Papua New Guinea has a long history of “fast money” schemes that promised to multiply deposits and collapsed with the savings of villagers, public servants and church groups. The Capital Market Act 2015 gives investors three simple tests and the Securities Commission powers against those who fail them.
The three legal tests
“A person shall not establish or operate a unit trust or managed investment scheme unless (a) the person is a licensed trustee under this Act and appointed by the members or unit holders … to act as trustee of the scheme; and (b) the unit trust or managed investment scheme is approved and registered by the Commission.”
- Licence. Carrying on a business of dealing in securities, fund management, investment advice or financial planning, or holding oneself out as doing so, requires a capital market licence (section 34), and individuals acting for a licensed firm need a representative’s licence (section 35). The trustee of a registered scheme must be a corporation licensed to operate a unit trust (section 189(2)). Penalty under section 34: up to K10 million or ten years, or both.
- Registration. The scheme itself must be approved and registered by the Commission (section 184(1)(b)), and the Commission keeps a record of registrations (section 186(2)). Penalty under section 184(2): up to K10 million or ten years, or both.
- Prospectus. Units may not be issued or offered to the public without a prospectus registered by the Commission, and no application form may be circulated without one (section 128(1)–(2)). Penalty: up to K10 million or ten years, or both (section 128(7)).
Ask the promoter for the trustee’s licence number, the scheme’s registration and the registered prospectus, then verify each with the Commission.
Other conduct the Act prohibits
| Conduct | Section | Penalty |
|---|---|---|
| Unsolicited invitation, offer or recommendation of securities (cold calling, door-to-door and social media selling), except by licensed persons to existing clients or with a compliant prospectus | 151 | Up to K10 million or 10 years, or both (s 151(6)) |
| Inducing a person to deal in securities by a knowingly false or misleading statement, promise or forecast, dishonest concealment of material facts, or reckless statements | 302 | Offence under Part VII; civil recovery under s 323 |
| Using a name, title or description implying that one is licensed, or is a stock exchange or participating organisation | 451 | Offence |
| Application forms for a scheme “that has not been formed” | 128(3) | Up to K10 million or 10 years, or both |
Section 451(3) refers to regulated activities “as specified in Schedule 1”; the regulated activities are in fact listed in Schedule 2, and Schedule 1 deals with exempt markets. The slip does not affect the prohibition. See cold calling and false statements.
What happens to an illegal scheme
Where a scheme is operated in breach of section 184(1), the Commission, the trustee or any member may apply to the National Court to have it wound up, and the Court may make any orders it considers appropriate (section 188(1)–(2)). Every promoter, director, chief executive, chief financial officer and company secretary is guilty of an offence carrying the section 184(2) penalty (section 188(3)). The Court may also wind up a company that has contravened a securities law on the Commission’s petition (section 450). Section 263 makes a contract to subscribe for an interest in a scheme operated in contravention of the Act voidable at the investor’s option by written notice to the offeror, who then has 21 days to ask the Court to declare the notice ineffective. The section cross-refers to “Section 187(5)”, an exemption rather than a prohibition; the intended reference appears to be section 184(1). The Commission may also recover investors’ money on their behalf (Securities Commission Act section 101) and prosecute (section 102). See unregistered schemes.
A practical checklist
- Check the Commission’s register. Confirm the scheme is registered and the trustee and fund manager hold current licences. Do not rely on a certificate the promoter shows you.
- Insist on a registered prospectus and the trust deed. If the promoter has only a brochure, a video or a WhatsApp message, walk away.
- Pay only into the scheme’s trust account in the trustee’s name (section 193). Never pay cash to an agent or transfer money to a personal, mobile-money or overseas account.
- Be suspicious of guaranteed or fixed returns. A unit trust’s value rises and falls; only a guaranteed fund approved under section 210(2)(g) may promise otherwise, and its guarantor must be identified.
- Watch for pressure tactics: limited places, bonuses for recruiting friends, deadlines of days, or claims of secret contracts with government or resource companies.
- Check who the people are. Directors of licensed firms must be fit and proper (section 40). Search the Investment Promotion Authority’s company register for the entity and its directors.
- Ask how you get out. A lawful scheme has a withdrawal clause or listed units; a scheme that only lets you leave by recruiting a replacement is a pyramid.
Schemes that promise to double or triple deposits within weeks, that pay early members from later members’ money, or that describe themselves as a “money scheme”, “investment club” or “mutual aid network” are not unit trusts and are not registered. Their operators can be prosecuted under the Criminal Code for false pretences, and proceeds restrained under the Proceeds of Crime Act 2005. Report them to the police and to the Securities Commission, which must keep a complainant’s identity confidential under section 106 of the Securities Commission Act 2015. Money paid into such a scheme is rarely recovered. See how to complain.
Sources
- Capital Market Act 2015 — ss 34, 35, 40, 128, 151, 184, 186, 188, 189, 193, 210(2), 263, 302, 323, 450, 451; Schedules 1 and 2
- Securities Commission Act 2015 — ss 101, 102, 106
- Criminal Code; Proceeds of Crime Act 2005
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.