The bad guys get smarter
FINANCIAL SERVICES LICENCE: WHEN REGISTERED ENTITIES GO ROGUE
The Ponzi industry is getting smarter, registering with authorities for one level of activity and then rolling out pyramid schemes with activities they’re not authorised to deliver.
For years the Financial Services Board (FSB) has been warning the public not to buy financial products from any entity that is not a licensed financial services provider (FSP). To the regulator’s credit, this campaign has been quite successful.
It has been so successful, in fact, that people with apparently nefarious motives are trying to turn it to their advantage. This is evidenced by the case of the alleged Ponzi scheme, Profit Trading.
'Forex robot'
The company, which supposedly developed a “forex robot” that trades the currency markets on behalf of investors, secured an FSP licence, under the name DMD Capital, before it started operating. As FSB deputy executive officer Caroline da Silva explains, it satisfied all conditions for obtaining a licence.
“The licence application of Profit Trading was received on February 18, 2014, and approved on 10 June 2014,” she notes. “In this four-month period the application and business model was interrogated and various engagements were held with Profit Trading and its compliance officer regarding the requirements, until all the necessary information required to satisfy the Registrar (that Profit Trading complied with the requirements to be issued with a licence to conduct business as a financial services provider) was received.”
This included ensuring that it was financially sound, that the activities in its business plan fell within the Financial Advisory and Intermediary Services (FAIS) Act, and its key individual was fit and proper.
However, it appears that Profit Trading never had any intention to conduct the business for which it was licensed. It was given a category 1 licence for giving advice and rendering intermediary services in derivatives, but instead began marketing itself as a forex trading company offering its “forex robot” software, which the FSB believes was a Ponzi scheme.
“We have seen a practice develop recently, because of our campaign warning customers to check for FSP licences, that persons apply for licences for a simple product then use that licence to give credibility to other practices,” Da Silva says. “Part of our frustration with this case was that the company was using an FSP licence to legitimise an illegitimate business.”
The company’s founder, Myles Ndlovu, emphasised that Profit Trading was a registered FSP during television interviews.
The regulator now says the public should not only check whether the entity is licensed, but also what it is licensed to do. In addition, the FSB is amending the General Code of Conduct to make it an offence to use an FSP licence to market any activity other than which is covered by the licence.
A second area of concern is what appears to be the “renting” of key individuals, not dissimilar to BEE fronting.
Key individual
Profit Trading said its key individual was Herman Bezuidenhout.
He resigned in December 2015, when the FSB’s investigation was starting
Ndlovu eventually conceded he was running the business himself.
“We need to amend the law to tighten up on this issue,” Da Silva says.