Financial scams

The biggest news item last week was the capture of the elusive Sakvithi, mastermind of a Rs. 1,000 million financial scam. His modus operandi was rather simple. Entice unsuspecting depositors with promises of very high interest, pay them for a number of months and then vanish completely with their funds. The script didn’t go exactly to the plan, but no one knows exactly what happened to the money yet. This is up to the investigators to find out.

There is no doubt that they will leave no stone unturned to probe the matter and do justice by the duped depositors. It was their hard earned money that Sakvithi took for granted. And he is not the first to engage in such a scam. There have been many so-called finance companies that either collapsed or conveniently closed shop, leaving customers high and dry. In many instances, thousands of unsuspecting customers lost their lifetime savings.

However, this is not likely to be the last instance of this kind, if people are not more alert. It is rather easy to dupe people, with the right kind of message with the words ‘high returns for your money’. This is exactly what the authorities should try to prevent, even as they take action against the current crop of fraudsters.

After the Sakvithi scam first came to light, the Central Bank took swift action to name illegal or unauthorised finance companies/individuals as well as the legitimate ones. This was a step in the right direction, as it gave the public clear directions as to where their funds would be safe. In the wake of Sakvithi’s capture, it will again be useful to update this list and publicise it widely.

It is true that the world went through an economic crisis, which may have had a bearing on events here. Several top banks in the world collapsed, not to mention the entire economic systems of several relatively wealthy countries. This has given economic planners, lawmakers and the public ample food for thought. Fortunately, Sri Lanka’s economy emerged relatively unscathed, but the authorities must do everything in their power to shield the local economy from external shocks.

But all this applies to the formal economy. Sri Lanka’s economy (or for that matter any economy) has always had an unseen element - the black economy, as they call it. Many persons seem to accumulate a lot of wealth which they are unable to account for through legal means. They are usually reluctant to deposit this money or otherwise invest it through legal channels, lest the taxman take it away.

This has paved the way for dubious individuals and companies that offer discreet services - and high interest - for such deposits. This was the livelihood of Sakvithi Ranasinghe, Danduvam Mudalali and their ilk. They accumulated billions of rupees from innocent and not-so-innocent customers. There is no solace for their customers - they had taken a risk without going to the established banks and they have now lost all their deposits. Such monies, if invested through proper channels, would have been an impetus for development.

There is no proper mechanism to attract such monies to the formal economy. Money laundering is another financial crime that comes to mind. Again, there are people who prefer such methods to legal channels. There are, of course, people who have accumulated funds through legitimate means but who do not want to get caught in the tax net. So they opt for dubious avenues to ‘invest’ their funds.

The formal banks should have better and more innovative products to attract customers, even though the current interest rates are not all that attractive. They should give wide publicity to their products and assure that their services and products are superior to those of any dubious financial institutions. This may well save innocent customers who might otherwise end up in the hands of fraudsters.

One should not forget that there are other types of fraudsters as well. A famous trick is to collect money promising residence and employment abroad. One could also include bogus foreign employment agencies in this category. Thereafter, they conveniently vanish from the scene without a trace, leaving hundreds of desperate individuals who had raised the money by selling their belongings and even houses. This is a completely unregulated method of earning money, one which authorities can hardly prevent beforehand.

The question is, have we, both the authorities and the public, learned any lessons from such debacles? There is clearly a need for more effective laws to police financial institutions and punish wrongdoers who dupe depositors and part with their monies. The same goes for other varieties of fraud as well.

In the recent past, several leading finance companies collapsed in this country and elsewhere. The Central Bank should again investigate all finance companies that offer very high interest, including their sustainability in the long term. A small economy such as ours could be seriously impacted if more financial institutions fall or if more scams are in operation.

The crux of the matter is that a lot of people have apparently had a good time with other people’s money. Thus it is vital to establish accountability and transparency at these institutions and declare the salaries/bonuses of their top executives. There should be a process of naming and shaming individuals who had swindled depositors’ funds, just as in Sakvithi’s case. This should also apply to the major defaulters of State banks, many of whom enjoy a grand lifestyle with the hard-earned money of the public.

The Sakvithi and other such stories are a lesson for the established banks and the Inland Revenue Department- why do people choose dubious individuals and companies for their deposits? Obviously, more needs to be done to attract such funds to the formal economy, with any appropriate incentives. That would be a much better option than rogue finance company heads taking it all away. However, it all comes down to the prudence of the depositor - stability and peace of mind pay in the end, not high interest.