FAIS Ombud calls for legislation to stop cross border fraud

While an increasing number of African countries are liberalising their markets to encourage honest investment and insurance opportunities, there is need to guard against toxic financial products, scams and pyramid schemes that masquerade as the real McCoy, says the Ombud for Financial Service Providers, Charles Pillai.

Only the setting up of legislative framework within the SADC region that affords the protection of a speedy and enforceable complaints resolution process like the Office of the Ombud for Financial Advisory and Intermediary Services can put the brakes on cross-border fraudulent activities, he said.

Speaking at the Conference on Financial Services Fraud and Money Laundering organised by Business Zone in Pretoria this week, Pillai said scams became effective machinery for money laundering and fraud.

Pillai gave examples of several scams that had cost investors to lose millions of rands.

He said the Masterbond saga involved investments of more than 22 000 investors with total investments of more than R600million. The full protection package offered by the FAIS Act was sparked by the Masterbond scam in which thousands of investors lost many millions of rands and a number of elderly people, who lost virtually everything, committed suicide.

In the years following the Masterbond scam, many other financial scams have been uncovered, including schemes such as Supreme Holdings, FundsTrust and ProPlace.

Mr Pillai cited the case of Global Investments which involved some R90 million of investors monies officially.

“I say officially advisedly. I was chatting to a police officer who was one of the investors and he told me that the real extent of the loss was some R200 million.

“Now why this discrepancy you may ask. Well the answer is simple. ‘Fly by night’ financial schemes or scams route out not only innocent victim’s monies, but also monies that are what we call ‘under the mattress money’.

“Such money is hidden away as a means of tax evasion. What then happens, the money is ‘laundered’ through the machinery of the financial scam.”

Mr Pillai referred to the Fidentia case in which over a billion rands of mostly widows’ and orphans’ pension monies from deceased mineworkers was stolen.

He said the collapse of Leaderguard saw some R385-million of South African investors’ - mostly pensioners’ - monies lost in what can variously be described as a scheme that went wrong or a scam operated by shady so called “forex services providers”.

“Leaderguard Spot Forex had in fact been granted a Category One global business Licence by the Mauritian authorities. Mauritius is a SADC country.

“It is clear that this in fact offered no protection to investors but allowed Leaderguard to use this veneer of compliance as a marketing tool to ensnare investors

“It would appear that the Mauritian authorities had previously picked up on some irregularities.

“Despite the fact that both Mauritius and SA are SADEC countries these irregularities do not appear to have been communicated to the relevant authorities in South Africa.

“The approval of a foreign forex services provider in South Africa was dependant on an appropriate level of investor protection in the resident country. In this respect Leaderguard relied on the Mauritian licensing<’ said Mr Pillai.

He said the lesson from the collapse of Leaderguard is that legislation is of no use without effective monitoring and enforcement. It is also imperative that this enforcement can be carried out across borders.

“We live in a global society and the transfer of funds takes place on a global basis making the proliferation of financial fraud an unfortunate reality.

“Many of these schemes operate out of countries that do not have appropriate or effective enforcement.

“Alternatively they make use of the fact that authorities across jurisdictions do not communicate or alternatively are not able to recognise or effectively enforce decisions or judgements made in other countries

“This is where scamsters see as the gap and take it.”

Pillai said in order to encourage continued investment it is important to set up a legislative framework within the SADC region that affords the protection of a speedy and enforceable complaints resolution process like FAIS.

“Money has no borders and will flow to countries that can offer both a return on investment as well as a stable and well-regulated financial industry,” said Pillai.