Chit funds are thriving and growing more sophisticated in uncertain economic times

Uneasy money

Chit funds are thriving and growing more sophisticated in uncertain economic times

SRIWIPA SIRIPUNYAWIT

Chit funds are almost as old as greed itself, and they thrive in uncertain economic times. Seduced by the lure of easy money, people commit investments to operators who break their promises or disappear with the cash. Sadly, many of the victims are lower-income people who can least afford the losses.

The most recent high-profile case involves Easy Network, headed by Pathom Ansakul, who led the small Thai Ramruai party in last month's election. The Department of Special Investigation has frozen the direct-sales firm's assets while it probes some 800 complaints from all over the country.

The Securities and Exchange Commission (SEC) reports a huge spike in complaints to its Help Center about illegal chit funds in the past year. It received nine complaints in 2004, three in 2005 and six in 2006, but 11 in the first half of 2007 and 102 in the second half, with losses claimed around 60 million baht.

According to Charuphan Intararoong, director of corporate affairs at the SEC, the frauds have matured in recent years into new forms. Many involve companies or brokers who set up funds claiming to invest in assets including securities, real estate, futures and commodities such as gold and oil. Agricultural products such as rubber and rice are also popular.

Some are direct-sales businesses or pyramid share schemes in which the victims are asked to purchase stocks abroad. These companies usually employ telemarketing but websites are increasingly popular - as many as 100, according to a recent police estimate.

Mae Chamoy (top, second from right) made front-page news in 1984, bilking thousands of people out of an estimated four billion baht.

"The companies will ask the victims to put in initial investments that range from 100,000 to 300,000 baht while promising to deliver incredibly, and unrealistically, high returns in the first few months. Some even promise a tenfold dividend or a daily return," Mr Charuphan says.

As well, many offer commissions to people who can persuade others to join.

Generally, investors will receive handsome returns for the first few months. However, later they will be informed that the companies are suffering losses and they will be asked for more money with a pledge that the returns or dividends will resume. Usually, that's the last the investors will ever see of their money.

"Some even end up losing 6-7 million baht in the scam," Mr Charuphan adds.

Perhaps the most infamous chit fund in recent years was the "Mae Chamoy" fund that claimed to invest in crude oil and promised returns of 6.5% a month. Accountant Chamoy Thipso raised four billion baht from thousands of investors in 1984 before her scheme collapsed.

Mrs Chamoy was convicted of fraud and served eight years in jail before being released in 1993. She was declared bankrupt and her assets seized to repay investors, but the repayments totalled only about 190 million baht.

Other notable scams have included Nok Kaew, which told investors that it invested in land; the Charter fund, which claimed to put money in agricultural products; and Khao San, which specialised in rice.

In recent years, new frauds have emerged in the form of franchised businesses. A report from Kasikorn Research Center says that the operators of such businesses realise that fewer people these days are fooled by traditional chit-fund pitches. But a franchised business has an air of respectability and the public generally trusts such investments.

The problem, says Somjit Likitsataporn, the managing director of Franchise Focus Co, is that many people don't understand the real concept of a franchised business.

The basic concept is that the franchiser sells an already successful business model to the franchisee, who must invest both money and his or her effort in the venture until it prospers.

However, she says, many franchisees mistakenly believe that all they have to do is wait for the returns to roll in while the franchiser does all the work for them. "And that's how they have been cheated. They must know that there's no such thing as a free lunch in this world."

The fact is, fake franchises are chit funds too. Their focus is on signing up as many "franchisees" as possible and using the funds raised from newcomers to pay those who joined earlier.

For example, police are currently investigating Bangkok Noodles Ua Arthorn, which is alleged to have raised two billion baht from 1,000 franchisees nationwide but not kept its promises of big returns. An earlier case involved The M@sk, which offered kiosks selling IT hardware and software and had 100 franchisees who had paid 400,000 baht apiece. They subsequently took the operator to court.

The lesson for investors is that they should avoid any business asking them only for money without focusing on selling any actual products or any services.

Ms Somjit says that anyone serious about a franchise needs to do research, including paying visits to existing franchised branches and speaking to the managers or staff. Simply observing the number of customers coming and going is also valuable when the franchisers decline to provide financial information.