Identifier
Created
Classification
Origin
07MASERU619
2007-12-03 17:39:00
UNCLASSIFIED
Embassy Maseru
Cable title:  

LESOTHO: GOL SCRUTINY OF PONZI SCHEME LEADS TO PROTESTS,

Tags:  ECON EFIN PREL PGOV LT 
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VZCZCXRO2372
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0619/01 3371739
ZNR UUUUU ZZH
R 031739Z DEC 07
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 3462
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHMR/AMEMBASSY MASERU 3863
UNCLAS SECTION 01 OF 02 MASERU 000619 

SIPDIS

SIPDIS

DEPT ALSO FOR AF/S, AF/EPS;

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV LT
SUBJECT: LESOTHO: GOL SCRUTINY OF PONZI SCHEME LEADS TO PROTESTS,
POLITICKING

MASERU 00000619 001.2 OF 002


UNCLAS SECTION 01 OF 02 MASERU 000619

SIPDIS

SIPDIS

DEPT ALSO FOR AF/S, AF/EPS;

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV LT
SUBJECT: LESOTHO: GOL SCRUTINY OF PONZI SCHEME LEADS TO PROTESTS,
POLITICKING

MASERU 00000619 001.2 OF 002



1. SUMMARY: On November 27, Lesotho's Central Bank suspended
many commercial activities of the country's largest funeral
services company, Lesotho MKM Burial Society, for functioning as
an unlicensed bank, insurance company, and possibly as a pyramid
investment scheme. As hundreds of anxious investors congregated
for several days outside of the beleaguered company's
headquarters and protested the GOL's action, Lesotho's political
opposition took up the cause by calling and then canceling a
general strike for December 4. PricewaterhouseCoopers (PwC) is
currently conducting a forensic audit of MKM under Central Bank
contract. The GOL's Minister of Finance gave assurances
publicly that, although MKM is prohibited from receiving new
cash deposits or paying out disbursements to investors pending
results of the audit, the company is still allowed to render
critical funeral services. The wide popularity of MKM's dubious
investment activities, essentially a Ponzi scheme, and
corresponding panic among many investors reflects the difficulty
that Lesotho's lower and middle income populations face in
accessing domestic credit. END SUMMARY.

--------------
Not Just a Funeral Plan
--------------


2. On November 27, the Central Bank of Lesotho requested that
the High Court order the nation's largest funeral plan
providers, Lesotho MKM Burial Society (MKM),to close many of
its unregulated commercial activities. MKM was licensed by the
Ministry of Trade solely as a funeral undertaker. In its
petition, the Central Bank alleged that MKM operated as both an
insurance company and as a bank in contradiction of the
Financial Institutions Act of 1999. The petition alleged
specific violations of the Act, including mandatory minimum
capital requirements and a 25% liquidity minimum for deposits.


3. The closure petition followed an extended period of
head-butting between MKM and the Central Bank during which the
Central Bank demanded that MKM convert to a licensed insurance
company. MKM's successful funeral operations expanded in 2004

when the parent company opened a deposit-taking public
investment service offering lucrative returns of up to 100%
annually under the name "Star Lion Gold Coin Investment
Limited." While not specifically alleged in the Central Bank
petition, MKM's incredible investment returns led to speculation
of a Ponzi-style pyramid scheme. The High Court approved the
Central Bank's petition, and MKM is currently undergoing a
forensic audit by PricewaterhouseCoopers--expected to be
complete within 90 days.

--------------
Political Implications
--------------


4. The closure of the MKM Funeral Society and Star Lion Gold
Coin Investment Limited added a new dimension to Lesotho's
already polarized political environment. Opposition parties
moved quickly to criticize the Central Bank action, while
Minister of Finance and Development Planning Timothy Thahane
stated his strong support for the Central Bank action in
Parliament. Thahane also gave assurances publicly that,
although MKM is prohibited from receiving new cash deposits or
paying out disbursements to investors pending results of the
audit, the company is still allowed to render critical funeral
services. The Central Bank stated that it will underwrite
deposits in MKM's standard funeral plans, but has not made
similar promises on other, unregulated investments placed in the
company.


5. On November 28, hundreds of investors, depositors, and
funeral plan subscribers congregated outside MKM's corporate
headquarters demanding their money and condemning the GOL and
Central Bank. The GOL posted heavily armed police to guard all
premises belonging to MKM companies and to provide escort for
PwC auditors. Thousands of Basotho subscribers, ranging from
the nation's poor underclass to its affluent elite, remain
anxious about the fate of their deposited funds and investments.



6. The weekly publication "Public Eye" quoted one disgruntled
investor, referring to the GOL's practice of providing
interest-free loans to senior officials, as stating, "The
government is stepping on our toes. They lend themselves money
but want to close our investments." Some investors remained for
several days at MKM's offices, vowing to protect the corporate
office and "keep an eye on" the PwC personnel conducting the
forensic audit.

--------------
Strike Cancelled, But Discontent Remains
--------------

MASERU 00000619 002.2 OF 002




7. COMMENT: The Central Bank of Lesotho's move to close MKM's
investment activities, which PwC will likely expose as a pyramid
operation, is by all accounts long overdue. Thousands of
desperate investors, unable to access credit through the
country's prohibitively expensive banking system, have been
enticed by MKM's Ponzi scheme and the unrealistic promises of
quick and lucrative returns. The need for such capital is not
for personal enrichment, per se, but to meet basic needs,
including relentless funeral expenses resulting from a
staggering number of AIDS-related deaths, costly school fees,
and housing construction materials. The opposition attempted to
capitalize on the public panic, as well as an ongoing conflict
between the Maseru City Council and unlicensed street venders,
by calling on November 29 for an indefinite general strike to
begin on December 4 (Note: Opposition leaders backed off the
strike threat on December 3, reportedly in response to students
and business reluctant to disrupt exams and holiday commerce.
End Note). While investors complain about the GOL's action
against MKM and their now highly vulnerable savings, the truth
is that only much earlier action might have protected their
investments. END COMMENT.
NOLAN