Who allowed Amber Gold to grow so big?

Looking back to late 2008 and early 2009 I remember first advertisements of Finroyal and Amber Gold in newspapers. Both shady companies would tempt potential customers with deposits meant to fetch income a few percentage points higher than traditional bank deposits. Cognisant of risk – return trade-off I wondered how it was possible to fix such income for customers, but never took the trouble to inquire into workings of such companies. In 2009, when browsing Polish Financial Supervision Authority, I ran across the black list of companies engaged in bank-like operations without required licences. Both business were listed there, but who actually visits the site of KNF?

Months went by and depositing money with such companies has grown in popularity. Poles have been put off risky investments on stock exchange and in investment funds after the bear market of 2007-2009, bank deposits could barely beat inflation, so guaranteed profits exceeding inflation rate by almost ten percentage points loomed as attractive investment opportunities. In the meantime some journalists tried to unravel the workings of companies offering allegedly guaranteed gains higher than offered by banks. With time Amber Gold began advertising itself aggressively. As long as inflows of money from depositors were bigger than outflows and OLT Express airline was managing to cover its expenses, the business drifted above water. Much of the money was probably swindled out of Amber Gold to its CEO and owner, currently 28-year-old Marcin P. In late July 2012, the house of cards was pulled down.

If you want to ask me to explicate how the whole scheme, or rather scam, worked, feel free; you’ll catch me naked. I know what principles underlie Ponzi schemes, I am familiar with some methods of laundering money, but each case is different. Unfolding the story will take relevant secret services and persecution offices years.

Marcin P., a man who at the age of 20 was sentenced for embezzlement for the first time and did his time, was allowed to set up another scam and run it undisturbed for three years. For years he kept away form the limelight and assiduously raked in money from the venture. In the days preceding the spectacular collapse of OLT Express and Amber Gold he came out of the shadow and acted as the number one celebrity in Poland. Currently Mr. P is behind bars, charged with several crimes. Personality of Mr. P is a good topic a separate posting – bold, unprincipled, lying through this teeth without scruples. There are supposition he is just a cog in the machine and much more powerfully and cunning criminal have contrived the scheme.

The money was taken away from the company, whose liabilities surpass its assets several times, so depositors who entrusted their savings to Amber Gold have little chance to recover their money. Thousands of people done out of money. The youngest aggrieved is aged 22, the oldest over 80. From all walks of life, some put there a few hundred zlotys, one sank there staggering 3.2 million zlotys. Some invested their savings there because they believed it was a bank, some realised it was a scam, but hoped to withdraw money before it falls apart. Most of Amber Gold’s customers had no notion of economics, were simply duped, fell prey to promises of gold-backed profits. Now they hold it against the Polish state that it has failed to protect citizens from deceitful businesses.

So who should be held accountable for dilatory dealing with Amber Gold case? The Financial Supervision Authority issued warnings on its website and filed a crime suspecting notion to the prosecution office. To no avail – sloppy prosecutors for some reasons, maybe the reason is imperfection of Polish law, full of loopholes, failed to get to grips with Amber Gold.

The scandal gave rise to a dispute who actually is to blame for loss of money deposited by people in the Amber Gold. There are generally two groups. Some, identified with enlightened economists, say these are depositors themselves who gave credence to implausible promises, others point at Polish state institutions failure to lay down clear law and to enforce it.

My take is that both groups are partly right. The state should secure a legal system under which a criminal cannot start up a financial company that works like a bank. The state should take steps to close it as soon as possible. The state should inform citizens about perils associated with putting money there. But the state should not forbid citizens from doing with their money whatever they wish. In a properly run country citizens should be able to easily access information (e.g. black lists should be printed in newspapers, presented in TV and put up in all bank branches) that Amber Gold, Finroyal and many other companies are on a black list of KNF, operate without license, are not covered by financial supervision and deposits are not guaranteed by the bank guarantee fund . Then fully aware citizens could choose to put their money at risk.

This, along with recent bankruptcies of travel agencies sheds some light not only on Poles’ carelessness, but also Poland’s advancement on the way towards welfare. Choosing to go on holidays with a dodgy travel agency to save, depositing money with a shady financial company to earn more. This illustrates not only unfettered and stupid avarice, blissful ignorance, but also the vague concept of dziadostwo. There is little wisdom in risking much to earn little and such was the case here.

In managing my financial surpluses I favour transparency. I keep 75% of my savings on bank deposits and make sure that the bank with which I deposit money is registered in Poland, thus overseen by Polish Financial Supervision Authority, deposits are covered by Bank Guarantee Fund and the bank is listed on the Warsaw Stock Exchange. The rest of my money is used for investment of speculation on the stock exchange. There I am exposed to market risk, i.e. that prices of financial assets I hold may drop, but at least it is transparent and I have no problems selling my stocks with a loss and recover the rest of money. It is not a matter of risk, as some say, it is a matter of transparency that enables you to control risks. Victims of Amber Gold surely had some problems with risk management…

Three years left?

If you believe in the Mayan prophecy of the imminent end of the world, you’ll probably nod. The 2012 fad is visible all over the world, if you tap “2012” into your google, the results are likely to be divided into three groups: Euro 2012 (the imminent organisational disaster is within the realms of possibility), London 2012 and Doomsday 2012. The one projected to occur in three years is the last we will survive, unless some new manuscripts are found.

Do I believe in this funny theory? No, though there was a time when I was fascinated with it. Is there any reason why? In my humble opinion the end of the world will strike humanity out of the blue. Too much has been spoken about, too many people know about, mostly after the film “Doomsday 2012” was released.

For no apparent reason if people live in affluence the like to devise new problems. Such is the case with year 2012. There’s no other need to worry, so let’s instigate fear of end of the world. Some, like Patrick Geryl try to capitalise on the fear. The main author of doomsday theory is now organising a group of people who will survive the disaster and restore the human kind on Earth. This for me looks like a big scam. This guy might take away the money from those people who trust him and enslave them or set up a sect or something…

SKO or SCAM?

SKO – stands for Szkolna Kasa Oszczędności (EN: School Savings Association). An invention with the long, tracing back to 1920’s, tradition, under the umbrella of partly state-owned PKO Bank Polski (this bank is a monopolist when it comes to that very product). SKOs are aimed at pupils, mainly of primary schools, aged under 13. The idea behind the whole deception is to instil the pupils ability and habit of saving. End is indeed commendable, but end justifies the means.

According to the bank’s statement, in which it declares it can’t decline to run SKOs as it is one of activities arising from its articles of association, the primary goal of the scheme (do not mistake for scam) is the financial education. Probably it even sounds loftily but there’s a hitch which can’t pass unnoticed. In the normal economy the value of money rises with time, this is called inflation. In the normal banks people get interest for the money they deposit, so that by inflation of four per cent and interest rate on their deposit of five per cent their money turns a real profit of about one per cent. At least depositors’ savings retain their real value – but that’s the shape of things in the normal bank, not in SKO. Here, indeed the deposit is interested, at 0,01 per cent (to illustrate it by an example, imagine that you pay ten thousand zlotys, pounds, dollar, etc. and after a year you get one zloty, pound or dollar as interests), what in practise means that a child would take out exactly as much as it paid in.

Case study:
A child puts aside money for a new bike, which costs 600 zlotys. Each month (at the beginning) it pays 50 zlotys into SKO, or into bank savings account set up by its parent with the interest rate of 5%. In the former variant it gets no more and no less than 600 złotys, in the latter approximately 613,95.

You might say that additional almost 14 zlotys is a little sum. It is, for one child, but it teaches that saving pays dividends. We deposit our money in the banks instead of putting them under the mattress to get more then we put – that’s the logics behind it. Children, although bank may highly speak about it’s action, are taught something different – taking into account inflation they pay out in real terms less than the paid in. Isn’t it in contradiction with the idea of financial education? It’s pathology, something like this should not be allowed to function. A normal man would not save on his current, bearing no interest, account, a financial surplus is transferred into savings account so that it works there.

But many people are unaware of another aspect of the situation. Banks doesn’t keep the collected money in the safe deposit box. It has it at its disposal and can lend it to another bank at the WIBOR rate (currently about 4,6 per cent). So, the conclusion is that bank makes money on poor, still naive children, doing them out of due interests.

Bank explains that the interest earned on the deposits of pupils is turned into precious prizes, like school trips for the best associations. The next lie and pathology – namely unfair redistribution of interest income – children from the whole country finance the trip of one, chosen school. That’s the con, although it may raise the spirit of competition among children – but the more they save, the more profit the bank can make on it. It may only discourage children from saving, as they see it doesn’t beat any fruits. If such programme is to be held, it should be held under market conditions – so depositors should be paid interests.

A traditional piggy bank is a better solution. One won’t get more anyway, the basic assumption is fulfilled and big fishes in expensive suits won’t get their bonuses from children.

The post was inspired by a short article from yesterday’s issue of Gazeta Wyborcza.

“Dziś oszczędzam w SKO, jutro w PKO!” – a fool and his money are soon parted!