Menzgold puts financial services regulation to the test

Over the past few months Menzgold has taken on one state regulator after another, putting the regulatory framework across two sectors of the economy to the test. ONAJITE SEFIA examines the company’s position and its strategy in trying to circumvent regulatory control.

The ongoing imbroglio between Menzgold, a gold dealer in Ghana, and an array of state regulators of business activities spanning both the financial services and the solid precious minerals industries took a dramatic new turn late last week when the company finally agreed to a directive to suspend its operations. The directive issued by the Securities and Exchange Commisson is the latest to be issued against it by regulators, but the first to be obeyed; over the past few months the company has defied similar directives by the Bank of Ghana and has simply ignored  statements from both the Minerals Commission and the Precious Minerals Marketing Company that it is not licensed to leverage locally purchased gold to create investment products for the public.

The decision last week by Menzgold to suspend its “gold vault” operations through which it offers the public extraordinarily yields on their short term deposits of gold, is not the submission of the company to regulatory oversight. Indeed, the company’s lawyers, Kwame Akuffo and Co has emphasized that the decision to accede to SEC’s latest directive “though very unfavourable has been informed by our commitment to the rule of law, absolute respect to state agents and total submission to the state.”

Instructively though , this is the first time Menzgold is showing such respect, having defied regulatory directives from the BoG over the past few months in a public spate which has infuriated the central bank and forced it, in sheer frustration to solicit the support of SEC.  Simply put, having seemingly successfully convinced stakeholders that it is not a deposit taking institution as alleged by the BoG, it is now being called to order by the regulator that oversees investments, which is what Menzgold claims it is taking from the public.   

However Menzgold now asserts that those investments have nothing to do with Ghana’s capital market, which  is what SEC is legally mandated to regulate.

Indeed, there appears to be a gap in the regulatory framework and Menzgold, through its lawyers, readily agrees that this is what the company is exploiting.

“Our business is not regulated by law,” asserts Kwame Addo himself. “It is not regulated by SEC or the BoG. It is a formidable innovative product that has been put out there.”

To be sure Menzgold’s gold vault investment product is unique. Customers are invited to purchase gold from a sibling company, Brew Marketing and lodge the gold with Menzgold for yields of between 7% and 10% a month. In doing this Menzgold has been nimble-footed, treading the murky edges of the regulatory framework.

This inevitably has cast doubts over the company’s commitment to regulatory compliance in spirit if not in word. For instance, its activities first attracted the ire of the BoG, when the central bank accused it of operating as a deposit taking micro-finance institution without a requisite license.  To get around the BoG’s challenge, it simply changed its name from the then Menzbank to Menzbanc – in order to diffuse the BoG’s refusal to let it use the “bank” genre; and when this proved not to be enough, it changed name again to Menzgold and argued that it is not a financial services firm at all, but rather a commodities dealer, and so therefore completely outside the regulatory purview of the BoG.

Indeed, the company argues that new legislation is required to regulate its activities because existing regulation does not cover its activities. The BoG has tried to apply provisions from the Banks and Specialized Deposit Taking Institutions Act [Act 930], but Menzgold’s argument that it does not take monetary deposits brings this into question. Consequently it has brought SEC into the fray, applying provisions from the Securities Industry Act. This is now being challenged by Menzgold on the basis that the investments being made by its customers are not capital market activities and therefore do not fall under the purview of SEC.

The company indeed argues that new regulation is required it its activities are to be regulated. “If you look at the [two aforementioned] Acts, there is a provision which says regulators are entitled to introduce new regulations for any other business model that is created” points out Kwame Addo. “if there is a legislative omission you do not come and blame Menzgold.”

While this creates lots of grey area with regards to applicable regulation, the regulators are correct to worry about the current impasse. Menzgold has refused to divulge its business model on the grounds that it is a trade secret which is critical to its competitiveness. This means that the public is investing in a business that cannot be assessed with regards to its underlying viability and the prudence of the risk management practices being deployed. Worse still, the relatively high yields given customers suggest that they are not sustainable – financial institutions, both licensed and unlicensed, that have offered similar returns in the past have proved to be unsustainable over the long term, costing customers their deposits and investments.

The company however points out that it has not defaulted so far, and asserts that it will not going forward because its business model, although secret, is sustainable. Indeed, many of its customers, including well known celebrities such as Sarkodie and Rebecca Acheampong [popularly known simply as Becca], have come out publicly to support Menzgold, insisting people should be allowed to continue benefitting from the high yields it provides.

But regulators fret that this may not be true and if the business does collapse, those same customers will turn around and hold the regulators responsible, just as they did in the case of the micro-finance industry meltdown a few years ago.

There is also another major worry; even if Menzgold’s business model is sustainable over the long term, allowing the company to continue as it is doing now, without regulation or even having to reveal its business model, would create a precedent which other enterprises, with less altruistic motives, could exploit to create pyramid schemes that ultimately would cost customers their investments.

The various possibilities, good and bad alike thus make it imperative that the test that the regulatory framework is being put to by Menzgold must be passed one way or the other. Ultimately, it can be expected to result in new regulatory legislation, even if the current impasse is resolved  through a short term fix. Tighter regulation, aimed at the grey area Menzgold is currently operating in would be a good, indeed direly needed thing, just as the ongoing impasse is proving.