Fool's Gold Or Genneva Gold?

It looks like Bank Negara Malaysia is bearing the brunt of the victims’ anger over the raid on Genneva Malaysia Sdn Bhd on 1^st October. This seems rather strange when it was actually a joint operation carried out by the Police, Bank Negara, the Domestic Trade, Cooperatives and Consumerism Ministry and the Companies Commission of Malaysia.

Perhaps it didn't help that the authorities were initially purposefully vague on the reasons for the raids. In its press statement Bank Negara said it was for “suspected offences under the laws administered by the respective enforcement agencies”.

It was only four days later that the central bank offered more details of the suspected offences as illegal deposit taking, money laundering, tax evasion and avoidance, false description (including misrepresentations), appointment of agents without license and failure to lodge statutory documents.

“Relevant assets and documents of the companies seized from the raid will be preserved for the purpose of facilitating the investigations. The relevant enforcement agencies have mobilized the necessary resources to expedite the investigations,” added the statement.

An extensive and detailed analysis is now being made on the assets and liabilities of the companies. This should address customers' concerns that their gold and money held by Genneva Malaysia will be frozen for an unduly long time while the investigations are pending.

However, the perception still persists among customers and consultants that the authorities were wrong to suspect Genneva Malaysia in the first place, and that the raids may have ruined a good business and the healthy returns the customers had been enjoying.

Supporters of Genneva Malaysia praise the company's business model and deny that it's a Ponzi scheme or a get-rich-quick scheme. Some have even gone as far as to say the company deserves recognition for its innovativeness and for its ability to expand abroad.

In the current sociopolitical climate it’s really very difficult to be a regulator. When there's enforcement, complaints of heavy-handedness and unfairness will promptly arise. When things go wrong and the rakyat suffer losses because somebody didn't play by the rules, then its “Why didn't the authorities prevent this?”. Damned if you do and equally damned if you don’t.

A multi-agency strike like this in Malaysia is rare and impressive. It's difficult to miss the point that the Government is putting in a lot of resources in acting on the suspicion that Genneva Malaysia has broken the law.

Shortly after Genneva, Bank Negara and the Ministry of Domestic Trade, Cooperatives and Consumerism also conducted joint raids on three other companies - Pageantry Gold Bhd, Caesar Gold Sdn Bhd and Worldwide Far East Bhd.

The trio are classified as gold investment companies on Bank Negara's Financial Consumer Alert list, which identifies companies and websites that are “neither authorized nor approved under the relevant laws and regulations administered by Bank Negara”.

On its website, Genneva Malaysia describes itself as “the leading gold bullion trader in Malaysia” and claims to have more than 50,000 customers and 6,000 consultants in the country, whereas investigations by Bank Negara show that some 35,000 people were affected, involving RM10bil worth of investments.

The fracas over Genneva Malaysia is strange because the enforcement agencies acted to protect the interest of investors and the public. Yet the regulators and the very people they want to help are the ones attacking them.

Genneva consultants and customers surely should have no problem understanding this. After all, if they're right about the superiority and legitimacy of the company's business model, Genneva will bounce back bigger and better. There will be no charges brought against the company and it will be allowed to resume operations.

It should be able to bounce back with a reluctant endorsement from the authorities. What can be a stronger endorsement than having cleared high-profile investigations by several regulatory agencies?

There has been significant progress since Oct 1. The Attorney-General's Chambers has joined the enforcement action against Genneva Malaysia and the three other companies. This probably means that the Government is already evaluating the possibility of going to court as the next step.

“Based on surveillance and examination conducted on these companies, it has been discovered that these companies are operating schemes that are believed to be not sustainable to provide the promised high monthly returns, nor would they be able to provide the buy-back guarantee of gold,” the agencies said in their joint statement recently.

“Such schemes are not sustainable because the returns promised are not funded through gold trading, but from the monies invested into such schemes. The investigations have also revealed that the amount of assets and monies held by these companies do not commensurate with the amount collected from their investors.

“Prior to the joint raids, it has been noticed that these companies have delayed in returning gold or money to the investors within the stipulated time as promised. Such signs are early warning indications prior to the collapse of such schemes that would result in significant losses to investors.”

The hard facts are that given what the Police, Bank Negara and the Attorney-General's Chambers have said to date, it's hard to imagine Genneva returning to business as usual.

After wrapping up their investigations, the agencies will decide whether there's any wrongdoing and if so, whether there's sufficient evidence to initiate prosecution.

That decision must be made soon. The agencies have twice assured that they are “mobilising the necessary resources to expedite the investigations”. If Genneva and its officers are dragged to court, it's up to them to contest the charges.

The immediate issue now is the consultants and customers' anxiety that they may not get their money back will of course hinge on the conclusion of the Government's enforcement action. Such uncertainty is understandably stressful and painful, particularly for those who have at stake money that they simply can't afford to do without.

There's little solace for these people as long as they have no access to their funds handled by Genneva. The freezing of assets and accounts is an unfortunate but necessary part of such investigations.

Swisscash investment programme

This is a good time to review the Swisscash investment programme, an Internet-based scam that drew civil action by the Securities Commission in 2007. Swisscash-related websites had been flagged by the SC as unauthorized investment websites before the action.

In September 2006, the SC and Bank Negara issued a joint press release to warn Malaysians against investing in the Swisscash programme, which claimed to have invested in equities, commodities and foreign exchange, and offered returns of up to 300% within 15 months of investment.

To stop the defendants from holding out as fund managers and investment advisers without a license, the SC filed a civil suit in June 2007 against three Malaysians and four companies controlled by one of the three individuals.

The regulator also obtained a worldwide injunction to prevent the Swisscash operators from disposing their assets, and to compel them to disclose details of their assets, companies and bank accounts.

In September the following year, the SC obtained judgment against the defendants in the amount of US$83mil and such further amounts as may be traced for payment.

A November 2009 settlement between the SC and two Malaysian defendants paved the way for the compensation of Swisscash investors, using the eligibility and payment criteria and payment ratio approved by the Kuala Lumpur High Court.

These criteria were recommended by the SC and PricewaterhouseCoopers Advisory Services Sdn Bhd, the Administrator appointed by the SC to manage the restitution from a pool of funds amounting to RM32.7mil.

One criterion was whether the investor was actively involved in recruiting others, in which case he was considered as abetting the scheme. “Any investor who was also involved in the scheme as a recruiter or an upliner would not be eligible to claim his money back,” the SC stated on its website.

The Administrator received 22,780 claims from both Malaysian and foreign investors, totaling approximately RM188mil, According to the SC's Annual Report 2010, RM30.53mil was paid to 19,625 eligible claimants. The payout rate was 20 sen to the ringgit. By the end of 2010, the Administrator had effected restitution to 99.1% of the total eligible claims.

Considering the above numbers, the Swisscash case is not exactly a source of comfort and optimism for the Genneva consultants and customers. The SC's actions here show that it's a long, hard road towards getting back money albeit merely 20% of the original sum invested in a too-good-to-be-true scheme.

Swisscash ought to be a cautionary tale about the need to truly be sure about the transparency and regulatory aspects of an investment scheme. Sadly, not many people see it that way even now.

According to the Gold Bullion Entrepreneurs Association of Malaysia, there are no clear guidelines regulating any aspect of gold trading in the country. It said the trade had been unregulated since the 1980s. Therefore customers have limited recourse when such companies go bust as their activities were not regulated.

The Monetary Authority of Singapore (MAS) also does not accord consumers any protection when they deal with such entities,

Bank Negara has always stressed that enforcement agencies would act against illegal financial schemes “to protect the interest of the investors and the public at large”. Of the 87 companies on Bank Negara's consumer alert list, 18 are involved gold investment activities.