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Gov't legislates against Ponzi schemes

Published:Wednesday | December 11, 2013 | 12:00 AM

Daraine Luton, Senior Staff Reporter

LEGISLATORS YESTERDAY passed a bill in the House of Representatives which grants the court powers to imprison persons for a term not exceeding 10 years, and or a fine, should he/she be convicted of operating a Ponzi scheme.

The bill, known as the Securities (Amendment) Act, seeks, among other things, to clamp down on the unauthorised dealing in securities.

It expressly prohibits a scheme, known popularly as Ponzi, which the bill defines as being "an investment scheme that provides investors with returns derived substantially from investments made by other investors in the scheme, rather than from genuine profits".

The prohibition extends to whether or not the name Ponzi is used by any person in connection with the scheme, and whether or not the scheme limits the number of participants either expressly or by the application of conditions affecting the eligibility of a person to enter, or receive compensation under the system.

Prohibition has also been placed on pyramid selling schemes, which the bill defines as "the selling of financial products in circumstances where a promoter or operator of, or an investor in, a scheme induces or attempts to induce a person to make payments into a scheme by holding out to the person that the person will receive some payment or other benefit".

Those benefits, the bill further states, may come from other investors in the scheme, or the introduction of other persons to become investors in the scheme.

Investment clubs

In the meantime, an investment club with a maximum of 20 members is to be exempt from established registration requirements.

The bill proposes that in addition to a limit on the number of members, the exemption shall apply if payments by members consist of equal sums payable at agreed periodic intervals. The proposed law also requires that there be a specified limit on the maximum annual contribution of members, which limit should not exceed the maximum stipulated by the Financial Services Commission (FSC), and that all members are entitled to equal participation and voting rights.

It also prohibits borrowing from the public, and states that remuneration to officers or members of the club for administrative or other services performed for the club, other than as reimbursement for expenses reasonably incurred, is also prohibited.

With the exemption of investment clubs, no person can issue or cause to be issued, any invitation to another person to become a participant in a collective investment scheme, unless the scheme is registered with the FSC in accordance with regulations under the new law.

Under the four-year extended fund facility with the International Monetary Fund, the Government has committed to reforming the securities dealer sector in order to strengthen its ability to withstand shocks.

The Government also said it would provide a wider range of financial services going forward, by phasing out the "retail repo" business model over time.

Retail repos or repurchase agreement is a financial transaction in which a dealer in effect borrows money by selling securities and simultaneously agreeing to buy them back at a at a later time.

In addition to amending the Securities Act, the Government is to put in place attendant regulations to establish a comprehensive framework for the regulation of collective investment schemes.

The Government has also committed to amending the income tax law to remove double taxation of collective investment schemes.