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 The Banking Business Requires a Licence

The Banking Business Requires a Licence

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By Ravi Nanga

RECENTLY in the media a particular entity has been receiving attention based on certain financial dealings where members of the public “invest” a sum of money and obtain a large return on this investment in a short space of time.

In the recent past they have been found with large sums of cash, which were seized from their premises.

The entity is apparently offering some type of investment scheme, where you deposit a sum of money with the entity and you are repaid a substantially larger sum of money for your “investment.”

Given the reported quantum of return on investments in the media, the questions that immediately comes to mind are; whether this form of investment scheme is legal; and how is it possible to offer this quantum of return, when globally, financial markets are under severe stress.

Without knowing the intricacies of the operations, and based solely on what is in the public domain as reported in the media, it appears that this entity can be regarded as a financial institution.
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The relevance of being regarded as a financial institution is that such institutions are by law, heavily regulated institutions and are required to be licensed.

The Financial Institutions Act provides a comprehensive code by which all financial institutions are regulated and governed.

Under that act if you are in the business of banking, you are required to obtain a licence.

The business of banking includes the taking of deposits, so that when this entity invites or accepts deposits from members of the public, arguably it is engaging in the business of banking based on that type of transaction.

Therefore, if this entity is in the business of taking deposits, which is then withdrawn, this entity will be required to be licensed under the provisions of the act.
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If the entity is not licensed under the act, that omission can constitute an offence under the act, and if this is in fact the case, the entity may be conducting a business contrary to the act.

The act also applies to individuals, so that an individual cannot engage in the business of banking without having the requisite licence.

Again, based on media reports, it appears that given the rate of return, members of the public are drawn towards this entity and this investment scheme is widely popular.

It is seen as providing some form of financial relief to persons due to the high rate of return on their investment within a very short space of time.

One of the purposes of the act is to protect members of the public, so that before an entity can obtain a licence, they are required to have a certain minimum capital and further, once an entity is licensed as a bank, a certain portion of deposits are insured, so that in the event the entity goes out of business, the public is guaranteed to get back the portion of their deposit that is insured, so that they will not lose their entire deposit.

In the event an entity is not licensed and is not regulated, there is no form of protection afforded to members of the public, so that there is a real risk that any sums “invested” can be lost in the event the entity cannot maintain their payouts based on their representations.

Given the high rate of return that is being offered in such a short space of time, it should be of concern to persons where are the funds coming from to be able to give this quantum of return.

It is unlikely that traditional methods of investments can be utilised to provide such levels of returns in such a short space of time.

If the entity is depending on new deposits in order to pay out the investments, eventually such a scheme will crash.

In the event the entity is unable to sustain the requisite level of deposits in order to be able to pay out the large returns promised, persons who deposit late in the system may very well lose their deposit and given the nature of the operations, may very well be unable to recover the sums deposited and may very well be without recourse.
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If the source of the funds is of questionable means and the source is discovered and stopped, again, persons may stand to lose their deposits.

While it may be able to pursue legal action against the entity in the event the entity is unable to pay out the promised investment, should the entity be regarded as being in breach of the act, any deposit made with the entity will be regarded as illegal.

Once a transaction is tainted with such illegality, a person may not be able to utilise the courts in order to recover the sums deposited in such circumstances.

Depending on the sums deposited, even if the courts are of the view that the transaction is not illegal, which is unlikely, it may very well cost more in legal fees that the sum deposited in order to recover the sum deposited.
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Further, even if a person decides that they want to go to court and is able to obtain a judgment, the next step will be to enforce that judgment, and it is not known whether once the entity is unable to pay the return on investments, whether there are sufficient or any assets available in order to satisfy a judgment.

Accordingly, while such investment schemes may seem highly attractive, it is highly likely that the operations are contrary to the law and unlicensed, with the result that should the entity be unable to repay the investment, or return the deposit that was originally made, persons will most likely lose their deposit and will be left without recourse.

Ravi Nanga is an attorney

[Please note that this article is intended only to provide general information on the topic being addressed and should not be taken as providing legal advice. In order to be properly advised it will be necessary for an attorney to examine the relevant documents and obtain the necessary instructions before properly advising as to rights and obligations]

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