Policy think tank IMANI Africa has added its opinion on the Menzgold saga that has provoked the financial sector in recent times.

“Ghana is experiencing a full-blown crisis of confidence in the financial sector, and Government actions provoke questions about the conduct of powerful financial actors in the private sector,” the article read.

The Bank of Ghana (BoG), has added forces with Securities and Exchange Commission (SEC) to halt Menzgold operations in a ‘battle of financial powers’, that has left individuals and organisations, including religious bodies, who have invested hefty amounts of money in the gold dealership, in confused states.

On its official website, the policy think tank posted a lengthy article detailing the Menzgold crisis that has rocked the country and a lot of its investors while advising that, “it is time to restore order and confidence to Ghana’s financial sector, and we need all regulators to start earning their keep or resign if the task is beyond them.”

Below is the full article.

IMANI’s mandate is the education of the public on policy issues in order to influence improved policymaking.

Consequently, IMANI tends to focus on Government agencies and other public bodies; institutions; and individuals with the capacity to make, determine or execute policy.

On those occasions where IMANI has examined the work of private entities and individuals, it has usually been because those entities or individuals are acting as agents (for instance, as contractors or consultants) of public agencies, or are in some other way substantially impacting on public welfare and policy.

IMANI has no business, in ordinary circumstances, probing the business models and practices of a company without government contracts like Menzgold, even if affiliates of IMANI have over the last year shared their views in their individual capacity.

But these are not ordinary times. Ghana is experiencing a full-blown crisis of confidence in the financial sector, and Government actions provoke questions about the conduct of powerful financial actors in the private sector.

We are compelled by developments this week – the lawsuit against the SEC and the Bank of Ghana, the suspension of “extra value” payments on matured “investments” placed with Menzgold, and reports suggesting that Menzgold has no trading capacity in the United Kingdom – to offer this analysis to help shape media coverage, regulatory action, and possible legislative probes into the ongoing liquidity crisis threatening to bring down one-third of the financial system.

IMANI’s official commentary are always based on original research, which, in the case of Menzgold, we had not dedicated the time and resources to undertake until now. Finally, we have.

We will only dwell lightly on the issue of whether Menzgold is in a regulated line of business. Whilst a judicial authority, such as a Court, shall look at law to determine whether the declared nature of Menzgold’s business falls within one of the broad bounds of regulated activities identified in Ghana’s main banking law (Act 930) and securities law (Act 929), the simple fact is that there are globally recognised definitions of words like “securities”, “derivatives”, “bonds”, “stocks”, and “securities” etc.

In a technical area like the financial markets, it would be literally impossible for every law to seek to also pose as a technical manual and academic textbook.

Not surprisingly, despite using the term 158 times, the drafters of the UK’s Financial Services & Markets Act of 2000 did not provide an exhaustive definition of, for instance, “securities” in its interpretation section. Broad principles have, however, been founded to tie a great many different ideas constituting variations of the same theme together by the simple process of placing them under one regulator.



The expansive and inclusive approach in all mature jurisdictions easily capture not just traditional securities such as shares, bonds, warrants, and debentures, “investment contracts”, broadly defined, but also “investment advisory”, “brokerage services”, and “derivatives”.

This is the case in Ghana too, where the securities law covers every conceivable third-party investment scheme structure. Broad categories of institutions and affiliated individuals subject to regulation include: “investment advisory” and “broker-dealers”. Furthermore, the law affirms that “any other institution” in the “securities industry” is subject to control and supervision. The definition given in the Ghanaian SEC law for “securities” is actually inclusive and expansive, not exhaustive; it lists a number of classic instruments, such as derivatives, and investment activities, without closure.

The US Supreme Court has moreover done the common law world a great service with a brilliant, common-sensical, position on the subject by establishing the Howey rule in the case of SEC v W.J. Howey Co as far back as 1946, when it held that an “investment contract” simply refers to “a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” This has over the years become a beacon of light in many dark waters.

The question of whether Menzgold is subject to SEC regulation, in the ongoing controversy, is to be determined by whether their line of business as they have described it, as is prescribed in their legal commitments (such as contracts), and as they have outlined it to be in their lawsuits, qualify to be treated as participation in the securities and/or derivatives creation and trade.

There are a whole range of activities described in the Ghanaian SEC enabling law, many of which are relevant, but “securities” and “derivatives” are so well understood worldwide, and so broadly regulated, that comparative experience and the general field of financial markets provide us with all we need to know to be confident about the eligibility of Menzgold’s activities for regulation.

Once we have shown that Menzgold is indeed participating in the securities trade, the next step would be to evaluate the risks of its business model, in order to gauge the urgency of the need for regulation. If it is successfully argued that they are engaged in a regulated business with a high-risk profile, the systemic nature of that risk can be assessed and recommendations offered in the hope of containing further contagion. Our final hope for this exercise is that it will offer some insights about how to treat new business models that may require regulation, whilst avoiding the temptation of imposing expensive regulations on every new idea, even if the systemic risks they pose are minimal.

The following activities of Menzgold in Ghana have never been in doubt. They have been repeated and confirmed many times in many contexts, formal and informal, by various Menzgold representatives. The details are still to be found in Menzgold’s brochures and websites.

Selling gold bars to the public through an affiliate, Brew Marketing, in denominations of 5 grams and above. These bars may be sold in partially refined form (called “Gold Dore” by Menzgold).

Selling commemorative gold objects to the general public.

Accepting these gold bars for storage and “trading”.
Paying “extra value” that accrues from the trading activity to the customers who own the gold bars, in the form of a capped percentage of the value of the gold bar every month over a fixed contract term, usually three months, six months or 12 months.

Some of our colleagues at IMANI have gone to great lengths to show that the contract documents covering Menzgold’s “Gold Vault Market” product, in connection with which the above activities are conducted, reveal a shocking lack of grasp of legal and financial knowledge. They have pointed out that the specifications of the gold indicated in the Menzgold contract are self-contradictory; the “aurum utallium” term is not a proper description used in standard contracts in the industry; and that Menzgold’s practice of selling the gold to the customer only to turn around in the contract and make compliance with the specifications the burden of the same customer is both ridiculous and inept, particularly when Menzgold refuses to renew its license with the country’s only authorised assayer of gold, PMMC, which alone can certify that the gold being exchanged is actually gold. Our colleagues have argued that a business cannot innovate on top of something that they barely grasp.

We shall not be go over these claims again here. Instead we shall focus on evaluating the risks in the business model and make some recommendations.

Menzgold’s activities establish a pattern of a company structuring securities and trading them with very minimal financial knowledge. That Menzgold does not or cannot understand that they are indeed trading in securities is in fact the scariest thing. Because it means that they do not have adequately trained personnel to engage in this whole line of business. Revelations that their operations in other countries are not also trading outposts multiply the concern severalfold. Here is why.

Menzgold is involved in the securities business in Ghana by the simple fact that they are taking a valuable asset of a customer and promising them returns over a definite period in the future. Menzgold NEEDS to be involved in securities, even if outside Ghana, in order to generate the constant stream of returns on their golden assets “under management” here in Ghana.

Even if we discount, and we shouldn’t, the fact that their Ghanaian operations involve securities, we cannot do that for the second leg of their operations, which presumably happens overseas, because they must continually RE-INVEST the deposited gold in order to generate returns from which to pay their customers. They need to have financial professionals with impeccable skills in order to be able to obtain these returns from the market.



To date, not a single Menzgold professional with a financial investment planning background has been found after a detailed review of their employee records, using Linkedin and investigators on the ground. This, coupled with the fact that they do not understand or accept that they are in any of the securities and investment categories listed in Act 929, through which short-term financial returns can be generated raises serious concerns about the basic professional capacity of the company.

Intriguingly, it has now also come to light that Menzgold is not licensed by any of the financial market regulators in those countries where they have set up overseas branches. So how exactly is Menzgold “trading” the gold it claims to be hoarding for Ghanaians overseas? Most likely, through agents.

Considering the importance of the London market in commodities-based trading, we decided to investigate if we could identify any legitimate financial instrument in London that an agent could be trading on behalf of Menzgold for the fantastic yields that would enable them to make the payments they have been making in Ghana. We could not, and we shall elaborate further in due course.

But imagine our disquiet when, instead, we learnt of certain real estate plays in South London involving a certain Adewale Adebajo, a real estate professional, whose offices had been sublet to Menzgold when they first set up their British branch. The problem is that Adewale Adebajo’s operations have been barred by the UK financial regulator, and his activities in the Nigerian real estate market become a serious source of concern. Why is it that Menzgold consistently fail to engage financial and investment professionals of the right calibre?

If Menzgold had any serious finance or investment professional on the team, he or she would have explained to them that the oldest form of “securities” were actually gold-backed notes, whereby investors placed their gold with goldsmiths for safekeeping and in expectation of value appreciation. The subsequent ability to exchange these notes, which led to gold-backed currency, is not a necessary factor in assessing whether or not a gold depositary is a security. Worldwide, they are recognised to be.

Take India, for instance, where “Gold Deposit Schemes” have long been run by jewellers and others in the gold trade. The customer hands over some gold to the jeweller or other depositary manager, and they get a fixed or floating return at specified intervals, usually a month. In India, the securities regulator, SEBI, regulates all these offerings as “collective investment schemes”, as indeed they should (see: https://www.sebi.gov.in/legal/circulars/oct-2013/gold-exchange-traded-fund-scheme-gold-etfs-and-gold-deposit-scheme-gds-of-banks_25561.html).

Menzgold has made a lot out of the fact that its contracts with individuals in its Gold Deposit Scheme (GDS), which it calls Gold Vault Market, cannot be considered a commodity warrant or depositary in the securities sense because the contracts are not “transferable”.

This is another sign of serious financial illiteracy. It is trite knowledge that participation in many collective investment schemes, whether in the form of buying into a hedge fund, investing in a mutual fund or unit trust, or becoming a limited partner in a private equity fund, typically involves the risk of restrictions on transferability, and in many cases transferability without permission is barred.



Not every security has a liquid secondary market. This is such trite stuff that Menzgold would have known had it actually employed finance professionals in management or on its board. That it does not understand this is testament to serious incapacity.

It is true that parts of Menzgold’s highly incoherent contracts have been drafted to suggest that the depositor is merely “trading” the gold on Menzgold’s “platform”, suggesting perhaps that Menzgold is merely a medium. This would indeed have raised interesting novel challenges for Ghana’s securities law since regulations governing Ghana’s “over the counter” electronic exchanges are generally less inclusive, and there are no universally recognised features of electronic commodity exchanges.

At any rate, the risk profile of such an operation would have been far lower and very different in character since investors/customers would have been exposed directly to market risk, without any implied mitigation through Menzgold’s skill.

Unfortunately, Menzgold is not actually providing anyone with a platform to directly trade gold. It is not even an exchange-traded fund, whereby it picks investments but pass on both risk and return to investors proportionately. Menzgold claims that it takes the gold and trade it on its own terms.

The investors/customers have no insight and are issued no reports at all about what Menzgold uses the money for, or which trades it has committed to. Its investment strategy is a complete blackbox, and it has never issued an annual report, much less audited accounts, to any of its customers to assure them that it is indeed following some specified trading strategy. It simply takes tokens, purported to be gold bars sold by its affiliate, goes away and returns every month to pay a return that all this while has been fixed. Such practices amount to serious misdisclosure.

The Gold Vault Market can clearly not be viewed as an independent trading platform. Nor can it be viewed as a commodities trading platform subject to any regulations made to fulfil the demands of section 214 of the SEC law.

For the avoidance of doubt: Menzgold’s “Gold Vault Market” is a Fund that takes gold, converts the whole or part thereof into cash somehow that it shares with customers, and then returns the gold at the end of the relationship.

To the extent that Menzgold advertises to the public and promises a return DEPENDENT ON MENZGOLD’S SKILL, CREDIT, AND GOODWILL, it is in the securities business. In fact, this is the most classic type of operation in any business that pools investments from the general public for the purpose of reinvestment.

To the extent that Menzgold selects the assets or strategies for the actual trading of the “gold deposit”, and not the customer/”trader”, it is also, at different stages of each routine “Gold Vault” transaction, an investment advisor, fund manager, and broker-dealer, all within the meaning of the Act.

A careful study of the “collective investment scheme” language of section 216 (the interpretation clause) of the SEC law provides additional insight by listing a tangible set of investment advisory activities almost perfectly identical to the Menzgold model, as they themselves describe it. The definition of derivatives (“any financial instrument” whose “value and characteristics” are derived from an “underlying asset”) strongly complements this text.

Were Menzgold to be considered an unregulated entity, its operation could easily become a funnel for the laundering of illegal funds since no know-your-customer or beneficial ownership restrictions would apply to it, as indeed they haven’t for many years now. Anyone wishing to launder funds would simply go to Brew Marketing with bags of cash, purchase purported gold and hand them over to Menzgold for “trading” and then direct for settlement in an account of their choosing. Which civilised jurisdiction can tolerate this?

That Menzgold has been offering a fixed return might suggest that it is dealing with risk-free instruments. Plain vanilla bonds and other fixed income instruments offer fixed returns too. But they usually offer lower rates precisely for that reason.

Presently, Menzgold offers on average nearly SEVEN TIMES more than benchmark fixed income investment products on the market. This is extremely unusual in finance. Typically, the higher the return or yield the higher the volatility. In fact, in all the hundreds of years since finance became a formal discipline, a high-yield instrument with zero volatility has not yet been conceived.

But let us explore precisely why, contrary to appearances, Menzgold’s model is even riskier than other, usually volatile, high-yield instruments.

To do that we must return to the business model. Menzgold accepts deposits of gold starting at 5 grams per unit (about 1000 GHS). Several investors/depositors/customers that our investigators have spoken to confessed to “depositing” the gold handed them by the Menzgold affiliate in quantities measured in “pounds”, which is to say in multiples of approximately 90,000 GHS. Our colleagues estimate a total gold value of about $300 million may be at stake, though we have also seen estimates as low as half of that.

The classic explanation of Menzgold in its brochures and on its website is that it is leveraging on price movements in gold, in particular on a bet that gold prices rise over time. This explanation is of course very implausible, since gold prices move up and down, rather than just up, and yet Menzgold has continued to offer a fixed, positive, rate for four or more years now.

Furthermore, gold-linked funds all over the world are in huge difficulties as a result of the bearish sentiment in the gold market right now (https://www.etf.com/sections/features-and-news/gold-etf-demand-falling?nopaging=1). But the real problem is that Menzgold’s fundamental model is fundamentally incoherent, and once again suggests the serious lack of finance and investment professionals in its rank.



Through its model, Menzgold is always exposing itself to the price of gold. By accepting deposits continually in gold without any understanding of what its optimal holding might be (it runs an “open scheme”, whereby, unlike most high-yield funds, through continuous advertising, it seeks to attract a never-ending stream of new customers), it means that its fund is always “long” on gold, regardless of market conditions.

In simple terms, Menzgold does not, unlike the rest of the market, modulate its holdings of gold based on the market situation. It just keeps taking in the gold for “trading”.

Any non-traded fund, as Menzgold’s model is, would regulate the size of its holding based on market conditions, which is to say it will recruit members up to a point, wait for a while to realise a trading strategy, and only then expand. Menzgold, on the contrary, is always taking in more gold.

But that is not all. The real situation is even more bizarre. Because it is “borrowing” the gold to “trade”, it is actually also always “shorting” gold, which means that the price of gold must continually fall for it to make sense to borrow the gold from its customers, trade with it, then buy back the physical gold for all investors who wish to retire their principal.

This is in complete contradiction of Menzgold’s stated claims of leveraging gold price increases for its returns. Indeed, if this is what it had been doing the model would make no sense since every three months it would need to buy back the gold it traded out at a higher price before returning same to the owner who would thus have benefitted from both the dividends and the price appreciation. But if so, where would Menzgold’s margin come from? It takes (in fact borrows) gold at price A. Price of gold goes up to A + x. It finds x dollars to enable it buy the gold back in three months and then return A + x to the owner. On top of that though it must also add y dollars in dividends!

What about the opposite case though? Would that mean that in a world of falling gold prices, Menzgold can structure a high-yield instrument from gold? No.

Even though it is true that Menzgold’s current model, apparently unknown to Menzgold’s owners, is actually betting on a drop in the price of gold when it borrows gold from customers and promises to return it to them in three months with interest of up to 30% (i.e. sell the gold as soon as it comes in, invest the proceeds elsewhere, make money, buy the same quantity of gold at a lower price and then return the gold with the 30% “extra value” keeping whatever remains), such a strategy only works when the company is also hedging against any episodic rise in the price of gold, an action that would introduce a transaction cost and thus render the model meaningless given what we know empirically about the price of gold historically.

But think about it carefully, if Menzgold knows how to liquidate gold, trade with the proceeds and make more than 30% in three months before buying back the gold for the depositor, why does it need gold in this mix in the first place? It could simply borrow at 5% a month from any number of eager financial institutions, trade with it, make 30% and keep the difference. Why go through the contorted path of first soliciting gold from the general public before executing these powerful trading strategies using its otherworldly algorithm, and suffer all the inconveniences?

Whatever Menzgold may be doing or thinks it is doing, the decision to hold gold, and thus be exposed to the volatile commodity market, and yet pay very high fixed returns over a short-term investment horizon implies such high risk that its regulation is a matter of urgent public interest. It must submit to a disclosure regime, within a sound regulatory regime, that will enable investors/customers/depositors to make up their own mind armed with all the facts.

Be that as it may, Act 929 empowers the SEC to resort to court to compel a production of documents when disclosure is not forthcoming. At a minimum, Menzgold needs to disclose the finance and investment professionals it is relying on to generate more than 10% a month in returns; which re-investments it is making upon receipt of gold; and its audited financial statements for examination.

The SEC is the appropriate authority with the skills and capacity to evaluate these records and disclosures. To the extent that several financial institutions may be laterally exposed to Menzgold due to the credible reports we have seen of investment companies making direct placements or lending to Menzgold depositors/customers, this is a matter of systemic risk and the regulators should act with urgency.

What has this episode thought us so far? Several things, and below we shall make some recommendations to avert future occurrences.

Recommendations:

Where a novel business model does not pose any systemic risks, the SEC has the power, under sections 50 to 58 of its enabling law, to grant the promoters self-regulatory status in order to promote innovation and avoid the stifling of creativity, especially for startups, since regulations are generally costly and are not always the appropriate starting point for the nurturing of creative ideas. The question thus becomes information. The SEC must have its fingers on the pulse of the financial markets and adjacent spaces and industries.

The Financial Intelligence Center’s (FIC’s) mandate and enabling legislation need to be enhanced and updated to include “market scanning” activity with a view to creating an early warning system for high-risk business models that may require regulation. It is completely unacceptable that for many years Menzgold was openly structuring and marketing securities in Ghana without the requisite license. This is completely unacceptable, given the powers available in the SEC Act.

The enhanced law should enable the Parliamentary Select Committee responsible for the sector to conduct monthly public hearings to examine the FIC’s monthly reports.

In view of some of the discoveries coming to light in the Menzgold matter, it must become a matter of regulatory policy that all Directors and managers of operators in the securities industries undergo continuous finance skills training.

SEC has absolutely no justification in the manner it has proceeded so far. Refusal to produce information is, under section 34 of the SEC law, a matter of criminal law requiring police investigations. It cannot continue to hide behind the absence of information to take concrete action to stem the systemic risk emanating from various unregulated investment schemes countrywide. Per sections 37 and 38 of the SEC Law, the commission may request banking information from the Bank of Ghana in connection with any party whom it believes is relevant to an ongoing investigation, and then proceed to court to compel additional evidence outside the banking system in order to trace assets, examine records of trades, and obtain customer lists. This is critical to start putting in place various contingency measures to prevent mass defaults should unregulated investment schemes refuse to submit to regulation and choose instead to wind down or abscond.

It is time to restore order and confidence to Ghana’s financial sector, and we need all regulators to start earning their keep or resign if the task is beyond them.