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Despite warnings, thousands still fall prey to Ponzi schemes

Despite the frequent exposure of high-profile scams, people persist in investing in dubious ventures offering unrealistic returns.

Reserve Bank spokesman Hlengani Mathebula said yesterday that thousands of South Africans lost money to illegal deposit-taking arrangements every year. And the bank had launched a national awareness campaign to alert potential victims to risks under the slogan: “beware of oMashayana!” – con artists.

280612 Reserve Bank Spokesperson Hlengani Mathebula speaking at the media briefing held at the offices in Johannesburg.photo by Simphiwe Mbokazi 6. Credit: inlsa

Mathebula said 15 illegal schemes were investigated last year. And 222 were investigated between 2007 and last year. Prime targets of the fraudsters were pensioners and recipients of various benefits. But it was not just the ignorant who were taken in; so too were wealthy and sophisticated investors.

Mathebula did not name them, but according to reports at the time, victims of the alleged R12.5 billion Ponzi-style fraud by Barry Tannenbaum exposed in 2009 included former Pick n Pay chief executive Sean Summers, the former head of OK Bazaars Mervyn Serebro, ex-Bond Exchange of SA chief executive Tom Lawless and former JSE chairman Norman Lowenthal.

Tannenbaum was said to have lured investors with the promise of 200 percent annual returns linked to pharmaceutical imports. And he was accused of forging HIV/Aids drug orders to give reassurance when money started to dry up.

Tannenbaum, who has left South Africa for Australia, denies the accusations.

The annual banking supervision report, released recently, outlined “some of the more prominent inspections” carried out last year. They included investigations into Realcore Holdings, Sharemax Investments and Ingede Mineral Holdings.

Mathebula said tax evasion by the operators of – and some of the investors in – illegal deposit-taking schemes was common and the central bank often co-operated with the SA Revenue Service and other agencies to investigate them.

There is a distinction between pyramid schemes and Ponzi schemes. The former ask victims to pay a joining fee, buy a product and sell it or to recruit more investors. Ponzi schemes only require a person to invest in something.

Mathebula said: “In recent cases it has been found that such schemes, often fraudulently, justify the exorbitant returns by stating that funds taken in from the public are to be invested in lucrative property developments, or by providing so-called bridging finance at a higher rate than the promised return, or by means of some sort of foreign exchange transaction yielding income in excess of the promised return. Some schemes have been found to provide ‘venture capital’ to other, legitimate companies or to legitimate microlending institutions.”

In some cases, funds were moved offshore in contravention of exchange control laws.

Schemes had become more complex and “not easily detectable at first glance”, Mathebula said. They were often structured as share or debenture units, where the equity portion was, for example, 1 percent and the loan portion 99 percent. Such schemes that had been investigated had all failed and had been found to be well-disguised pyramid schemes, where investors lost all or most of their investments.

Both Ponzis and pyramids essentially pay returns out of money from new investors in the scheme. For this reason the schemes are unsustainable: the larger they grow the more new investors are needed to keep the funds rolling over.

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