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Ponzi squeeze - House revises Security Act in bid to attract more investors

Published:Wednesday | December 11, 2013 | 12:00 AM
Dr Peter Phillips

Daraine Luton, Senior Staff Reporter

THE DECISION by the House of Representatives yesterday to amend the Securities Act to clamp down on unauthorised dealing in securities will make Jamaica a more attractive destination for investors, Finance Minister Dr Peter Phillips has said.

"In our present circumstances, I dare say especially with the examples of recent Ponzi schemes in the Caribbean - not only in Jamaica - the Caribbean and Jamaica do not have a good reputation as a safe haven for securities. This (bill) will strengthen it (the reputation) considerably," Phillips said.

The minister made the comment as he closed the debate on the bill, which, among other things, places prohibitions on pyramid and Ponzi schemes.

He told legislators that the passage of the legislation "cause those whose support we look" to recognise that Jamaica is moving to deal with a problem, which is estimated to have cost the country between 15 and 25 per cent of GDP.

The minister said that in discussions with the multilaterals, they have said Jamaica must "demonstrate a willingness to clean up your own financial house and the arrangements, otherwise don't look for the financial help from us".

The amendment to the Securities Act is a requirement under Jamaica's four-year Extended Fund Facility arrangement with the International Monetary Fund (IMF).

The Caribbean Policy Institute (CAPI) has estimated that there were 21 unregulated financial institutions operating in Jamaica in 2008, and by 2010, the Financial Services Commission (FSC) said the number grew to 63.

"Two of the bigger schemes took in more than $35 billion from more than 50,000 investors," the minister said.

"Jamaica's financial reputation suffered greatly, and a significant number of Jamaicans lost significant sums of money," Phillips said.

There have been at least two high-profile convictions in the United States, which have resulted from Ponzi schemes in the Caribbean. In one instance, David Smith, from the notorious OLINT, was sentenced in 2011 after being found guilty on 23 counts of wire fraud, conspiracy to commit money laundering, and money laundering. Smith was previously sentenced to six and a half years in the Turks and Caicos in 2010.

Smith ran OLINT as a foreign-exchange outfit that promised persons high returns that averaged 10 per cent per month. In reality, OLINT was a massive Ponzi scheme that managed to reportedly rake in more than US$220 million from more than 6,000 investors.

Another fraudster, Allen Stanford, was convicted of charges that his investment company was a massive Ponzi scheme that operated out of Antigua.

Opposition Leader Andrew Holness said "it is absolutely necessary" that the law be put in place to deal with Ponzi schemes.

However, he said that the bill should have been referred to a joint select committee of Parliament for consideration and that players in the securities industry should be invited to Parliament to give their feedback.

Phillips, however, said that securities dealers have been discussing the matter since July 2011, and they have been kept abreast of the proposed amendments to the law.

Meanwhile, government Member of Parliament Peter Bunting described the impact of unregulated financial schemes on the economy as "watching a train wreck in slow motion".

He noted that because of the deficiencies in Jamaica's legislation, the country had to endure the "embarrassment of watching other jurisdictions proceed with investigations, charges, and successful convictions, while we were impotent to do anything".

In the meantime, an investment club with a maximum of 20 members is to be exempt from established registration requirements.

While it outlaws Ponzi schemes, the bill makes provision for the existence of investment clubs, providing they contain no more than 20 members who contribute equal sums payable at agreed periodic intervals.

The bill also allows the FSC to provide information to fulfil any requests from overseas on trading in securities.

Phillips, in explaining the rationale for the provision, noted that the crimes committed by fraudsters through various schemes often take on a multi-jurisdictional flavour. He said the agreement for the sharing of the information is contained in agreements signed at the level of the United Nations.