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Friday, 13 July 2012

Dutch Authority Financial Markets (AFM) decides to throw a pebble in the pond of the €100,000+ investments, hunting for fraudulent real estate funds

In The Netherlands, there is the strange situation that ‘small’ investors who invest less than €100,000 (was €50,000) are protected by the official supervisors of the Dutch Authority Financial Markets, while the ‘big’ investors (over €100,000) are totally on their own. Roughly translated, the theory was always: small investors need to be protected by a strong, fair and vigilant supervisor, but big investors are rich, hence: intelligent, hence: smart enough to stand on their own two feet, without the help of a supervisor…

Which is of course… totally ridiculous.

The result of this longterm policy was that all investment sharks, piranhas and orca’s  offered investment products ABOVE the €50,000 threshold (now €100,000). With no exceptions, these investment funds had shiny brochures on quality, handscooped paper with beautiful full-color pictures from the best photographers. In bombastic language these brochures promised the investor a personal eldorado through his investments. Every picture in the brochure and personal contact gave a silent promise of vintage gold watches, 30ft yachts, Cuban cigars, Italian thoroughbred cars and retirement at 50 on your personal island.

It didn’t matter whether the investment goals were Nicaraguan teakwood plantations, Bernie Madoff funds, Quatarian, Spanish or Dutch Real Estate, Costa Rican fruit farms or short-sea container ships. Many of these funds promised unrealistically high yields of 12 – 20% and kept totally silent about risks, forseeable expenses, the bandwidth and realism of the promised yields and the honorability and trustworthiness of the people behind the investment.

Some fund initiators gave their candidate-investors a final push with a personal appearance in an obscure, but successful business program from a Dutch real estate tycoon. This tycoon has been and still is buying broadcasting time at one of the Dutch commercial TV stations, in order to sell it at the highest bidder. The formula is: you pay the price, you get the interview in order to endorse your product. No difficult and critical questions asked! The perfect podium to an investment-happy, non-critical audience, consisting of wealthy viewers, would-be investors and daydreamers!

Funds like these collected sometimes many millions of investment money, purely based on empty promises. Some funds survived, but many funds perished well before their time.

Sometimes, it came out after such a fund defaulted, that the only investments that had been done with the collected funds were in the same vintage gold watches, 30 ft yachts, Cuban cigars and Italian thoroughbred cars that were held out to the gullible investors. The initiators had a ball with €20 mln in investments and ‘partied like it’s 1999’, until the money was gone and some investors started to ask unpleasant questions.

At other occasions, the promised investments had actually been done, but so many expenses had been charged, or the investments were so unsuccesful or amateuristic that the people lost large shares of their investments anyway. The only people that were always holding the longest straw, were the operators of such investment funds.

Of course there have been fair, honest and respectable funds that indeed returned the invested money with a decent yield, but it has always been very hard to distinguish the chaff from the wheat.

The AFM responded at many occasions with a clear toothgrinding, but as it didn’t have a mandate to operate above the €50,000 threshold, its gun was always without bullets. Warning would-be investors didn’t help much either, because of what a monstrous German leader once stated: “the bigger the lie, the more it will be believed”. People were always willing to turn off their brain in exchange for a promised yield of 20%. As many social media investor might tell you in five years: this remains true until this day.

However, according to the following article in the Dutch financial newspaper Het Financieele Dagblad (, this frustrating situation might be over soon.

The AFM wants to offer more protection to private investors in real estate.

The market watchdog asks more power of authority from politics, so it can have supervision at all unlisted real estate-investments, participations in limited partnerships or bonds that are offered to private persons.

The AFM came to this conclusion after a 2y investigation into these investment types. At this moment, only about 20% of the €16 bln in unlisted real estate investments for private persons, is supervised by the AFM. There are about one hundred tenders active at this market; of these, only 30 have an AFM-license.

‘We are not going to wait until the market separates the chaff from the wheat’, according to director Harman Korte of the AFM. ‘Therefore we plead for a license-duty for all tenders of real estate investments’.

The competencies of the AFM have recently been extended, due to the extension of the supervisory threshold from €50,000 to €100,000. On top of that, there are the stricter demands from the European regulation AIFM for managers of investment institutes. This is still not enough, according to the AFM. There is still an exemption from supervision for investment funds, when they offer investments of more than €100,000. Therefore the AFM wants an investigation into the possibility of additional law, in order to supervise the full €16 bln in real estate investments.

The AFM presented today its own investigation into investment funds. It diagnosed ‘serious shortcomings’. The report speaks of misleading information in brochures, collected money that never had been invested, violation of the banking prohibition and illegal exchange of money between funds of the same owner.

The AFM thinks that many problems can be prevented when it keeps a watchful eye at these funds.

Normally, people should be very cautious when government bodies ask for more power of authority. Effective and efficient operating organizations can suddenly turn into private kingdoms, where small, ‘J. Edgar Hoover-ish’ dictators are on their quest for absolute power and bear no contradiction from anybody anymore.

However, in this case there is such a jungle full of amateuristic or straigth-forward fraudulent investment funds, that I applaude the action that the AFM takes to gain the power of authority on these €100,000+ investment funds.

Also wealthy investors need protection from the sharks and piranha’s. The AFM seems the most suitable party to offer this protection.

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