Are you gambling or doing business?

Are you gambling or doing business?

Have you ever considered why gambling is illegal or strictly regulated in most jurisdictions? Well, other than criminal activities which are highly prevalent in gambling, there are other social, religious and public policy reasons why gambling is not encouraged or highly regulated and one of such reasons is the high risk of loss of money.

 According to a publication on the “Opinionfront” website (https://opinionfront.com/reasons-why-gambling-should-be-illegal) which I find very instructive in this write-up, the writer stipulates and I quote:

“Gambling refers to the process of staking money in view of gaining more. When it comes to making money, one has to draw a line between need and greed. Gambling is something that blurs this line. It tempts you to risk more in an attempt to win more (emphasis mine) and the cycle does not seem to end…. Perhaps, a good solution to prevent the damaging effects of gambling is to make it illegal.”

As the saying goes, “res ipsa loquitur”. The above quote clearly speaks for itself on the characteristics and /or consequences of gambling which raises concerns for strict regulation. And truth be told, most people, unknowingly, are engaging in gambling under the disguise of doing business and losing huge sums of money to their own detriment and that of their families and society at large.

We should understand that whenever we do business the wrong way, whenever a due process is breached, whenever an investment decision is clouded by the desire to make more money than necessary, and whenever we outwit the law, we are gambling. And yes, in business, “the higher the risk, the higher the returns” but the urge to make higher returns should not outweigh the application of prudence in investment.

 In this write-up, we discuss three (3) common business activities that can be considered as gambling rather than doing business.

 1.        Seeking windfall gains at any cost

Every Ghanaian seeking windfall gains is likely to consider any of the “big six” business ventures namely: (a) oil marketing, (b) mining, (c) construction, (d) import and export, (e) haulage, and (f) renewable energy. These are termed the “big six” in this article because every wealthy businessman in Ghana engages in at least one of the above which makes them attractive to the business novice.

Thus, in a way of following in the footsteps of the rich and powerful in the country, business novices begin to look for opportunities in the “big six” industries without caution or care about the possible loss of investment. This is not to say that the business novice should not consider the “big six” ventures, rather, they should enter the respective industries with care.

They should have adequate information on how the business is carried out, they should engage brokers or experts in the field for training and advice, they should insure against business risks, the business should be well structured, they should conduct a risk assessment for every transaction and obtain legal advice before diving into these ventures. These are a few of the requirements and preparations a prudent businessman needs to undertake prior to any high-risk investment.  

 What happens, however, is that, when the business novice obtains some considerable amount of funds, let’s say $100,000, the first idea is to invest and get back all or at least half that amount so they start looking for opportunities in the “big six” industries with less or no preparation. This makes them susceptible to either; fraudsters who will present nongenuine opportunities, fall victims to industry bullies who will take advantage of their ignorance for their personal gain, or end up partnering with other untrained novices who will implement wrong business decisions.

In the end, they lose all their investment and /or get into trouble with regulators leading them to possible imprisonment. Accordingly, entering into a risky business venture without due care, protection, and adequate preparation is gambling rather than doing business.

 2.        Improper financing of a business  

 Working capital is hard to come by in Ghana. With high-interest rates, small or new businesses resort to borrowing from family and friends in return for either equity stakes in the business or a share in profits. In as much as this is a common and acceptable business practice, one bears a huge risk of loss, if financing a business is done without adequate security.

For example, if the intention is to obtain equity in the business (equity financing), you must understand that you will get your money back from dividends. You should, therefore, ensure that there is an agreement or signed documentation clearly indicting this fact and the relevant Forms completed and filed with the Registrar-General’s Department (“RGD”).

Thus, you will need a share purchase agreement, the Companies board, special resolutions, and RGD Forms 7 and 8 completed and filed to ensure that you are legally a shareholder of the business. In the absence of the above, you will invest in the business, but will not be legally recognized and entitled to enjoy dividends and other rights of a business owner.

It is riskier when in the future, the business is merging, being acquired or where new investors come on board. All such decisions will be taken without recourse to your interest and you may end up litigating the matter in court.

If the intention is to give out funds as a loan to the business (debt financing), then, a board and shareholders’ resolutions approving the loan should be obtained from the company, a well-written contract specifying the terms of the loan should be executed with the authorised representative of the business and a charge or security should be created over the business assets as collateral against non-payment.

Read: JVCs post 8,790% decline in net profit for 2020 – Finance Ministry

Any such security must be perfected by stamping and registering the same with the Collateral Registry and the RGD. Where the asset involves land, it must also be registered with the Lands Commission. You will be able to reclaim repayment of the loan outside of court if these registrations are done.

In all the above situations, legal and financial due diligence must be conducted on the business to ascertain the viability of the investment, the ability of the business to repay the loan or make good returns on equity investment as well as the compliance culture of the business.

Unfortunately, this is not the case in practice. Many people in Ghana invest their monies in businesses or with people only because they were presented with the projected financials and the figures looked attractive or based on relationships without proper caution. I’ve seen many cases where the borrower disappeared after receiving funds from clients to support their business and their company had no record of the said investment.

I’ve seen many cases where loans given to a business were not secured or the security was not perfected and I’ve also seen cases where monies invested in projects or partnerships were diverted for personal use because the business activities were not monitored or controlled leading to long legal battles and loss of investment. Accordingly, you are gambling if you are giving money to finance any business without taking any action to secure or protect your investment.

3.       The use of “shell companies” by foreigners

The prevalence of this situation in Ghana is truly mind-boggling. Under the laws of Ghana, a non-resident or a foreigner who intends to do business in Ghana is required to register the business with the Ghana Investment Promotion Centre (“GIPC”) and satisfy the foreign minimum capital requirement as follows: USD 200,000 if they do a joint venture with local partners; USD 500,000 for enterprises that are wholly owned by foreign investors and USD 1,000,000 to engage in trading activities.

To avoid paying this minimum capital, foreigners or non-residents seeking to do business in Ghana contract Ghanaian individuals to register the business as the owners, pay them off and then take over the management of the business. Maybe we can say they are arranging their affairs to reduce their liabilities. After all, they are creating jobs, paying taxes, and contributing to the development of the country.

Well, however you describe it, this business model has not offered the best returns to foreign investors. The foreign investor under this model will be able to charge for management services and any business supply but cannot pay and transfer dividends or business gains out of the country and this becomes a problem when the business keeps growing. Free transferability of dividends or funds is only permitted where the business is registered with the GIPC.

It is riskier where the Ghanaian individuals contracted to register the business as owners do not cooperate with management and exercise their shareholding rights against management or where such individuals disappear and cannot be located to sign off resolutions required for business decisions.

I have seen situations where foreigners have used this business model and when they decided to sell or liquidate the business, the Ghanaian shareholders refused to sign the relevant resolutions. In some situations, we have discovered in a due diligence exercise that the Ghanaian shareholders went behind the backs of the foreigners to remove them as directors and appointed new individuals in their place.

In a more recent case, the Ghanaian shareholders have been demanding huge payments for every resolution they have to sign for the business. All of these have affected the returns the foreign investors anticipated in the business. You are, therefore, gambling as a foreigner, if you choose to do business in Ghana under this business model without complying with the prescribed legal requirements.

 Conclusion

There is always a better way of doing business and making the most returns out of it in a safe and secure manner. Anytime you choose a path in business for high profits without caution, you are gambling and putting your investment at high risk.