When the Menzgold issues started to garner public traction, not many people thought it was interesting enough to spend any time analysing them. A few of us, on the other hand, found the whole affair mesmerising.

In our various comments on the subject, we warned against two extremes:

  1. Overbearing regulations and omnipotent regulators whose arbitrary, mission-creeping, and cookie-cutter approach to their work can stifle innovation and prevent genuinely mould-breaking innovations and innovators from entering our financial markets;


  1. Weak regulation that fails to engage with emerging trends in the financial markets, favour strong competition, or promote fair and transparent standards; and the absence of a consumer protection regime premised on open and consistent communications, clear guidance and risk-based supervision.

The first warning had the Bank of Ghana (BOG) in mind. The second was implied criticism directed at the Security & Exchanges Communication (SEC).

BOG was at the time of our initial commentary fast transforming itself into an octopus-omnibus regulator and encroaching the territory of other regulators; whilst SEC seemed, to all intents and purposes, comatose.

Since then, a whole lot has happened on various fronts, but the tension brought about by the continued framing of the Menzgold affair in certain circles, even in some sophisticated ones, as a tension between “financial innovation”, on one hand, and “firm regulation”, on the other, continues to block effective analysis. One Academic, an economist, was recently heard on primetime television applying the precautionary principle of harm: if people are benefiting from Menzgold, then what value would regulation bring, he asked.

In many ways, that is the issue at stake: innovations bring benefits to many people, and unless regulation can show that risks or harm to other people are possible, or even imminent, in the absence of control, many liberal-minded people are unlikely to accept that regulation must by all means be imposed. This country does not exist to provide regulators with “something to do”. Regulators, like all other professionals, must continually convince us that their resources and powers, all granted by public endowment, actually do improve our society and ultimately enrich our lives by securing our interests.

Menzgold insists that they are financial innovators here to rescue us from a moribund financial system that is shortchanging consumers by providing returns below inflation, and that their presence implies much needed competition to mutual funds, unit trusts, and other investment platforms in the country, who have had it too easy for far too long.

The regulatory agencies insist that, even so, Menzgold needs to comply with the relevant laws so that their operations can be better monitored to confirm that they are indeed doing what they claim is in conformity with the law.

Unless it can be shown that the activities of Menzgold are genuinely so revolutionary that our laws as they exist today did not foresee them and therefore could not have determined that they have characteristics that warrant additional regulation beyond that which all businesses must comply with (eg. business registration and tax), Menzgold would need to undergo immediate licensing. The demand for a “special” dispensation to accommodate them would be shown to be empty.

Licensing would ensure that they file regular reports to the authorities and submit themselves to intrusive scrutiny including the verification of claims made in the reports. A major feature of such prudential regulation would be to establish that the company is technically solvent, and that it is observing the standard rules of accounting practice.

Sections 24 to 31 of the primary legislation on securities in Ghana (Act 929) grant wide powers to the SEC over all businesses in Ghana dealing in securities, in whatever form. This extends to authority to cause the production of accounting records and other “books” of the company under scrutiny for examination. Indeed, the SEC’s powers here may even extend to non-licensees (under subsection 24(1)g and elsewhere).

The usual argument one hears in this connection is that Menzgold has not been known to default on its obligations, so what is the problem of the regulators? Well, by that logic, any driver that has never had an accident shouldn’t worry about licensing. Licensing of drivers exist because we consider driving to be risky and potentially harmful enough that a particular type of review of drivers’ skills and vehicular conditions has been established by law. This is without respect to any particular driver’s track record.

The rational question to ask therefore is whether the activities Menzgold are engaged in currently bear similar risks to those being engaged in by insurers, brokers, banks, discount houses, money transfer companies, etc. If so, then the next question to ask is whether, beyond the similarity of risks, the activity is sufficiently similar or perfectly identical to any of the explicitly identified lines of businesses regulated by mandated agencies under the law. If the answer is yes, then the analysis moves on to determine the appropriate manner of bringing Menzgold into compliance with the appropriate licensing regime.

The simplest way to make that determination is to simply examine the “product” and/or “services” that Menzgold is selling. The most definitive description of that product/service is to be found in the legally binding contracts that cover or governs the sale. They describe, more than anything else, what is officially on offer.

We have done just that, and our findings are as below.

  1. In each of the trading contracts Menzgold enters with counterparties, it identifies itself as a “Gold Trading Platform” and the counterparty as a “trader”. Menzgold starts by projecting itself as offering an over-the-counter channel to certain trading exchanges. The “trader” utilises Menzgold’s proprietary platform to “trade” in gold in these unnamed gold exchanges or markets.


  1. Menzgold asserts as follows: “the company, under full corporate authority and responsibility, declares that he (sic) has the clear and qualified right to deal in gold (AU metals)”.


  1. In the same clause 1, the “trader” (i.e. the individual or institution entering into the contract with Menzgold) affirms that (on the pain of “perjury”, no less) they did not get the gold from a criminal source.


  1. The trader is then provided with specifications that the gold must meet:  A. The gold must be Aurum Utallum; B. It must be 22+ carats; C. It must be in the form of Gold Dore bars; D. It must have 92% minimum purity.


  1. There is a “returns price payable” that will “not exceed” 10% “extra value on the prevailing market price at the time of commencing gold trade”. The clause that follows then talks about a monthly payment schedule but does not specify the rate.


  1. Menzgold commits to “superintend the gold trading within the trading period authorised by the trader”. Note the abrupt shift from offering a “gold trading platform” to offering an “agency service” to trade gold on behalf of the counterparty/customer.


  1. If the “trader”/customer/subscriber/counterparty is also not interested in monthly returns or the 10% “extra payable value”, then by giving Menzgold seven days’ notice and paying an unspecified fee, they can come for their gold upon the expiration of the term. Considering however that the minimum term is 6 months, and a monthly schedule for returns is provided, even if the rate is not specified, how exactly one can opt out of the benefit, or would want to, remains a mystery.


  1. The parties to the “trading contract” consent to a third-party assayer determining the quantity and quality of the gold, presumably in the event of a dispute. The procedure for appointing this assayer is not specified. Our interviewees confirm that they certainly did not sight any assay report at the start of the relationship.


  1. In clause 6 of the contract, the trader/customer consents to pay a commission of 100 GHS for each 7.7 grams of gold (200 GHS for every 5800 GHS) traded on the “gold trading platform”, but this amount or quantity (it is unclear which) is “subject to plus or minus 20”. Like many provisions in the agreement, it is impossible to make head or tail of this.


  1. The entire agreement is held to be subject to certain International Chamber of Commerce (ICC) non-circumvention rules promulgated in Paris, France, at an uncertain date. The intention is perhaps to reference one of the various ICC model contracts for intermediaries (such as pub. 169, which offers boilerplate language on non-circumvention). The agreement ends with another opportunity for parties’ avowal of authority on the pain of “perjury”.

The first thing that strikes the reader is the sheer improvisational tint of the whole 4-page contract. It clearly was not crafted by anyone who has ever studied any law, much less an actually practising lawyer. The terms are contradictory and the agreement’s worth as a reference document in the event of a dispute is zero. The two main pages of the document are attached for reader’s own assessment.


Here are some of the most spectacular species of weirdness:

  1. In the particular contract we analysed, which we have confirmed to be the company’s standard template, the amount of money involved was $230,000 or 1.15 million Ghana Cedis. From our preliminary analysis based on interviews conducted so far, we estimate the aggregate value of “funds under management” or “trading volume” in the so-called Gold Vault trading platform controlled by Menzgold at $300 million. But this is based on pure extrapolation from limited data and could be off by a considerable margin below or above. Yet, the full terms and conditions of the only subsisting legal agreement used for these transactions come to less than 600 words. A standard, plain vanilla, savings account at Citi, Barclays, or any serious Bank, comes with an agreement adorned with 10,000 words. The average savings balance in the UK is $5500. We must thus add “legal innovation” to the list of innovations we are examining in the Menzgold repertoire.


  1. A “dore bar” is an alloy containing gold and lesser valued minerals that is usually the starting point of the refinery process. To specify a purity of 92% or 22 carats minimum whilst insisting on “gold dore” bars is to indulge in meaningless specification. It shows a complete disinterest in traditional gold trading.


  1. The use of the phrase “Aurum Utallum” is a tell-tale sign of a lack of professional exposure to international gold trading, as that term is meaningless Latin, and is never used in any serious international commodities trading context.


  1. The agreement effectively asks the customer to bring unrefined gold from mines to trade on a platform, placing the burden of ensuring that the gold is of the requisite specs on the same customer. This is seriously comical seeing as the customer in fact brings money to purchase the gold from an affiliate of Menzgold, and rightly so since only licensed traders can buy raw gold in Ghana anyway. The contract is effectively describing a process that is contrary to the actual practice.


  1. The wording of the “consideration” in the agreement is incoherent and incongruous. The provision that the “returns price payable will not exceed 10% extra value on the prevailing market price at the time of commencing gold trade” is at best indiscernible and at worst deliberately obfuscatory.


  1. Even the quantity of deposits is left subject to indeterminate third-party verification.

In short, the agreement is so loosely written, to put it mildly, that as a private contract, it is well-nigh unenforceable. Is this “financial innovation”?

Menzgold insists that their model is “commodities trading”, a specie of financial activity that is simply, according to newly hired, highly expensive, lawyers, unaddressed by our laws. We can play a mind game with commodities trading that could perhaps, even if murkily, enable a model to fall through cracks in the current regulatory architecture. So let’s try.

For example, if people indeed bought refined gold from goldsmiths, and sent same to Menzgold, which then “borrowed” the gold, sold it abroad, repatriated the proceeds, kept a fee, and paid the owners of the gold, Menzgold would escape the PMMC regime but it would still be caught by the “investment advisory” and “brokerage” elements of the securities legislation (Section 3(c) of the Act). But if indeed, it merely arranges for the refining of the gold overseas, deposit of same in bullion vaults, authorising of trading by an overseas agent, and repatriation of the proceeds for management fees, then the situation becomes complex.

The following is the chain of actions inherent in the hypothetical model above. Raw gold is, say, provided by licensed gold buyers in Ghana. The gold is sent overseas for refining. The so-called Gold Vault platform enables the purchase of refined gold by the public (standard e-commerce marketplace). The refined gold is thus purchased by the retail investor using Menzgold’s electronic platform locally and in local currency. The purchased refined gold is deposited overseas in a bullion depositary. A nominated agent exploits spreads in the futures market or some other arbitrage-seeming opportunity. Gains are repatriated to Ghana and paid to the buyers of the refined gold. Menzgold keeps a fee.

Would this be innovative? To the extent that no such product exists in Ghana today that leverages the full continuum of the gold trading opportunity, one cannot begrudge its innovative character. Though we know for a fact that under current market conditions this model would most likely be unprofitable, we cannot presume to know all futures trading algorithms in the world available to every possible agent that Menzgold can engage.

Would the said business model escape the ironclad jaws of the SEC though? No. There is still an element where Menzgold is serving as a “clearing and settlements platform”, and to the extent that money is paid at one point to an institution, Menzgold, and returns received later from the same institution, in the expectation of profit, by an investor, one cannot escape the designation of “investment security”, within the general meaning of that term. In simple terms, even if the high bar of “innovation” could be met, that would not automatically absolve of the pain of regulation.

The fact that the Act does not provide an all-encompassing definition of “commodities futures, contracts [and] options”, or of “settlement” affords no comfort for an evader whatsoever. In the same way that “derivatives” are not defined in such a manner as to explicitly adumbrate all the million and one varieties of derivatives seen in many markets around the world, there is a certain sense in which the broad definitions are purposefully broad to capture reasonable varieties of actions obvious to those skilled in a particular industry.

The definition of “derivatives” in the Act, as a “financial instrument” whose value is derived from one or more underlying “assets” is so on-point as to make the argument that the Menzgold offering does not constitute either a derivative, or at the very least the means to trade derivatives and options, completely untenable. In a court of law, the exact mechanics of how exactly Menzgold converts notional credits of gold allocated to people’s account into profits in a world where the price of gold has been falling would be laid bare without the protections afforded purported trade secrets, which is probably why Menzgold has wisely chosen not to approach the courts.

So, we return to the question: is Menzgold a financial innovator?

The answer is clear: not according to the product description in the contract covering the products they are selling. The design of the contract shows striking inattention to detail. If anything at all, the quality of the contract raises great doubts about whether Menzgold understands the financial industry even well enough to actually participate in it.

Does that mean that there is no risk of regulatory overreach? We reckon that there remains such a risk. We should all not be overly fixated on Menzgold when evaluating the general posture of the regulator. We can be as concerned about the operational behaviour of regulation as we can about its substance. We have to be wary of regulatory overreach because otherwise someday regulators could stifle real innovation if we let down our guard.

There is also the issue of “political economy”. A regulator has to be sensitive to its environment. We live in a society where attention to the fine details of situations is not the forte of even the elite, not to talk of the masses.

A forced and abrupt winding down of Menzgold is very likely to be extremely nasty, politically and socially. Given the opacity of the company’s operations, and the fact that it has been unregulated, and therefore never reported, for nearly five years, the first order of business should have been intelligence gathering and the obtainment of detailed information about assets, including assets held overseas. In particular, an audit of Menzgold’s bullion position is extremely critical. It is the first stage in determining whether it has the capacity to meet even the bare obligation to return the 75% of the gold it is purportedly trading on behalf of their owners back to them in the event of a liquidation (the agreement it signs with its customers does not detail what constitutes a “force majeure” – a contract-relieving incident).

Section 205 of the SEC’s Act anticipates situations where the Commission would encounter recalcitrant companies. It thus makes provision for the use of court orders to compel undertakings. SEC could have used these powers to secure as much access to the information held by Menzgold so that prior to an order of suspension of trading it would have been in a much better position to determine the company’s risk of default on the hundreds of millions of Ghana Cedis’ worth of contracts it has entered into.  The approach that the SEC, and prior to it, the BOG in particular, seem to prefer may lead to a situation where the regulators are blamed for any defaults that occur.

We acknowledge an argument, gaining currency, that people who can “deposit” notional gold worth more than a million Ghana Cedis on the strength of a 4-page agreement ridden with elementary legal and technical errors and mindboggling confusions deserve to lose their principal, and not just 75% of it.

Unfortunately, from what we can gather, financial institutions and other types of institutions are considerably exposed to Menzgold.  There have been substantial placements as well as roundabout placements, of investments, through borrow-to-play methods, with the self-declared “gold dealership”. Should a mass default be triggered without proper due diligence, the ripple effects could well bring down another group of financial institutions, especially in the lower tiers of the banking system, which are already under great strain.

In short, we need savvy regulators fully capable of innovative risk management. Who said only entrepreneurs need innovation?

Selorm Branttie and Bright Simons are affiliated with IMANI Center for Policy & Education, which does not, as yet, endorse these views.


There are reports in the Ghanaian press that the IMF has referred Ghana’s recently ratified Master Project Support Agreement with Sinohydro Corporation of China to its legal department for advice on whether what the Ghanaian government is calling a “barter agreement” should instead be classified as a loan.

Intrusive as that may sound, and an affront to Ghana’s sovereignty as some may rightly term the intrusion, it may well serve some use, considering the fact that the said agreement has not been made accessible on the website of the Ghanaian Parliament or any government website for that matter. Most analysts may just have to wait for the IMF’s legal opinion.

Luckily, for some of us, it is not the legalities that are of primary interest; it is, rather, the commercial and financial logic.

The “bauxite barter deal” between Ghana and Sinohydro is not actually very different from the cocoa deal that got the Bui dam built (an interesting point considering the current dispute over the eligibility of the “loan” categorisation). The same company, Sinohydro, by most measures the world’s largest dam construction company, is involved. Clearly, it is drawing on its experience in the Bui episode as it enters into this latest arrangement.

Whilst the general design of the two deals, resource-backed infrastructure financing, is the same, there is a world of difference, however, when one takes into account the level of complexity.

In the case of Bui, Sinohydro was operating in its sweet spot: dam construction. A single dam to be precise. Dams are revenue generating objects, and to underline that fact, an escrow account was set up so that proceeds from power sold to the Electricity Corporation of Ghana (ECG) could be channelled directly to offset part of the debt. Furthermore, the natural resource involved – cocoa – is a mature category in Ghana’s portfolio of assets. The buyer – Genertec – and the ultimate lender – China EXIM bank – could be assured of the volumes without much fuss (about 40,000 metric tonnes per annum, just about 5% of Ghana’s usual annual production).

The “bauxite barter” deal on the other hand is far more complicated.

In the first place, the actual resource being presented as security is not yet available. The Government of Ghana chose “alumina” instead of bauxite in order to improve the value of the security. The motivation is very easy to understand, at an 8% discount rate, Ghana would need to find bauxite worth $420 million a year over the 15-year life of the facility for the arrangement to make sense (assuming zero production costs, a subject we treat later). With Chinese landed bauxite prices hovering around the $53 mark for our type of bauxite, that would suggest about 8 million metric tonnes of bauxite a year. Ghana has been struggling to produce even 800,000 tonnes a year to date. The infrastructural investments required to triple this quantity by bringing the Atewa reserves into play are significant (assuming here that all bauxite produced into the country shall be handed over to the Chinese). Increasing the overall production by ten times, which is what would be needed were bauxite the resource collateral, is simply unrealistic for at least 8 more years.

Hence the focus on alumina. Sound pricing forecasts for alumina in the near-term indicate an average of about $550 per metric tonne. In essence, using a rough rule of thumb, 1 million tonnes of alumina requires just about 2.5 million tonnes of bauxite, in turn requiring that Ghana only triples its current production of bauxite (assuming, once again, that no bauxite shall be exported raw to any other country).

Tripling bauxite production should not be gut-wrenchingly difficult. All that is needed really are access roads, giant trucks, ore cleaning machines, and port storage facilities. At those volumes, rail investment can be deferred. We can be safe in the knowledge that with an estimate of $100 million in capital expenditure and $25 per tonne in operating costs we would be getting close to what is required to deliver our side of the bargain. That means that an upfront investment of about $125 million should be sufficient to unlock the $2 billion. Except of course that it won’t. We are not carefully accounting for the alumina refining component of the deal nor explaining who bears the operating costs for mining the bauxite.

If Sinohydro is to become responsible for the operating costs of mining the extra 1.8 to 2 million tonnes of bauxite we need to produce in Ghana in order to be able to refine the quantities of alumina needed to service the $2 billion facility, then it needs to find roughly $750 million to underwrite that expense (over a 15-year period). It seems obvious that this amount needs to be factored into the calculations somehow. That cost, carefully reviewed, is the cost of the bauxite that has to go into the alumina production.

Ghana’s bauxite is mainly gibbsite which, compared to trihydrates, consume significantly higher amounts of power during the process of conversion to alumina. That fact, compounded with scale factors and other complications, yields a production cost for alumina in the Ghana context of about $300 per tonne.

Thus whilst Ghana could easily make $550 million per annum producing 1 million tonnes of alumina after tripling its bauxite production, it needs to find about $1 billion in upfront investments, and account for running costs of about $300 million a year.

Two questions therefore arise: is Sinohydro investing this amount of one billion dollars separately from the $2 billion “barter” arrangement, or is this investment requirement factored into the $2 billion “barter deal”? If so, how come Ghana has tendered a laundry list of roads and hospitals worth $2 billion, out of which an initial tranche of $500 million is already due by the end of the year?

More critically how is Ghana going to fund the refinery costs of $300 million a year if all the inbound $2 billion is expended on roads and hospitals and no portion of the amount is amortised to assist with costs of production and maintenance? Recall that at an 8% discount rate, the average servicing costs for both principal and interest is about $420 million per annum (including provisioning for principal retirement). Should the sale of alumina yield $550 million per annum, the surplus recorded is only $130 million, not enough to keep the engines running. The situation is only saved if $170 million is available annually to cushion the financial model.  To keep matters simple this analysis does not even take into account the 15% co-financing obligation of the government, another $300 million millstone.

But even if we have been overly stringent in our projections, it seems very likely that a substantial proportion of the $2 billion being borrowed is required just to support the underlying venture and thus uphold the security of the facility (i.e. to mine and refine the bauxite). It is hard to see how anything less than half of the amount will do. Unless Sinohydro is in the business of losing money, why would it guarantee $2 billion of loans from China EXIM Bank or other lenders for Ghana without factoring into the financial model somehow the costs of securing the natural resources needed to pay for the interest and principal? Unless the profit margins on the infrastructure it is to build are so large that it intends that ultimately Ghana gets far less than $1 billion of infrastructure for $2 billion worth of bauxite. This is after all, one giant sole-sourcing arrangement.

This discussion has centred only on the $2 billion package. As everyone now knows, the government plans to secure $10 billion overall. The analysis breaks down completely in the face of such audacity.

Much of the thinking propelling these bold borrowing plans is based on a misguided notion of zero-cost production. Firstly, there was a claim that Ghana has bauxite reserves valued at $460 billion, by none other than the Senior Minister himself. This implies 8.7 billion tonnes of proven bauxite reserves, making Ghana the owner of the world’s largest reserves, and with more than 25% of the global total. Obviously ridiculous.

Even the uncritical 960 million metric tonnes of bauxite reserves figure one hears often in government circles should translate to $50 billion in terms of historical average prices. If the $460 billion figure emanates from an assumption that all that bauxite shall be converted into alumina, then one wonders why we don’t assume that the bauxite shall be converted to aluminium, or even roofing sheets.  The truth of course is that converting any part of that bauxite into alumina, aluminium or roofing sheets requires billions of dollars of investment, a prospect far from assured.

It is also instructive to point out that the 960 million tonnes of reserves number is based on wild guessing. Successive Ghanaian governments have to date refused or neglected to conduct any serious mineralogical surveys, with the sad result that most of the data used for estimation in these matters date back to the ‘70s and ‘80s and rely on half-baked datasets. The upper bound found in the only major Ghanaian geological survey of bauxite reserves to date was 580 million metric tonnes across thirteen main deposits. These were however not all proven. Proven reserves were in the order of about 370 million metric tonnes. This would suggest a valuation of about $20 billion.

One may be tempted to argue that resources worth $20 billion are still far more than needed to secure a $10 billion facility, after all it would suggest that Ghana is “leveraging” only 50% of one asset category for massive development. Unfortunately, it is not that simple. “Exploiting” reserves of any mineral, as we have seen in the preceding discussion, is a complex undertaking. Guinea for instance only produces about 0.5% of its total reserves per annum. Australia produces about 1.25%. Jamaica produces about 0.4%; and Vietnam, about 0.05%. If Ghana is successful in exploiting an incredibly high proportion of 5% (i.e. decide to consume all the bauxite it has in 20 years), it will immediately become the 6th largest producer in the world, overtaking Russia, Jamaica and Vietnam, all countries with reserves many many times the quantity of Ghana’s. This amount of production – 18.5 million tonnes a year – will still yield only about $500 million unless the country succeeds in converting most or all into alumina. Doing so will indeed yield about $4.6 billion per annum (a testament to the incredible shift of the bauxite-alumina value ratio from 6.5 to nearly 10 over the last decade). More than enough to securitise a $10 billion facility with a 15-year tenor. But it will require anything between $25 billion and $30 billion in upfront investments. And a considerable amount of environmental damage. None of which we can afford for at least a decade.

In short, the idea of using bauxite resources to secure $10 billion is fanciful, and will go nowhere. The $2 billion package is more realistic, but the undertaking needs considerably more work to ensure successful realisation within the term of the current Ghanaian Administration, as well as value for money.