Business Practices Committee Report 80

Although Propalux commenced business in May 1997 it could not furnish any annual financial statements. Mthombeni said that the annual financial statements would be available soon. The officials were of the opinion that the lack of books of account would have made this event impossible. Mthombeni said that the motive in accepting deposits was to help people. When consumers wanted to invest in Propalux, they were first given advice about their financial problems. Propalux would then, through its agents, establish whether it could be of "assistance". If Propalux could not assist a consumer with his/her problem, it would not accept the investment. This explanation was rather garbled. Mthombeni said that Propalux had between 300 and 400 investors.

Propalux has 48 employees of whom eight receive salaries. The remaining 40 receive a commission of 10 per cent on the amounts invested by the consumers/investors consulted by them. It appears that these 40 "consultants" are also shareholders in Propalux, Sekheleng Propalux and L Mthombeni and Associates (Pty) Ltd.

Mthombeni was asked how it was possible to pay an annual interest rate of 40 percent to investors, keeping in mind that 10 per cent of each investment is paid as commission to "consultants". An investment of R10 000 is immediately reduced to R9 000 after the commission has been paid. To pay the required R4 000 interest implies that the yield on R9 000 would have to be 44.44 per cent per annum. This return would only provide for the interest to be paid and would not contribute to Propalux’s costs or profits. Mthombeni said that he was an astute property dealer and his business deals provided enough to pay the required interest and his costs. He then quoted a number of examples of properties bought at bargain prices and sold at "enormous" profits. He also digressed about a hotel he bought for R650 000 and which now provides a monthly income of R200 000.

Officials asked Mthombeni whether they could inspect his accountancy books. The officials were presented with two "books." These books contained the names of the investors, the amounts invested and the maturity dates of the investments. The last entries in the books were made on 4 October 1999 and Mthombeni said that "they" did not have the time to update the books. A spot check was made of the amounts invested. From 1 to 4 October 1999 Propalux accepted R255 000 from investors, during September 1999 consumers invested R1 626 500 and during August 1999 Propalux took R955 000 from investors.