Beware of investments that sound too good to be true, says banks registrar

Illegal investment schemes, involving billions of rands, are becoming ever more sophisticated, exposing you to a greater probability of being ripped off, says Errol Kruger, the Registrar of Banks.

In the past five years, R13.7 billion has been invested in schemes that are, in fact, illegal deposit-taking operations that contravene the Banks Act. And it has cost R59.3 million for the registrar to investigate and close down the schemes.

In an interview following the publication of his 2009 annual report on bank supervision, Kruger says schemes that contravene the Banks Act have moved from simplistic pyramid schemes to far more complex structures.

And he says investors keep falling for the schemes because of their own greed.

One of the duties of the Registrar of Banks is to investigate people and institutions suspected of taking deposits from you in contravention of the Banks Act.

It is a criminal offence to take deposits from the public if you are not a licensed bank or have a specific exemption from the requirements of the Banks Act.

Kruger says that illegal deposit-taking normally involves investment schemes that "are generally operated on a fraudulent basis and are harmful not only to the established banking system, but to the economy as a whole".

And the chances of ever seeing your money again are exacerbated by the fact that the funds are often transferred abroad in contravention of exchange controls while also avoiding tax liabilities.

The number of suspected illegal deposit-taking schemes being investigated by the registrar hit a five-year record of 21 complaints in 2009, and a total of 35 schemes have been investigated. Kruger says this is not the total number of possible illegal schemes - it is only those that have been reported to the registrar.

He says in new schemes lawyers and accountants are being used to find ways around laws that are there to protect consumers, and you should not be taken in by assurances from a scheme's accountants or lawyers.

He says an example of a complex scheme was the Careturus/Sun Homes product, which was closed down by the Reserve Bank in 2007 for contravening the Banks Act. Investors were encouraged to put their money in a product which ostensibly had property as an underlying investment, but, in fact, did not.

The biggest warning to you should be any promises or "guaranteed" high returns. Guaranteed returns of 30 percent a year were offered in the Careturus/Sun Homes scheme.

Kruger says newer-model schemes being offered to investors entail the deposit of a large sum of money (R100 000 plus) in a property scheme with promises that you will receive returns of as much as 25 percent a year.

He confirmed that he is currently investigating various property syndication schemes for contravention of the Banks Act.

He warns that regulators cannot protect you in advance.

"The problem with most of these schemes is that the first people investing usually make money, but the following investors are the ones who lose out," he says.

By the time contraventions of the Banks Act come to his attention it is too late.

Health warnings
Kruger says that to protect yourself against scams you should do the following:

Don't rely simply on checking whether an adviser selling you a product is registered with the Financial Services Board as a financial service provider (FSP) or is a representative of an FSP before investing your money. You also need an independent expert such as a lawyer, accountant or your bank manager, or even all three, to check the product or proposal. This is particularly important if the product is not specifically regulated. Unit trust funds and endowment policies, for example, are highly regulated, but property syndications are not.

Don't be rushed into a decision by warnings that any delay in taking action will mean you lose out on the opportunity to invest.

Don't be mesmerised by your own greed. The old adage always applies: "If it sounds too good to be true, it nearly always is too good to be true."

Don't be taken in by glossy brochures.

Avoid complex schemes. The more complex it is, the more likely it is attempting to sidestep protective laws and regulations.

Check whether the people promoting the scheme and the type of scheme have a sound track record. You need to ask for references and do such things as check out the scheme and its promoters on the internet.

Source : B Cameron
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