Guilt-edged investments: Singapore’s latest ponzi scheme explosion

I like to think that all of JRE’s readers would be smart enough to run a mile if they saw an investment advertising returns of “20-25% per year guaranteed!”. 

Unfortunately, a phenomenally large number of Singaporeans and Malaysians weren’t: 

KUALA LUMPUR – A gold-trading business shut down [in October] by Malaysian authorities for suspected illegalities may have raised as much as US$3 billion (S$3.66 billion) from its clients, a government official said Wednesday.

Authorities raided trading firm Genneva Malaysia on October 1 on suspicion of taking deposits illegally, money-laundering and tax evasion, and later expanded the crackdown to three other firms.

[…]authorities have defended the crackdown, and Deputy Finance Minister Awang Adek Husin told lawmakers on Wednesday that Genneva Malaysia alone had taken in some 10 billion ringgit (S$4 billion) from customers.

Genneva Gold was an explosion that Blind Freddy could have seen coming. Their business model – which ran from at least early 2009 to late 2012 – was to sell gold to gullible retail buyers at a 30% markup, and then offer a “buyback” programme that paid 2% a month interest to the buyer on the marked-up amount. This pretty much reduces to funding their overpriced-gold-selling business via loans at 27% (1.02^12) p.a., which is not exactly a sustainable interest rate. 

When the customers stopped buying overpriced gold, Genneva stopped repaying the loans, and this was the end result

PETALING JAYA – The police, Bank Negara, the Companies Commission of Malaysia and the Ministry of Domestic Trade, Cooperatives and Consumerism jointly raided gold trading firm Genneva Malaysia Sdn Bhd and its affiliates in the country for various suspected offences.

Singapore’s Commercial Affairs Department also conducted a similar operation against Genneva Pte Ltd in the republic.

In a statement released yesterday, Bank Negara said the raid was to probe suspected offences under the laws administered by the agencies.

Some particularly ballsy investors were just depositing their money with Genneva, rather than taking possession of the gold, which changes the story from an unsustainable business model to an explicit Ponzi scheme.

The ending count, across the Singaporean and Malaysian arms of the business, adds up to somewhere around $30 million of assets and $300 million of liabilities (including four tonnes of gold that was promised to investors but never delivered, which… yikes), which would make it one of the biggest frauds in Singapore or Malaysia’s history.

Singapore, in particular, seems to have a real problem with transparently fraudulent investment schemes (c.f. the $40m-ish Profitable Plots blowup, which you can’t have missed if you ever watched ESPN in Singapore; and the $25m Sunshine Empire blowup)… so what are they going to do to make sure this doesn’t happen again? 

Basically nothing. 

The MAS is going to tighten its advertising rules for investment products – which wouldn’t affect these gold-buyback schemes because they’re not regulated by the MAS. 

Singapore’s Deputy Prime Minister has also explained that the MAS will “will continue to monitor market practices and refine its regulatory framework if necessary”, rather than actually taking any action. 

And meanwhile, these schemes are still out there and still taking customers. This piece – basically unpaid advertising for a rival “gold buyback” scheme” – made it past the editors at the Straits Times less than a week after the Genneva raids:

The Gold Guarantee and Asia Pacific Bullion gold trading firms have been preparing for the Genneva bailout for many months, said the firms’ owner yesterday.

Mr Lee Song Teck told The Straits Times that he had heard of Genneva’s woes almost a year ago and he is offering his “rescue plan” to help out Genneva customers.

[…] Mr Lee said that his companies have received about 300 calls from stranded Genneva customers over the past few days and expects about 200 of them to take up his “rescue plan”.

[…]The Gold Guarantee said it will buy the gold from Genneva’s customers, who must then join the firm’s own scheme. […] While the two gold bullion purchase plans seem to work the same way, Mr Lee explained that the two companies are very different operationally.

…after all, as the FTC explains, the most fertile targets for a scam are the people who’ve already fallen for it once

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