Exposed: 96% scheme a 'Ponzi'

FUEL company Carmol Distributors, which offers investors spectacular 96% returns, appears to be operating illegally as a deposit-taking entity .

The firm, which allegedly secured about R450-million from more than 2500 investors, also appears to be operating as a money-multiplication scheme as defined by law.

A money-multiplication scheme is the legal term for what is commonly known as a Ponzi scheme.

This has been established through a month-long Business Times investigation, which can reveal that Carmol Distributors:

Closely resembles and has a close association with Innovatech International Solutions, whose CEO was recently charged with contravening the Bank Act;

Accepted deposits from the public without a banking licence; and

Offers investors returns that are illegal, according to SA law, and are characteristic of Ponzi schemes.

Carmol has come under the microscope after Prinasen Dhaver, CEO of Innovatech International Solutions, was arrested last month by the commercial crimes division of the Hawks and later released on R100000 bail.

His arrest, which coincided with a Business Times investigation into Innovatech, came after the registrar of banks at the Reserve Bank notified Dhaver last month that it "has reason to suspect" that Innovatech "has been conducting the business of a bank while it is not registered as a bank in terms of the Banks Act".

Like Carmol, Innovatech had been offering its investors returns of up to 8% a month, equivalent to 96% a year, via "profit-share" agreements ostensibly entered into by Innovatech to fund the purchase of fuel.

However, it has been established that Innovatech operated not as a fuel distributor but simply pooled investor funds, which were then deposited with Carmol.

Documents seen by Business Times show that Carmol had paid Innovatech returns exceeding 100% a year on deposits of up to R3-million.

According to Dhaver, Innovatech would profit by taking a "commission" from the returns it received from its Carmol investments while distributing the remainder to its investors.

Dhaver maintained that his business paled in comparison with the scope of Carmol's, which he claimed had secured about R450-million from its investors.

Dhaver further maintained that Innovatech was effectively a copy of the much larger Carmol. "Our contractual documentation to investors was the same as Carmol, except ours were better constructed.

"We did the exact same thing when it comes to profit share. If I am contravening the Banks Act, they are contravening the act," said Dhaver.

Although Carmol admitted to having accepted deposits from Dhaver, it claimed it had terminated its contract with him in January, returning his net investment of R3.7-million.

Carmol claims it does not solicit funds from the public and is not in contravention of the Banks Act.

"Carmol presently has a number of business associates with whom it has a mutually beneficial relationship. The associates are made up of mostly family and friends with whom Carmol shares a close relationship. Contrary to any perception that Carmol solicits funds from the public, Carmol is a private entity, which complies with all relevant legislation," said Duran Govender, assistant to Carmol CEO Yunus Moolla.

But Professor Tanya Woker, former chairma n of the Department of Trade and Industry's consumer affairs committee, said this explanation would not exempt Carmol from its legal liability in terms of the Banks Act.

"If you are conducting a business in terms of which you take money from members of the public on a regular basis which you intend to return to them, you are effectively conducting the business of a bank and you need to be ... registered as a bank."

The Banks Act excludes "close relatives" from its definition, but does not exclude "friends", said Woker.

Business Times has heard the detailed account of a number of investors, who are not relatives of Carmol's directors, becoming involved in the business after being "approached by people in their church".

Four other investors in Carmol confirmed that they are neither friends nor family of Carmol directors, but had been introduced to the scheme after hearing of its fantastic returns.

Business Times has also established that Carmol has recently delivered presentations to potential investors at the Coastlands Hotel in Umhlanga. According to the memorandum of understanding issued by Carmol to its investors relating to "diesel transactions and storage of diesel product", the "investor is aware that the return on a monthly basis ... is on average, a minimum of 6% to 8% [72% to 96% a year]".

"In terms of the Consumer Protection Act (CPA), the moment you offer a return of over 20% above the repo rate [currently 5.75%] your scheme is classified as a money-multiplication scheme, which is a prohibited scheme under the act," said Woker.

Responding to specific questions on its apparent breach of the CPA, Carmol said: "It has not one single complaint against it. In this regard, Carmol does not have any knowledge of any contravention of the CPA."

Carmol "operates by purchasing and selling legitimate petroleum products to legitimate clients".

As proof, Carmol showed Business Times a copy of a letter by Mozambique company Comopetro in which Comopetro said it had a "business relationship with Carmol Distributors ... for the supply of petrodiesel product in Southern Africa".

Business Times was unable to make contact with Comopetro, but was informed by a fuel trader that it was a legitimate company.