The Madoff Ponzi scheme: how can investors be protected?
If you thought that 2009 was the last time Bernie Madoff made the headlines, you were wrong. The mastermind of the world’s largest Ponzi scheme reminded us of the fragility of the financial world when his death was announced last month. The former investment banker was serving a 150-year sentence in jail for siphoning more than 40,000 people across 125 countries of their money. Being a giant in the sector and someone of repute did not stop him from turning into a fraudster, which teaches us some important lesson. A Ponzi scheme running for four decades This whole operation was a very high-scale one. It involved top celebrities like Steven Spielberg, Kevin Bacon, Sandy Koufax, Fred Wilpon and Elie Wiesel. How did it work and succeed? Bernie Madoff, the founder of Madoff Investment Securities LLC, had already built the reputation of being a wizard of the Wall Street. He boasted of credibility, financial influence, power and an offer of exclusivity. So investors did not really suspect anything about him or his scheme. How does a Ponzi scheme work? The operation mode is quite simple. Old investors’ money is siphoned off and new investors’ money is used to offer them their gains/dividends. This is exactly what Madoff did. He had not conducted a single trade for his clients for years. Millions and billions were invested by investors in a portfolio that did not even exist. During the whole process, he defrauded them of an estimated $17 billion. The Great recession sours things However, things started going wrong in 2008 when the US Capital market crashed. During the Great recession, thousands of investors were afraid of the potential collapse of the American economy and they decided to withdraw their money from the scheme. However, having siphoned off the money, Madoff did not have the funds needed to meet these demands. After that, Madoff decided to confess everything to his children, Andrew and Mark Madoff. Both of them work at the same company. However, it is believed that they are not involved in the Ponzi scheme. They alerted the authorities about the fraud and an arrest followed. Bernie Madoff confessed to the crimes and he was given a sentence of 150 years in jail. Then the news of his death hit the headline recently… A trail of despair and loss While Madoff was serving a sentence of 150 years, is this justice enough for what he did? He left behind a trail of despair and loss for his family, friends and even Palm Beach. Thousands of people’s savings and retirement plans were destroyed and a lot of his clients had to come out of retirement, return to work and even move in with friends and families, when they should have been spending the rest of their lives leisurely. In December 2010, on the second’s anniversary of his father’s arrest, Mark Madoff killed himself. Mr. Shapiro, who is one of Madoff’s first investors and friend for a long time is presumed to have lost millions because of this scheme. Nonetheless, he and his family agreed to pay $550 million to resolve claims and an additional $75 million was settled to the Department of Justice for civil forfeiture claim. Besides individuals, Palm Beach as a whole was affected by this scandal. Already, 2008 was a year of financial turmoil and Palm Beach felt the impact because it became ground zero for the scandal. Many of its islanders, such as Mr. Shapiro and Jeffry Picower, were victims of this. The actions of Bernie Madoff and the collapse of Lehman Brothers, which also took place in 2008, left a trail of financial ruin in Palm Beach. The island was propelled into the recession that was dominating the US. How can investors be protected? If this scandal has taught us one thing, it is that you cannot blindly trust an investor or a firm when it comes to money. Even the reputable Bernie Madoff was tempted. This raises the question: how can investors protect themselves? There are several measures that can be taken to ensure that your money is in safe hands. Background checks First of all, it is very important to conduct background checks. The person that you are dealing with must be licensed or registered with a firm. This means that they have the minimum credentials required to work in the industry. Another good idea is to conduct a little search on the advisor or broker’s name to see if any news about past indiscretions or lawsuits appear. If there are any issue or complaints, you will learn about these in regulatory databases. These will feature disclosures, complaints or arbitrations and it is not recommended to work with these individuals. Nonetheless, as the case of Bernie Madoff has proven, even the most reputable individual can turn rogue. That is why it is advised to conduct business in a jurisdiction where investors are protected. For instance, in Mauritius, there are laws and regulations that protect investors who are victim of fraud. As such, selecting the right financial firm to work with is crucial. Communication Whenever you are dealing with someone, you must review statement accounts regularly and, of course, ask your financial advisor f you notice something funny going on. If you do not have a satisfactory response within an appropriate time frame, then you must be on your guards. Another red flag is in the investment banker’s response itself. If while seeking answers, you cannot understand what is being said and the explanations that are being given to you are confusing you more than clarifying, then this is a bad sign. Someone very persuasive can talk you into investing into something that is not legit. That is why you should not act on a rush, think well and conduct all the necessary checks. If you have questions or you need a piece of advice, do not hesitate to get in touch with our customer support team which consists of trained and responsive agents.
The Financial Services Commission releases The Settlement Framework
The Financial Services Commission (“FSC”) has through a Communique on 11 December 2020 published its “Settlement Framework”. The Settlement Framework sets out a means through which timely and proportionate enforcement outcomes can be achieved in appropriate cases. This Framework delivers on a key commitment of the FSC to adopt “Settlement” as part of its enforcement process. Kindly refer to the communique and the guidance notes: https://www.fscmauritius.org/media/94244/communiqu%C3%A9-settlement-framework.pdf https://www.fscmauritius.org/media/94240/settlement-framework.pdf
PROLIFERATION FINANCING (PF) RISK ASSESSMENT
At its last virtual plenary meeting in October 2020, the Financial Action Task Force (FATF) adopted amendments to Recommendation 1 which now require countries and the private sector (financial institutions and DNFBPs) to identify, and assess the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing and to take action to mitigate these risks. This document provides an overview of these amendments to Recommendation 1 of the FATF and suggestion on conducting a PF Risk Assessment.
Highlights on guidelines on fitness and propriety issued by the FSC
The Financial Services Commission (FSC) has issued on 2 October 2020, pursuant to its powers under Section 7(1)(a) of the Financial Services Act 2007 (FSA), its revised “Guidelines on Fitness and Propriety” (Guidelines) in line with the FSC objective to ensure the sound conduct of business in the financial services and global business sectors. The FSC issued a “Circular Letter CL021020 – Guidelines on Fitness and Propriety” on 2 October 2020 which becomes effective as from 01 November 2020. These revised guidelines supersede the Guide on Fitness and Propriety previously issued by the FSC on 9 June 2020. The revised guidelines can be accessed at: https://www.fscmauritius.org/media/85113/guide-to-fitness-propriety-with-pq.pdf Scope The aim of the Guidelines is to clarify the criteria to be taken into account by the FSC to assess the fitness and propriety of an applicant/licensee, including any person authorised, registered or approved under a relevant Act. These Guidelines are not exhaustive, and each case shall be considered on the basis of its own merits. The effective date of the Guidelines is 1 November 2020. Salient features Revision of policies, procedures and controls – Regulated entities are required to reflect the elements of these Guidelines in their internal policies, procedures and controls and apply them in their assessment of persons who manage, control, direct, own or perform key functions in a regulated entity. Scope of application – The scope of application of the guidelines have been widened and extended to additional parties: Any incumbent officer such as the Money Laundering Reporting Officer, the Deputy Money Laundering Reporting Officer and the Compliance Officer; Any representative or agents of the applicant/licensee; Trustees and management committees of occupational pension plans; External and outsourced auditors of regulated entities; The principal representative of a foreign financial institution that is conducting insurance business or business of a financial nature; An insurance agent, broker and sales representative and any such person as may be determined by the FSC. The Fit and Proper Test – Pursuant to the section 20 of the FSA, the FSC considers several factors to assess whether a person is fit and proper. A fit and proper test is initially carried out when an applicant submits an application for a licence or requests any other authorisation from the FSC. This test is then carried out, on an ongoing basis. It has been mentioned in the revised guidelines that a consolidated approach, rather than meeting specific tests, is used in assessing whether a person is fit & proper. The Purpose of Fit and Proper Test – The purpose of the fit and proper test has been extended to include: “to ensure that persons, who are not “fit and proper” to perform functions in relation to a regulated activity, are precluded from doing so, in the public interest”. Responsibilities of the applicant/licensee and the relevant persons subject to the fit and proper test – It is important to note that the onus is on the applicant/licensee and each relevant person to establish that the latter is a “fit and proper” person, as different appointment(s) and designation(s) entail different responsibilities. Furthermore, the applicant/licensee and the relevant person(s) must accordingly, complete the Fit and Proper Person Questionnaire (PQ) and must provide, depending on the nature of the license, authorisation, registration or approval sought, any information that the FSC may require to complete its assessment. Where a PQ has already been filed, the applicant shall indicate in this application that the PQ has been filed and inform the Commission of any material change. Providing false and misleading information to the FSC will lead to criminal prosecutions under the FSA as mentioned in the revised Guidelines. Assessing fitness and propriety – The FSC reserves its regulatory powers to gather any information from any appropriate source on the overall reputation of a person, regardless of whether such information results from the above criteria and factor in its assessment of the person’s “fitness and propriety Fit and Proper Person Questionnaire (PQ) The revised PQ is more comprehensive than the previous version. The declaration part in the PQ has been further amended thereby giving FSC the authorisation to make such enquiries and seek such further information as the FSC thinks appropriate in verifying the information given in the PQ. To also note that, any material changes affecting the completeness of the PQ will have to be notified to the FSC within a 30-day timeline. False and misleading statements to the commission Under the FSA, any person who, in connection with an application for a licence including a Global Business Licence, an authorisation under section 71A or any information submitted in respect of a valid licence (a) make or procure the making of a statement to the FSC which he knows or ought reasonably to know is false or misleading; (b) omit to state any matter to the FSC where he knows or ought reasonably to know that, because of the omission, he is misleading the FSC in a material respect, shall commit an offence and shall on conviction be liable to a fine not exceeding 500,000 rupees and to imprisonment for a term not exceeding 5 years.
The FATF Recommendations
The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats. Please refer to link below for further information: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html
Registration of Reporting Persons pursuant to Section 14C of the Financial Intelligence and Anti Money Laundering Act (FIAMLA)
The Financial Intelligence Unit (“FIU”) has issued a notice on 16 October 2020 on “Registration of Reporting Persons pursuant to Section 14C of the Financial Intelligence and Anti Money Laundering Act (FIAMLA)”. The FIU is in the process of registering reporting persons and a timeframe has been set therein. Kindly note that the notice can also be accessed on the following link: http://www.fiumauritius.org/English/Documents/2020/Section%2014C%20Notice.pdf
Why choose Mauritius for alternative investment funds?
It might surprise many that Mauritius is not just the perfect holiday destination; instead, it is very well known for being a leading international finance centre. The island is the getaway for US$600 billion of annual investment into Africa and 40% of those leverage its comprehensive list of tax treaties. This demonstrates that…
The government’s effort to improving the business environment in Mauritius
Throughout the past year, the government of Mauritius has implemented several regulations and new laws to attract investors to Mauritius. Several of them are dedicated to improving the business environment in the country. As such, it is going to be easier to establish and operate a business. Some of…
