by unregistered entities; deepfake scams; impersonations of FSPs; and exploitation via social media platforms as trends to be aware of in coming years. Pay attention dear reader, and keep your clients informed of the myriad pitfalls they face while conducting their financial affairs. For the uninformed, copy trading involves individuals offering to assist clients with trading on internet-based platforms where high-risk derivative products are traded, often with disastrous financial outcomes. 

Three of the aforementioned challenges can be addressed under a single sub-heading namely ‘the increase in online harm’. Per the FSCA report, “the increasing globalisation, interconnectedness and technological advancements have provided fraudsters with more sophisticated tools and larger platforms [from which] to exploit financial customers”. So-called deepfake scams see fraudsters use artificial intelligence (AI) and other technologies to create fabricated, high-quality videos, images, audio or text content that imitate public figures and successful businesspeople to promote scams. Similar tech can be used to impersonate legitimate FSPs and / or regulators in attempts to solicit funds from unsuspecting consumers.

Intermediaries in both the financial and risk advice disciplines would do well to warn their clients to check and double-check the authenticity of finance-related communications, especially when such requests are for the remittance of funds. Care should also be taken on social media platforms which provide financial criminals with easy access to an individual’s information. The simple message: be careful what information you share on public platforms – yes, even those community WhatsApp groups you love so much – and if you happen to stumble into any public forum that is trumpeting about outlandish financial returns, run. 

More ways to keep you and your clients safe

There are few excuses for rushing headlong into a financial scam nowadays. And the FSCA deserves praise for its efforts to assist financial consumers in interrogating the financial services providers they are thinking about doing business with. One of the disciplines you should put in place before parting with money for savings or investments is to check if the entity or person is suitably authorised by the authority by telephone, on the FSCA toll-free number (0800-110-443). You can also conduct online searches for authorised financial institutions by license category and /or for financial services providers that are authorised in terms of the FAIS Act

Writer’s Thoughts:

The FSCA has a small chance of collecting its R475 million Steinhoff penalty; but investors in the Warriner scam can probably forget about seeing their R2.9 billion, ever. Are you as amazed as this writer by how easily consumers part with their hard-earned cash? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.

 

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