Ponzi mess taints all players

In monster fraud scandals, such as the one allegedly involving Barry Tannenbaum, fingers normally point in one direction, that of the suspect.

But this apparent Ponzi scheme, which involves over R1-billion, has fingers pointed at the investors who gave Tannenbaum buckets of money and the regulators who appear to have been completely blindsided by him.

The Financial Mail reported last week that RMB Private Bank had alerted the Financial Intelligence Centre (FIC) in 2007 to suspicious transactions on Tannenbaum’s private account.

Tannenbaum is alleged to have defrauded hundreds of investors through a scheme, to which his companies, Frankel International and Frankel Chemicals, also known as Eurochemicals, were central.

Investors were convinced to invest money ostensibly for the importation of active pharmaceutical ingredients (APIs), used in the manufacture of antiretroviral drugs to treat HIV/Aids. These were to be sold to large generics firms such as Aspen and Adcock Ingram.

Tannenbaum has denied the claims.

While about 400 investors are said to be involved, few names have so far emerged, leading to speculation that some investors may have put in hot money and not paid tax on proceeds.

Similarly, there are questions about whether Tannenbaum or his companies and advisors should have been registered with the Financial Services Board (FSB) since they were apparently a deposit-taking institution and paid out dividends.

These are questions no-one seems able to answer and apparently questions investors did not ask.

The scheme promised double-digit returns over a few months.

To date it is believed that well over R1-billion is unaccounted for but purported links to overseas investors suggest that this amount could be much higher, possibly somewhere in the region of R10-billion.

According to the UK’s Telegraph newspaper individuals such as Peter Long, CEO of London Stock Exchange-listed TUI Travel, and Richard Kirk, CEO of British clothing company Peacocks, are believed to be involved.

In addition, Monaco-based Russian investors may also have come unstuck, along with individuals from the United States.

The FIC could neither confirm nor deny that it has received any suspicious transaction reports from RMB Private Bank. Spokesperson for the FIC Themba Hlegani would only say that this forms part of the investigation that is currently under way.

He said the FIC gets almost 25000 reports of this nature each year. Similarly, RMB Private Bank refused to answer questions about any reports made to the FIC.

FNB would only state: “The bank is cooperating with the task team that has been formed and due to this we would decline to provide any further comment at this time. We continue to maintain a policy of zero tolerance to criminal activity and assure the public of our commitment to that policy.”

The scheme is believed to have started in 2005, and what may have begun as a legitimate operation seems to have spiralled out of control as money from latecomers to the scheme was used to pay off earlier investors.

But there are other obvious questions—such as why so many people invested in a scheme that apparently created no paper trail, and required nothing more than trust and a few cheques in the mail as payment?

This has led authorities, including the South African Revenue Service (SARS), the Reserve Bank (SARB), the Serious Economic Offences Unit and the National Prosecuting Authority, to begin sniffing around Tannenbaum.

SARS spokesperson Adrian Lackay said a joint task team formed last week to investigate the claims against Tannebaum will be examining a host of “angles”.

These include trying to determine where the money invested came from, whether dividends paid out to early investors were taxable, whether foreign exchange controls were breached and whether local business entities were used to take money off shore.

Lackay said that provisions of the FIC Act may need strengthening. The very “bureaucratic process” involved in investigating suspicious transactions could arguably have hampered the authorities’ effectiveness.

He called on investors to come forward, saying the authorities are likely to be more sympathetic to people who assist the investigators.

While criminal charges have yet to be laid against Tannenbaum or any of the men alleged to have recruited investors, civil proceedings have begun.

Following a sequestration application granted to investors last week, trustees have been appointed to administer Tannenbaum’s local assets.

Shirish Kalian, one of the trustees, said that a “fair amount” of people have come forward.

He confirmed that the missing money amounts to over R1-billion, but declined to say how many investors may be involved.

Investors were lured into a false sense of security by apparently fraudulent purchase orders issued by pharmaceuticals giant Aspen Pharmacare.

Aspen has flatly denied that it owes Tannenbaum any money and has stated that the documents pointing to its relationship with Tannnebaum and his companies were fake. It did say that it “purchases selected raw materials directly from Frankel” and “whilst Frankel is listed as an agent of Aspen for the supply of certain other chemicals, Aspen deals directly with the suppliers thereof on a direct indent basis”.

Eurochemicals had also provided financial results for 2007. But auditors IAPA, who initially gave the company a clean bill of health, alerted the Independent Regulatory Board for Auditors (IRBA) to suspected irregularity in these financials on June 4 this year.

Bernard Agulhas, CEO of the IRBA confirmed that this was the case.

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