By Pravin Bowry
Last week a 71-year-old American, Bernard Madoff, was sentenced to 150 years for masterminding what has been termed the ‘biggest scam in history of mankind.’ It is estimated that Madoff’s mind-boggling epic swindle may have reached $65 billion (Five trillion one hundred and seventy billion shillings!)
Court papers indicated that Madoff’s company had about 4,800 investors as at November, last year and the company issued statements for that month that it held a total balance of about $65 million but actually "held only a small fraction" of that balance for clients.
Judge Denny Chin of US District Court in New York announced the sentence after Madoff’s plea of guilt in March on 11 felonies involving securities, fraud, investment adviser fraud, mail and wire fraud, three counts of money laundering, false statements, perjury, making false returns and theft from employee benefits.
Justice Chin called the fraud ‘unprecedented’, ‘staggering’, ‘extraordinarily evil’ and when sentencing said: "I have a sense Mr Madoff has not done all that he could do or told all that he knows," noting that Madoff failed to identify accomplices.
Madoff’s sentence is not the largest for white-collar crime. One Sholam Weigs was sentenced in February 2000 to 845 years for his role in a plot, which defrauded $400 million from an insurance company.
Madoff’s nefarious scheme was what is termed a Ponzi scheme – known in Kenya as ‘Pyramid Schemes’. The scheme is named after one Charles Ponzi who became notorious for using the technique after emigrating from Italy to US in 1903. Ponzi did not invent the scheme. Charles Dickens in his 1857 novel Little Dorrit describes such a scheme, decades before Ponzi was born.
Ponzi scheme is a fraudulent operation that pays returns to separate investors from their own money or money paid by subsequent investors rather than from actual profits earned. These schemes are non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any products or service being delivered.
Greedy investors
In Kenya there exists no specific law on Ponzi or Pyramid Schemes under the Banking Act or other legislation and investigators have to rely on the Penal Code to nab alleged schemers and no known prosecutions have ever taken place.
There have, in the history of Kenyan white-collar crime, been many such schemes that have gone unnoticed and largely unpunished. All the failed banking institutions such as Kenya Finance Corporation, Trade Bank, Trust Bank and Reliance Bank were involved in some or other form of these schemes.
Reliance Bank Limited, for example, was a Kisumu based institution which took massive deposits from unsuspecting investors and entrapped them by giving unusually high interest rates of up to three percent per month. Greedy investors pumped billions into the bank. The unusual aspect of this bank was that its investors were given off the record notebook accounts (called in Hindi as ‘Chopri’ accounts). Investors deposited monies not recorded in the bank’s books of accounts. It was claimed that they operated on trust and collected the interest in cash and lived on.
When the bank closed its doors, the most interesting scenario was that investors themselves could not get any recourse in law, as they had no documents to prove their investments. They were themselves accomplices in fraudulent dealings and by and large involved in a scheme of tax evasion. The ultimate result was that whilst the management lives in palatial houses and unbelievable luxury in foreign lands, hundreds of Kenyans lost, like Madoff’s clients, their lifelong savings.
The author is a lawyer in Nairobi
{bowryco@iconnect.co.ke }
