As relatively new foreign market investors, South Africans need to be aware of the many pitfalls involved
Neil Thomas
It usually starts with an unsolicited phone call. The voice on the other end sounds very professional and knowledgeable about investments.
They represent a company that sounds reputable, a name like Bradshaw Global Investments or Mendes Prior. Your number has been forwarded to them because they understand you are interested in investing offshore, and they can buy a couple of hot Nasdaq-listed shares on your behalf. They will offer forecast returns, which sound great, send you glossy brochures and, in some cases, even invite you to visit their website, which is impressive.
All you have to do to make your first million is deposit money in a foreign bank account, usually in an exotic location like the Philippines.
The problems start when you want to sell the shares. Market conditions aren’t right, you are told, liquidity is low, hold on a bit longer. After a while your calls are no longer taken, messages aren’t returned. Then it sinks in that your money is probably gone – you could trek halfway around the world to try and confront them, but chances are the office would have moved by then. And even if you do track the company down, your chances of recourse in a foreign country, under a foreign legal system and using a foreign language, are slim.
A number of foreign “investment” companies have been pulling this scam on South Africans this year. The Financial Services Board (FSB) knows that at least R14-million has been deposited by local residents in faraway bank accounts. It also knows this is probably only the tip of the iceberg – some of the funds were probably hot money and would not have been reported. In many cases people just feel too stupid and embarrassed to take any action.
A friend received one of these calls a few weeks ago, from a woman who said she was phoning from Spain. Same story, hot Nasdaq shares for sale. He declined the offer, but did figure out that they probably traced his phone number off the Internet. They had his number, not his name, and a few nights before he had visited a number of websites to research foreign investments. He must have seemed a likely candidate to be fleeced.
This may be an extreme example, and it’s amazing that people can fall for this sort of thing, but it does illustrate that there are a number of potential pitfalls to investing offshore. South Africans, as relatively new offshore investors, need to be aware of them.
And just in case it helps these are the companies the FSB has received complaints about and is investigating for the Nasdaq share ploy.
Mendes Prior, the most recent one to appear on our shores, seems to operate out of Indonesia, the Philippines and Mauritius. Then there’s Birchmen Lee, Evergreen Consulting Corporation, Bradshaw Global Investments, Trident International and Worldwide Investment Managers, who all seem to be based in the Philippines. Finally there’s Fisher Sterling International from Hong Kong.
Perhaps they can’t be accused of actually doing anything illegal at this stage. But there are a number of investors in this country trying to get their money back from these companies with no success so far.
Rinate Smit of the FSB warns these are very slick operations that specialise in hard- selling techniques. Her advice to anyone receiving a call is to first ask who their financial regulator is – then take some time and investigate the company before committing any money.
Those smaller investors who have been caught should not feel too stupid – one of the victims this year was a stockbroker who invested private money with one of the companies. The line between greed and stupidity is indeed a very fine one.
The easiest and safest way to invest offshore is probably through the many foreign and global unit trust funds available on the market in South Africa. But these vanilla funds might not match the specific requirements of some investors, who can then choose from the products and services offered by a number of local and foreign companies.
What’s extremely important though is to check whether they have been approved by the FSB. The list of approved foreign investment managers is available on its website (www.fsb.co.za), and includes the names of all the large local players and a number of familiar foreign banks and asset managers.
One of the reasons the FSB encourages foreign investment managers to register is to offer protection to local investors. If something goes wrong with the investment, or the company, you will have recourse.
Some people object to this protection – hell, it’s my money, I’ll invest it where I like – but it is to the benefit of the small investor, particularly those new to investing offshore. And there are a lot of companies and products to choose from.
When choosing a jurisdiction for your investment money care must also be taken. Some popular traditional tax havens are now being questioned, and the European Union has blacklisted a number of these jurisdictions, including some of the wealthy tax-free principalities like Monaco. Not surprisingly, the Philippines is also on the list. The danger of using these jurisdictions, even if they do offer tax incentives, is that you may not have recourse if your investment goes awry.
Andr de Kock, Nico Kruger and Paul Roper, in a useful book called The Practical Guide to Offshore Investments that anybody serious about investing offshore should read, say the choice of jurisdiction must take into account a developed system of law and comprehensive trust law.
They say other considerations include political and economic stability, taxes, professional,
corporate and banking services, good communications, transport and time variances.
The authors also urge local investors and financial advisers to make use of FSB- approved products.
Another problem looming for offshore investors, spurred by the introduction of residence-based taxation in South Africa next year, is what to do about money they skulked out of the country in the bad old days of full foreign exchange controls.
Of course what they did was illegal, if understandable, and they would dearly like to “legitimise” that money in some way.
We probably can’t expect the Reserve Bank or South African Revenue Service to condone something done illegally, even under the restrictive regulations of the previous government. But there is hope that the taxman may offer some leniency, perhaps by declaring an amnesty period or allowing these illicit funds to be invested in a bona fide offshore fund.
After all, this makes sense. Right now the revenue service is not collecting any tax on that money, but if it allowed this to be legitimised it would get its share.
This column would never offer any advice on illegal money, but to take the hypothetical case of my uncle who slipped a modest amount overseas in his younger years, he found the solution was to slowly merge his illicit money with his legal investment in a high-income offshore fund.
This fictitious uncle cannot bring the capital back, but he benefits from the interest income earned on it. And he pays tax on it, which seems the right thing to do and helps him sleep better at night.
The alternative could have been to invest the money in Nasdaq shares though a company in the Philippines. Then he would have wished he had never sneaked it offshore in the first place.