White Dot: Issues Arising

Pyramid Schemes

By SR Balgopal

The “White Dot” scam has hit over 1000 Mauritian investors very hard and has to be carefully handled by all stakeholders to ensure that the reputation of Mauritius as an international financial services centre is not dented beyond repair. It also raises a number of pertinent issues in relation to where Mauritius wants to head with regard to interest rates.

As matters stand, it seems that deposits of over Rs 700 million rupees are in danger of being lost. As rightly pointed out by the Governor of the Bank of Mauritius (BOM) in an interview given in Week-End on 31 March 2013, there is a lot of money flowing in Mauritius which cannot be declared officially. Banking laws prohibit Mauritian banks from dealing with dirty money and money whose source is not known.

Further, the Governor has pertinently raised the issue of why Mauritians are attracted to schemes which yield high interest. The onset of the White Dot scam seems to vindicate the Governor and his two Deputies who have consistently been in favour of raising interest rates so that persons who deposit money in banks do not suffer from the differential between the rate of inflation and the rate of interest offered by banks. The wise words of the Governor of the BOM who stated that “we must offer an interest rate more productive and higher than inflation” and who referred to “another battle of the BoM vis-à-vis other institutions who believe that inflation will be the winner” assume all their importance.

It is also interesting to note that it is an accepted truism in economics that schemes such as the one represented by the White Dot scandal tend to flourish in a context where interest rates are low.

Clearly, there is a tension between the members of the Monetary Policy Committee appointed by the Minister of Finance and Economic Development and the Bank of Mauritius. It is a pity that in relation to this, there is a deafening silence from members of the Labour Party whose traditional electorate would completely identify with the stand taken by the Governor of the BOM in relation to the need for higher interest rates on deposits.

The Labour electorate, especially in Quatre-Bornes, gave their take on the policies of the Minister of Finance and Economic Development loud and clear in the last municipal elections on where they stand in relation to the diametrically opposite views on interest rates of the Governor of the BOM and the Minister of Finance and Economic Development.

Aside from the contentious topic of interest rates, the White Dot scam further raises the following important issues:

(a) How far do the authorities want to ensure that the real scope of the scam is uncovered?

To get to the bottom of the White Dot scam, maximum information needs to be collected with a view to completely unravelling the truth. This would have the benefit of ensuring that lessons are learned and that remedial action is taken. To ensure that this is achieved, it is clear that persons who deposited money in the scam should be given immunity so that they can openly expose the facts. This, of course, should only apply to genuine persons who can prove the source of their funds as it may be unsafe to grant immunity to persons who cannot explain the source of their wealth.

The Governor of the BOM has, in the same interview, stated that some persons have taken their deposits from banks or taken loans to “invest” in the scam and this clearly indicates that some genuine persons who have been fleeced by White Dot now face the real prospect of being prosecuted under section 5 of the Financial Intelligence and Anti-Money Laundering Act, which may naturally cause them not to cooperate with the police as in the course of a prosecution, if called as a witness against White Dot, they may raise their privilege against self-incrimination under section 165 (1) of the Courts Act:

“165. Questions tending to incriminate

(1) Nothing in this Sub-Part shall render any person (other than a bankrupt examined before any Court or Judge under any law relating to bankruptcy) compellable to answer any question the answer to which would tend to expose him to prosecution for an offence punishable by law, or shall render any person compellable to answer the question whether he has or has not committed adultery.”

(b) Will victims of the scam be doubly punished?

Section 5 of the Financial Intelligence and Anti-Money Laundering Act states that:

“5. Limitation of payment in cash

(1) Notwithstanding section 37 of the Bank of Mauritius Act, but subject to subsection (2), any person who makes or accepts any payment in cash in excess of 500,000 rupees or an equivalent amount in foreign currency, or such amount as may be prescribed, shall commit an offence.

(2) Subsection (1) shall not apply to an exempt transaction.”

Under this section, victims who deposited Rs 500, 000 with White Dot could be prosecuted. However, we have to bear in mind that the decision to prosecute bears two essential components, i.e. whether there are reasonable chances of securing a conviction and, secondly, whether it is in the public interest to prosecute a case. In this particular case, one may safely argue that the public interest is to unravel the whole scam rather than to doubly punish victims of the scam.

Victims of the scam have already lost their money and now face the prospect of prosecution. This prospect will no doubt discourage victims from coming forward to assist the police in their inquiry and will be music to the ears of the controlling mind behind the White Dot scam. We have noted that the DPP is not loathe to communicate with the press and on this issue of national interest, it would be essential that he communicates his stand.

(c) Will the DPP grant immunity from prosecution to victims of the scam?

The DPP may, to ensure that all victims of the scam cooperate with the police, come forward and specify which victims of the scam could be given immunity. Clearly, persons who have proof of the genuineness of the source of their funds should be exempted so that they can fearlessly give statements to the police. This would enable the inquiry to go to the root of the case and the chances to reach the controlling mind of the White Dot scandal would be enhanced.

(d) Will there be only one regulator for the financial services sector?

It appears that the persons involved in the White Dot scandal have acted expertly and got through a legal loophole in that their activities were, prima facie, not under the purview of either the FSC or the Bank of Mauritius. This raises, however, the issue that since we are a small jurisdiction, it is essential that there is a sole regulator who has a “droit de regard” on both the banking and non-banking activities in the financial services sector. A sole regulator would, in this situation, have been able to better tackle the White Dot scam.

(e) Will the BOM be granted the powers which have been granted to the FSC?

In spite of the fact that the Financial Services Commission has wide powers under section 50 of the Financial Services Act to freeze assets of a person suspected of involvement in financial crime, the BOM is deprived of such powers and yet, the Minister of Finance went on record to request an inquiry on the BOM. Government, rightly, has restricted the inquiry to the Financial Services Commission.

(f) Will Government consider empowering the BOM, through amendments in the law, to allow it to tackle Ponzi schemes?

It is interesting to note that in Sri Lanka, there are specific provisions in the Banking Act against Pyramid Schemes, which are similar to Ponzi schemes. In Hong Kong, there is a specific piece of legislation, the Pyramid Scheme Protection Ordinance which outlaws both Pyramid Schemes and participation therein. Here, in Mauritius, we have no legal provision in the Banking Act against Ponzi schemes and similar scams and it is essential that the Ministry responsible for the portfolio of Banking, the Ministry of Finance and Economic Development, addresses this loophole without delay so that the BOM is empowered to protect Mauritians against scams such as the White Dot scam.

* Published in print edition on 5 April 2013

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