VZCZCXRO2372
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0619/01 3371739
ZNR UUUUU ZZH
R 031739Z DEC 07
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 3462
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHMR/AMEMBASSY MASERU 3863

UNCLAS SECTION 01 OF 02 MASERU 000619 
 
SIPDIS 
 
SIPDIS 
 
DEPT ALSO FOR AF/S, AF/EPS; 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL PGOV LT
SUBJECT: LESOTHO: GOL SCRUTINY OF PONZI SCHEME LEADS TO PROTESTS, 
POLITICKING 
 
MASERU 00000619  001.2 OF 002 
 
 
¶1.  SUMMARY:  On November 27, Lesotho's Central Bank suspended 
many commercial activities of the country's largest funeral 
services company, Lesotho MKM Burial Society, for functioning as 
an unlicensed bank, insurance company, and possibly as a pyramid 
investment scheme.  As hundreds of anxious investors congregated 
for several days outside of the beleaguered company's 
headquarters and protested the GOL's action, Lesotho's political 
opposition took up the cause by calling and then canceling a 
general strike for December 4.  PricewaterhouseCoopers (PwC) is 
currently conducting a forensic audit of MKM under Central Bank 
contract.  The GOL's Minister of Finance gave assurances 
publicly that, although MKM is prohibited from receiving new 
cash deposits or paying out disbursements to investors pending 
results of the audit, the company is still allowed to render 
critical funeral services.  The wide popularity of MKM's dubious 
investment activities, essentially a Ponzi scheme, and 
corresponding panic among many investors reflects the difficulty 
that Lesotho's lower and middle income populations face in 
accessing domestic credit.  END SUMMARY. 
 
----------------------- 
Not Just a Funeral Plan 
----------------------- 
 
¶2.  On November 27, the Central Bank of Lesotho requested that 
the High Court order the nation's largest funeral plan 
providers, Lesotho MKM Burial Society (MKM), to close many of 
its unregulated commercial activities.  MKM was licensed by the 
Ministry of Trade solely as a funeral undertaker.  In its 
petition, the Central Bank alleged that MKM operated as both an 
insurance company and as a bank in contradiction of the 
Financial Institutions Act of 1999.  The petition alleged 
specific violations of the Act, including mandatory minimum 
capital requirements and a 25% liquidity minimum for deposits. 
 
¶3.  The closure petition followed an extended period of 
head-butting between MKM and the Central Bank during which the 
Central Bank demanded that MKM convert to a licensed insurance 
company.  MKM's successful funeral operations expanded in 2004 
when the parent company opened a deposit-taking public 
investment service offering lucrative returns of up to 100% 
annually under the name "Star Lion Gold Coin Investment 
Limited."  While not specifically alleged in the Central Bank 
petition, MKM's incredible investment returns led to speculation 
of a Ponzi-style pyramid scheme.  The High Court approved the 
Central Bank's petition, and MKM is currently undergoing a 
forensic audit by PricewaterhouseCoopers--expected to be 
complete within 90 days. 
 
---------------------- 
Political Implications 
---------------------- 
 
¶4.  The closure of the MKM Funeral Society and Star Lion Gold 
Coin Investment Limited added a new dimension to Lesotho's 
already polarized political environment.  Opposition parties 
moved quickly to criticize the Central Bank action, while 
Minister of Finance and Development Planning Timothy Thahane 
stated his strong support for the Central Bank action in 
Parliament.  Thahane also gave assurances publicly that, 
although MKM is prohibited from receiving new cash deposits or 
paying out disbursements to investors pending results of the 
audit, the company is still allowed to render critical funeral 
services.  The Central Bank stated that it will underwrite 
deposits in MKM's standard funeral plans, but has not made 
similar promises on other, unregulated investments placed in the 
company. 
 
¶5.  On November 28, hundreds of investors, depositors, and 
funeral plan subscribers congregated outside MKM's corporate 
headquarters demanding their money and condemning the GOL and 
Central Bank.  The GOL posted heavily armed police to guard all 
premises belonging to MKM companies and to provide escort for 
PwC auditors.  Thousands of Basotho subscribers, ranging from 
the nation's poor underclass to its affluent elite, remain 
anxious about the fate of their deposited funds and investments. 
 
 
¶6.  The weekly publication "Public Eye" quoted one disgruntled 
investor, referring to the GOL's practice of providing 
interest-free loans to senior officials, as stating, "The 
government is stepping on our toes.  They lend themselves money 
but want to close our investments."  Some investors remained for 
several days at MKM's offices, vowing to protect the corporate 
office and "keep an eye on" the PwC personnel conducting the 
forensic audit. 
 
---------------------------------------- 
Strike Cancelled, But Discontent Remains 
---------------------------------------- 
 
MASERU 00000619  002.2 OF 002 
 
 
 
¶7.  COMMENT:  The Central Bank of Lesotho's move to close MKM's 
investment activities, which PwC will likely expose as a pyramid 
operation, is by all accounts long overdue.  Thousands of 
desperate investors, unable to access credit through the 
country's prohibitively expensive banking system, have been 
enticed by MKM's Ponzi scheme and the unrealistic promises of 
quick and lucrative returns.  The need for such capital is not 
for personal enrichment, per se, but to meet basic needs, 
including relentless funeral expenses resulting from a 
staggering number of AIDS-related deaths, costly school fees, 
and housing construction materials.  The opposition attempted to 
capitalize on the public panic, as well as an ongoing conflict 
between the Maseru City Council and unlicensed street venders, 
by calling on November 29 for an indefinite general strike to 
begin on December 4 (Note: Opposition leaders backed off the 
strike threat on December 3, reportedly in response to students 
and business reluctant to disrupt exams and holiday commerce. 
End Note).  While investors complain about the GOL's action 
against MKM and their now highly vulnerable savings, the truth 
is that only much earlier action might have protected their 
investments.  END COMMENT. 
NOLAN