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Double dipping

07 March 2015

There seems no end to scandals involving charities, especially those that espouse the highest standards of integrity.

The charity we accidentally came across is of special interest because its office-holders pulled the wool over the public’s eyes so cleverly and with so much sophistication that even the highly regarded top-notch investigators had to spend a lot of time unravelling the flow of money involved in their scheme.

To begin with, this charity amassed funds primarily from donations, which it received by preaching to the public that the more they gave to the charity, the more blessings they would receive in future. This set-up was not far off from a Ponzi scheme, but its pitch certainly resonated with one’s soul.

The chief executive of this charity then exercised his executive powers to direct that these amassed funds from the public be used to buy bonds in two companies. A deeper probe into these two companies would have shown anyone that they were not financially viable. Yet for reasons known only to this chief executive, he went ahead and bought into their bonds anyway.
To the investing community, these high risk bonds were rated in the junk category.

At first, we understand that the charity ploughed the interest it earned from these high-risk bonds back into the charity. This was fine, and was not an issue with the charity’s donors.
What outraged the donors later was when they were told that the chief executive’s wife, a budding artiste, wanted to become a superstar in the United States – and that in order to do so, she would need funding to help her break into that very competitive market by hiring expensive marketing agents. If she was successful, she claimed, she would spread the good word of the charity through her music and apparently impending fame. Sounds far-fetched? Well, all that we were told, happened.

With this strategy to spread the word in the US, the charity subsequently sent the investment returns that it earned from the two companies to the chief executive’s wife for all sorts of activities to promote her and her music in the US. When some of the charity’s office-holders learnt of how the funds were being invested and used, they were up in arms because the money was being used inappropriately.

The chief executive, however, was able to allay some of the concerns of his colleagues, by showing them that their bond investments resulted in a return plus interest. The chief executive claimed that his bond-buying activity was a typical investment.

The plot then thickens. It emerged that one of the board members has considerable financial expertise and who, perhaps not surprisingly, set up a fund business which would invest the donations from the charity. More significantly, upon obtaining the charity’s mandate to invest such funds, he channelled these new funds into the same two companies from which the chief executive had earlier bought the bonds. Were these two companies his best options as an investment? Was there no other better potential investment?

You may ask why would someone invest new money into two financially weak companies again. The stories were soon leaked when members of the public protested at this.

What appears to have happened is that the charity had to somehow inject capital into these two weak companies to make them flush with cash, and then from that cash infusion, return the original capital sum the charity had originally invested. So, the audit trail seems to indicate that the charity had to use its own capital to bail out these companies in order for the charity to be paid back on its first investment. The transaction flow was done in such a way that the charity’s accounts were made to appear as though those bonds in the two companies were fully redeemed.

Among investors, this roundabout way of covering one’s tracks is known as round tripping or in some quarters is known as double dipping.

Meanwhile, the saga continues as the chief executive’s ambitious wife learned that her bid to be a musical sensation in the US was proving costlier than she ever could have anticipated. She found it far too expensive to work with large marketing entertainment groups that were her lifeline to keep her dream alive.

So how did she get all the money to keep her dream alive in the US? From none other than the same two companies that the charity had invested in. Those two same companies were the main sponsors of her music career. To top it all, even when sales of her music album tanked, the charity raised money so it could buy her CDs and promote the sales of her album.

All this has since ended in a full-scale investigation into the charity, and culminated in a high-profile trial about the charity’s alleged misuse of funds. We await with much interest the court’s decision on the charity’s workings and the inner workings of the money trail.




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