BRAMER BANK & BAI DOWNFALL : A loudly castigated Ponzi scheme…

Since last Friday, the term “Ponzi scheme” has become the new buzzword sprawling across the media and in people’s conversations, no doubt spurred by its use by none other than the country’s premier, Sir Anerood Jugnauth, when referring to the Bramer Banking Corporation Ltd (“BBCL”) and British American Insurance Co Ltd (“BAI”). Revisiting the definition and characteristics of a Ponzi scheme, along with the salient points of the most famous case – namely the Madoff scandal, would certainly shed some light on whether assimilating BBCL and BAI to such a scheme is justified.
A Ponzi scheme is a fraudulent investment operation where the operator pays returns to its investors from new capital paid to the operator by new investors, rather than from profit earned by the operator as part of its investment operations. Clients / investors receive other new clients’ / investors’ capital. Operators of Ponzi schemes usually entice new investors by offering higher returns than those of other investments, in the form of short-term returns that are abnormally high. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.
The Madoff investment scandal broke in 2008, when Bernard Madoff admitted that the wealth management arm of his business was an elaborate Ponzi scheme. Madoff was sentenced to 150 years in prison for running the biggest fraudulent scheme in U.S. history. Even now, only a few of his victims have since regained all of their losses. Madoff convinced thousands of investors to hand over their savings, falsely promising consistent profits in return. Ponzi schemes aren’t usually very sustainable and eventually fall apart after: (1) The operator takes the remaining investment money and runs, or (2) new investors become harder to find, meaning the flow of cash dies out, or (3) too many current investors begin to request their returns. 
It may be argued that the business of BAI presents some troubling similarities with traits of a Ponzi scheme. The Minister of Finance revealed that one of the ‘products’ marketed aggressively by BAI, namely the One-Time Endowment Policy, offered clients rates of return and terms which were ostensibly higher compared to similar policies offered by other competitor firms. The One-Time Endowment Policy has 24,175 policy holders who purportedly subscribed for an aggregate amount of MUR22 billion. Doubts have been manifested regarding whether the funds received from policy holders have indeed been invested or rolled over à la Ponzi scheme.
On the basis of media rendition of the downward spiral of BBCL from a profitable situation (net profit of MUR79.9 million for the financial year 2014) to revocation of its licence, it might appear reasonable to deduce that the commercial performance of BBCL had deteriorated of late, especially since the change of regime in December last year. This situation seems to have been accentuated by the over-dependence of BBCL on support from the previous government in the form of deposits by parastatal bodies. With the new government vowing for eradication of favouritism and consequently withdrawing funds accounts held with BBCL, the latter found itself in breach of compliance requirements set by the regulators.  All this seems to attest more to a commercial failure of the BBCL rather than an elaborate scheme to defraud its clients – in the absence of evidence to the contrary (which might be uncovered further down the road as the enquiries unfold).
Whilst politicians will discuss lengthily semantics regarding the appropriateness of qualifying the BBCL/BAI business as a Ponzi scheme, it might be more useful on their part to cogitate about the gatekeepers that may be instated to prevent emergence of Ponzi schemes in future, in the context of paltry interest rates for savings offered by mainstream banks which may easily encourage Mauritians to go for obscure investments. Reinforcing the robustness of the regulatory system is a must. Regulators must be empowered to perform regular checks, much like the stress-tests conducted by American regulators on banks operating in the U.S.A. In addition, rewarding whistleblowers financially can turn insiders of fraudulent firms into informants by making it more worthwhile for them to blow the whistle than to participate in the wrongdoing. In USA, if a tip leads to an enforcement action with penalties of $1 million or more, the informant can receive a reward ranging from 10 percent to 30 percent of the money collected by the regulatory authority.
In light of the above, though the BBCL / BAI scandal is still inconclusive at this juncture and its ramifications will prove far-reaching, it has arguably provoked a bout of soul-searching amongst all players involved in the matter, from financial service providers to auditors and regulators.  It has certainly also set the ball rolling for high-level discussions to improve the financial system and to do away with conditions favorable to the fostering of ponzi schemes. The Government has acted responsibly by reassuring clients of BBCL and BAI that their savings / insurance policies will not be jeopardized and by swiftly arranging for a seamless takeover of the crumbling firms by existing operators, thereby averting a crisis of confidence and mitigating a systemic risk of collapse in the financial sector.