Vigilant regulator needed to fight white-collar crime


Vigilant regulator needed to fight white-collar crime

We shouldn't rely only on the Reserve Bank to shut down pyramid schemes, property frauds and the like

Stuart Theobald

If you’re a fraudster looking to dispossess people of their money, it makes sense for you to carefully sidestep any legal form that puts you under the purview of an effective regulator.
For instance, you would want to avoid anything that would make you subject to an investigation by the SA Reserve Bank or the Financial Sector Conduct Authority. Both have legal powers to obtain documents and deliver punitive fines. The SA Revenue Service too, at least in its better days, is best avoided by paying the right tax. Certain other specialist regulators, such as those for medical aid schemes or communications, can come down hard on those transgressing the rules for those narrow areas of activity.
But that leaves a large space for you to operate with less vigilant oversight. A space in which the only barrier is the law and therefore the police and prosecutions service. Except, that is, for the Companies and Intellectual Property Commission (CIPC), as it is now demonstrating in the case of Steinhoff.Companies can issue shares and debentures, and other forms of financial instrument. While taking deposits from the public would violate the Banks Act and therefore get you in trouble with the Reserve Bank, if you reframe those deposits as debentures, you have less to fear. It is also illegal to take investments from the public and manage them without being registered with the FSCA, but you can do so using shares in a company. You are also much freer in what you can say to potential investors and what you can do with their money.
Sure, fraud is illegal. And the Companies Act outlines various rules and regulations for issuing securities, including the requirement to register a prospectus and tough penalties for lying in that prospectus. It also applies strict rules for financial statements and other disclosures. But those requirements are only as good as the enforcement, which has been the problem when it comes to companies that are not otherwise regulated.
A scheme like Sharemax walked this path carefully. Investors were given debentures in return for their money, which was then squandered on executive pay while promised property developments didn’t materialise. Investors put their money into instruments that the prospectus described as “an unsecured subordinated interest rate acknowledgment of debt linked to a share”.In that case, eventually, the Reserve Bank did intervene, deeming the debentures to be too close to deposits for comfort. The Reserve Bank filed criminal charges against Sharemax in 2012. Investors are still struggling to recover R4.5-billion.
Such abuse of companies and securities should be vigorously investigated and prosecuted by a companies regulator, rather than having to rely on the Reserve Bank to find some way of applying the Banks Act. It is most obviously the Companies Act that has been violated.
The CIPC is, according to the Companies Act, tasked with “ensuring that contraventions of this act are promptly and properly investigated”. Those contravening the act can be fined and imprisoned for up to 10 years.
However, until the CIPC announced it was investigating the Steinhoff matter, I had not heard of it taking any action against errant companies. On searching its website I found a section titled “judgements”, which contained only one, in response to a complaint made by the AmaBungane Centre for Investigative Journalism concerning access to a share register, in which it ordered a company, Proflex Investments, to hand over its share register to AmaBungane.In another section, “Reports”, it has two reports about previous compliance notices, one in 2017 regarding Mdali Group and another in 2015 regarding the Blyde River Botanical Reserve Home Owners’ Association. This is a rather short list, considering the bewildering number of questionable activities involving companies.
In January, a month after the Steinhoff mess broke, it issued a compliance notice to the board of Steinhoff demanding details about those involved in accounting irregularities within six months. Last week Steinhoff submitted the last of six reports it filed in response. Now we will see what action the CIPC takes.
In the battle against white-collar crime in SA, we need a vigilant and active companies regulator. We should not be relying only on the Reserve Bank to shut down pyramid schemes, property frauds, and many other instances of fraud.The CIPC depends on receiving complaints, so if you’ve been victim of a company that has violated the Companies Act, complaint forms can be downloaded from its website.
But not receiving a complaint is no excuse for the CIPC to fail to take action – the minister of trade and industry has special powers to direct the CIPC to undertake investigations. The DTI should lead the activism.
I hope the CIPC’s actions in the case of Steinhoff are the sign of an invigorated CIPC that will be an active part of the fight against white-collar crime.

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