21 November 2012

Namibia: BoN Declares War On Pyramid Schemes

The Bank of Namibia (BoN) has given three pyramid schemes operating in Namibia 14 days to return money solicited from the public or face the full wrath of the law.

BoN yesterday confirmed the businesses as GoldPrimeTime cc, Penta Steam Investments (under the concept of Penta Gold and their prior joint venture under Pincode) and U-Care Namibia. "These are criminal activities and the Namibian Police will conduct their own investigations to determine if any parties should be prosecuted," said the BoN Governor, Ipumbu Shiimi.

The central bank advised members of the public who have joined these pyramid schemes to discontinue their membership with immediate effect, and those who intend joining these schemes should refrain from doing so, failure of which may lead to prosecution in terms of the law.

In addition, BoN asked any member of the public who has lost money to any of these entities to present documentary proof of such payment.

"This will enable the bank to assess the progress of repayment of the money obtained from the public in contravention of section 55A of the Banking Institutions Act. Such documentation should contain sufficient details, including but not limited to the amount paid, to whom, and how such money was paid, as well as details of who introduced the individual to the business," explained Shiimi.

According to the BoN governor, these business entities are in contravention of the Banking Institutions Act (Act No. 2 of 1998), as amended.

Pyramid schemes typically operate by charging membership fees and offering monetary rewards for recruiting new members.

Speaking specifically about GoldPrimeTime, Governor Shiimi said: "In essence, no tangible products or services are offered to prospective members to join. This means that the joining fees are not paid in exchange for education in gold investment, but this is used to lend legitimacy to the business. It is also clear that the real attraction of participants to the business is not investment education, but the need to make money by introducing other participants whose money is used to reward the (existing) participants."

When asked if locally operating company, Amway, is considered a pyramid scheme, Governor Shiimi responded with an emphatic "no", adding that Amway has genuine and tangible products to sell. "Illegal schemes such as these are prohibited by law, which gives the power to the Bank of Namibia to protect the public from losing money through such schemes. The Banking Institution's Act gives power to the Bank of Namibia to protect the public's money and by doing so maintain public confidence in the financial system.

This is because when people lose confidence in the financial system, it can spell economic disaster for the country's economy and the wellbeing of its citizens."

Shiimi cited the example of Albania in Eastern Europe where pyramid schemes started emerging in the mid-1990's after that country's transition from a state-controlled economy to a liberalised economy. Pyramid schemes, also known as Ponzi schemes, then dominated Albania's financial sector and lured two-thirds of that country's population to participate by creating the illusion of financial success.

Many Albanians sold their homes and used their life savings to invest in these schemes.

In 1997 the number of so-called investors into these schemes grew so rapidly that it was impossible to find new participants and the funds started to dry up. The schemes ceased making payments and started to collapse. Consequently, these events led to chaos as people started rioting and demanding their money from the Albanian government.

About 2 000 people were killed in violence resulting from the riots and large parts of the country were no longer under government control. As a result that government's revenue shrunk as customs, post and tax offices were burned down and Albania's currency depreciated against the US dollar by 40 percent, while prices increased by 28 percent in the first half of 1997.

Many Albanian industries temporarily ceased production and trade was severely interrupted.

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