SADEC must block cross boreder financial fraud - OMBUD

There is urgent need to integrate legislation for financial services within Southern African countries to curb the proliferation of cross-border financial fraud, says Charles Pillai, the Ombud for Financial Services Providers.

Addressing a conference on cross border trade at Midrand today (Monday 27 November) organised by the Law Society of SAs Legal Education and Development division, Pillai stressed that the harmonising of legislation across SADEC countries must be accompanied by effective enforcement.

He said many fraudulent financial schemes operated out of countries that do not have appropriate or effective enforcement.

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

"This is where the crooks see as the gap and take it," said Pillai whose office is charged with the investigation and adjudication of complaints in terms of the Financial Advisory and Intermediary Services Act.

He said arising from the lack of adequate governance, South Africa has seen some major financial scandals which have sent shockwaves through the JSE Securities and turned innocent investors lives upside down.

"The Masterbond saga involved investments of more than 22000 investors with total investments of more than R600-million.  
 
"Established in 1984, the directors of Masterbond pretended that it was registered with the Reserve Bank. Thousands of investors lost many millions of rands and a number of elderly people, who lost virtually everything, committed suicide. 
 
"The extent of the scam led to the appointment of the Nel commission of inquiry which recommended that tough legislation be introduced to protect consumers against both malicious and ignorant miss-selling of financial products."

Pillai told the conference that in the years following the Masterbond scam, many other financial scams have been uncovered, including schemes such as Supreme Holdings, FundsTrust and ProPlace.

Only recently, the PSC Guaranteed Growth Fund, which exploded in financial guru Jack Milne's face, cost investors in the region of R150 million.

"The extent of the fraud - part of a much larger scheme related to Tigon Limited and its various subsidiaries - is evidenced by the charge sheet which contains over 3000 charges.

"In the last quarter of 2004 and into 2005, we saw the spectacular collapse of Leaderguard.

"Some R385-million of South African investors - mostly pensioner's monies - was lost in what can variously be described as a scheme that went wrong or a scam operated by shady so-called 'forex services providers'.

"It must be appreciated that we are now pronouncing on these and the role played by brokers who naively marketed their products without complying with the FAIS Act. This is current stuff, happening right in front of us whilst the FAIS Act is in place.

'The precursor to the Leaderguard Scheme was Prozet Invetments (Pty) Ltd and in this respect some of the same individuals that were involved in Prozet were instrumental in the formation of Leaderguard.

"Prozet had links to a company in Greece and the principal trading arm of Leaderguard operated out of Mauritius.

"Leaderguard Spot Forex had in fact been granted a Category One global business Licence by the Mauritian authorities.  Mauritius is a SADEC 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 South Africa are SADEC countries, these irregularities do not appear to have been communicated to the relevant authorities in South Africa," said Pillai.

He said 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.

"Regulation 15 of the Regulations to the Financial Advisory and Intermediary Services Act requires that in order for the Registrar to grant approval to a Foreign Forex Services Provider the Registrar must be satisfied that the regulatory framework of the country in which the clearing firm or provider is located must, to the satisfaction of the Registrar, be substantively of the same nature and standing as that of the Republic.

"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."

Pillai said global interest in investing in Africa was expanding at an exponential rate. Whilst legitimate operations expand, fraudsters also proliferate.

"In order to encourage continued investment it is important to set up a legislative framework within the SADEC region that affords the protection of a speedy and enforceable complaints resolution process like the FAIS Ombud's Office."