Prof. C.E Fiscian, who was one of the two personalities who established the Department of Psychology at the University of Ghana, once said “Authority” is one of the principal sources of knowledge. For this reason, the Pastor at the pulpit must be circumspect in what he or she says. Same goes to the teacher, the lecturer, publications, the newscaster, the presenter, journalists, etc.
This is why when an Ace Private Legal Practitioner talks about the law in reference to MenzGold in this era, one must consider that as an opportunity to learn, especially so when he had said it on no mean a programme than MultiTV/Joy FM’s Newsfile. However, ever since the MultiTV/Joy FM’s Newsfile of August 25, 2018, I have had a cursory look at the Securities Industry Act 2016, Act 929 and haven’t been able to find anything on derivatives nor commodities as stated on the programme.
Of course, this apparent 21st-century innovative business model by MenzGold is undeniably intertwined with unclear legalities because it borders on derivatives. The derivatives market exists in two folds. One fold is under the radar of the exchange clearinghouses, called the futures and this is what SEC can regulate because these are fungible negotiable financial instruments. The other is over-the-counter (OTC) derivatives. The OTC option reduces such financial derivatives to a mere contract between two parties. The question, therefore, is, who can regulate a contract between two parties, especially so when the two parties have an understanding and there hasn't been any default neither was the contract unconscionable?
Derivatives used to be referred to as Difference Contract in the 19 Century. A derivative is a “product”. A private company can design and manufacture a product and sell it to the public, and collect money for the said product. Same applies to a financial derivative such as what MenzGold has engineered?
During the 1990s boom, O.T.C. derivatives were widely applauded as new financial “products” and “innovations,”. The derivatives’ market has, therefore, become excessively huge and cannot be regulated. The inability to regulate the derivatives market is a global problem and not peculiar to only Ghana. Subprime mortgages were a form of derivative that contributed to the global financial crisis. Students of Industrial Finance and Financial Engineering meet this classic question in their exams now and then on ‘Why can’t we regulate the derivatives market”? The reason is simple; the derivatives markets are always steps ahead of the regulators. For example, by the time this MenzGold-Minerals Commission-SEC-PMMC-Bank of Ghana muddle is resolved, High-Frequency Traders would have developed yet another derivative that would require the attention of the regulators: and that is how it is. The regulators keep playing catch-up. Paul Wilmont who is an authority on the subject estimates that the derivatives market is 20 times the size of the world economy. He puts the financial derivatives market around a total of $1.2 quadrillion, whereas the world's annual domestic product is estimated at only $55 trillion on the average.
Unfortunately, derivatives are not new. They have been around for millennia. (The Babylonians used derivatives to bet on trading caravans). Although Wall Street traders and finance professors like to surround derivatives with confusing jargon and mathematical equations, behind the smoke lurks a simple reality: a “derivative” is only an agreement to pay or receive an amount of money determined by the performance of an underlining asset. In other words, derivatives are bets — nothing more. And bets are risky, but in finance the higher the risk, the higher the returns. Above and beyond, derivatives are legal financial bets. Bets can be used to hedge risks. But bets can also be used to speculate, and speculation creates risks where there were none before. This is why healthy economies generally regulate gambling, especially large-scale derivatives gambling.
For the sake of our in-depth understanding, let’s for a minute forget about MenzGold trading only gold on the world market. Hypothetically, let’s assume that as part of her business model for her derivatives, MenzGold takes some other risks that bring 10% returns on every cedi every day. Would MenzGold be able to pay 7 or 10% ROI on that one Ghana cedi after 30 days? You do the math. However, for the type of risk she may be taking to be able to pay such returns, let’s say that is her trade secret as long as it is legitimate. Individuals by nature are not ready to personally take that type of risk for themselves. Indeed, if clients are made aware of the said risk level, they will be tempted to opt for the American Option by exercising their rights before the maturity date of the derivatives. Nonetheless, having successfully done this for two years, MenzGold is speculated to have generated capital enough to serve as cushion for bad days for 24 straight months. That’s why we must not rush to say it’s a Ponzi Scheme. Nevertheless, we need to be interested in the purported gold bars that customers pay for at Brew Marketing Consult. Is the public paying for gold? Who has certified the weight and purity of that gold?
MenzGold is indeed registered and incorporated in Ghana by the company’s Act of 1963 (ACT 179) and undertakes dealership in Gold, Diamonds and other precious stones and metals with license from the Minerals Commission of Ghana to undertake the aforementioned business. The company has further created a bullion investment platform (gold trading), that offers ten percent (10%) monthly return on investment (ROI). The fact is, MenzGold used to have a license from the Precious Mineral Marketing Company (PMMC) to purchase gold from small-scale miners but hasn’t renewed her license since getting a similar license from the Ghana Mineral Commission. So currently, PMMC may not have any locus whatsoever in the current business model of MenzGold. This is because MenzGold is not operating with license from PMMC. Nonetheless, PMMC has locus in the sister company that sells the Gold to the clients.
Menzgold has intelligently avoided any form of direct reception of money from the public or her customers save processing fee. Until regulators can completely prove even at an arm’s length, that the directors of MenzGold and those of Brew Marketing Consult which receives money from clients for the gold bars, are still the same, we cannot say MenzGold is taking deposits. The least we can say now is that, MenzGold selling a profit making product via a Difference Contract or a Derivative. Period. MenzGold’s derivative is OTC so she has little to do with SEC. MenzGold is not a financial institution so she hasn’t registered with the Bank of Ghana. Honestly, do we as a people think MenzGold could flout the laws of Ghana for two years and these institutions would remain toothless? What we have now is a legal conundrum! And yes, MenzGold is treading on a grey area that begs for a bill just as the US did to bring the Commodity Futures Trading Commission Act of 1974 into existence, and also for introducing the Sarbanse-Oxlay Act (SOX Act 2012) when Enron and WorldCom engaged in corporate accounting scandals.
To find solutions to the current BoG, SEG and MenzGold muddle, this is what we can do. A possibility is to simply go back to what worked before and learn from history and the common law. I have been calling on our lawmakers to step in with such a bill. However, in Ghana, private bills as the SOX Act, don’t see the light of the day and for the past two years, the relevant regulators have been combing through their respective laws to see where MenzGold could have been flouting to no avail. But I think Bank of Ghana, with support from SEC and PMMC, can spearhead a bill to cover this grey area and restore sanity for a while. However, because we are told the laws already exist, and this may be a learning process for me and the general public, I voir dire Ace Ankomah Esq. to state the exact section of the 219 sections of the Securities Industry Act 2016, Act 929, gazetted on October 11, 2016, that provides for the derivatives market in Ghana. Statistics can be pliable, but facts are stubborn, so it is not enough to say there is a law on derivatives without adding the specific section or clause.
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