Fever spreading? Get rich quick and the foreign exchange trading craze

Things are never dull in Jamaica. Last time I was here I was struck by something and now I am here again the same thing has struck me. There is an apparent craze for "get rich quick" schemes, and the current crop are largely based around foreign exchange (forex) trading.

Several years ago, around Christmas time, a priest gave a very good sermon, which sticks in my mind for one phrase: "recticular activation syndrome", where the brain filters out certain things and we start to see everywhere what we find important (see link for a good example). With that in mind, given what struck me a few months ago I have been seeing a lot of reports about a raging fever spreading in Jamaica at least.

My interest was sparked by reports of superb returns to be made from joining an investment "club" called Overseas Locket International (OLINT) Corporation, run by a Jamaican named David Smith (see picture). Mr. Smith was a talented forex trader with Jamaica Money Market Brokers. OLINT is phenomenal for giving members returns of around 10% a month (sometimes more, sometimes less), but with no guarantee. Some "wealth creation clubs" report that they are "facilitated by" OLINT (see ICS Wealth Creation). The high returns are apparently being generated by forex trading. My own limited foray into online forex trading tells me that this is theoretically possible, at least for a short period of time. My own experience, however, does not tell me if it is sustainable over a long period. Now the "clubs" and their high returns have sparked a lot of questions and debate rages about OLINT and several other "clubs" that have come into existence, which also offer very high returns (such as Cash Plus (calling cards, property investment, maybe some forex trading), and Lewfam (forex trading--see link that indicates it invests through OLINT). Are these schemes for real or are they another case of "If it sounds too good to be true, then it probably isn't"?

Quite by chance, I met a Jamaican businessman on a plane just after visiting Jamaica in July and having my eyes opened to OLINT. The topic came up and he admitted that he had a good amount of money with OLINT and had been getting the high returns. The subject also came up with some other Jamaican acquaintances I have and they too admitted that they had invested with OLINT, and were getting their high returns. I know people who have invested in Cash Plus. In all cases, the investors had recouped the initial capital in the space of less than a year. Some who have invested have other concerns, mainly to do with possible tax liabilities which they would prefer to keep away from the relevant authorities.

OLINT is currently in a legal dispute with the Jamaican authorities about whether the activities it is undertaking are legal, after a raid by the Financial Investigations Division (FID) on the company and on Mr. Smith's home in March 2006 (see article). FID agents seized documents records and essential computer equipment. David Smith responded by suing the Financial Services Commission (FSC) for J$300 million (about US$ 4.5 million) for "wrongful intrusion". So OLINT was investigated by FSC for supposed breaches of the Securities Act: the essence of the charges being that OLINT is not licensed to trade securities and offer investment advice (see letter from FSC), which it is alleged to have undertaken. FSC subsequently issued "cease and desist" notices against four companies (Olint Corporation Limited, Overseas Locket International Corporation, Lewfam Investments and Trading Limited and Lewfam Investments Club). OLINT subsequently moved its principal location from Jamaica to the Turks and Caicos Islands (after a failed attempt to move to St. Kitts; it also has some presence in Panama). It still has an office in Jamaica to facilitate transactions for pre-existing members. The dispute between OLINT and FSC has gone through the Jamaican courts, including the Court of Appeal in March 2007.

Some reports indicate that OLINT has some US$300 million-US$400 million from members but this figure has not been confirmed (see report by Venture Research Institute). No new members are allowed but this has not meant that new customers have not become involved as people try to get on the band wagon: some existing members have begun to "share" their accounts, in some cases in return for a share of the proceeds or a "fee".

Views are genuinely mixed (see a recent blog about Jamaica today). Some see the "little man" getting a chance to make big money, but the authorities want to do all they can to make this impossible. Some have seen the OLINT-type developments as shaking up established financial institutions as people move their funds out of banks and other financial institutions, which offer modest returns, and plough cash into the "clubs". I walked into a recently opened Cash Plus office in Mandeville this week and there is plenty of evidence of this occurring as people seek to open new accounts.

Some fear that things are not what they seem and that these "clubs" may be pyramid operations. Their concerns focus on the possibility of the "clubs" being pyramid schemes, and look back at the catastrophe that occurred in Albania in the mid-1990s (see article in IMF Survey). That case was startling for the size of the schemes relative to the national economy, and the vast amount of the population that were involved, as the IMF reported: "At their peak, the nominal value of the pyramid schemes' liabilities amounted to almost half of the country's GDP. Many Albanians—about two-thirds of the population—invested in them."

Some fear that even if the activities are legitimate and in forex, changes in legislation (such as recently occurred with efforts to make online casinos illegal) could take the bottom out of the activities and send the stack of cards crashing. Forex trading is huge (a reported US$ 3 trillion traded daily!-see FXMarketSpace) and very risky and the companies who offer online trading facilities have prominent disclaimers to that effect.

Some individuals have decided to deal with the risks directly. The Silicon Caribe website recently posted an article about the various routes people are taking (see link), and identifies some of the other players in this area, including some individuals who have decided to try to make high returns themselves. Grace Cheng is one of these people and her website (see link) shows that this can become a full-fledged business.

Jamaica has had its share of financial sector crises and the country always appears to be sitting in a fragile financial position. Jamaicans have been used to getting high nominal returns on investments for a long time, and government debt for many years offered high interest rates. Bank of Jamaica 1-year certificate of deposits were offered at 14% annually in September 2007. Treasury bill (TB) annual rates are currently about 11 1/2% (see Bank of Jamaica data). As recently as 2003 TB rates were 29%, and for much of the period since the late 1990s the rates were around 20-25%, with rates over over 40% seen in 1996. In that context, getting high returns is not a new phenomenon.

I also suspect that the average Jamaican is quite sanguine when it comes to financial affairs, and is ready to take the risk and get the reward, but if the risk fails then "Ah so it go." People are less tolerant of things that appear to be low risk blowing up in their face. But in Jamaica the government's dealing with the financial sector crisis in the mid-1990s might also have left people feeling that depositors will be protected (see research article). Given that OLINT, Cash Plus and others of their type are not licensed then if people are rational they should be less than happy.

I guess I got the proof how Jamaicans see things a few minutes ago, when a church brother of my father's came to visit, and we got talking about the investment clubs. He is a man in his mid-50s, recently retired as an engineer, and now does consultancy work and sells real estate. We talked about how land and house prices had escalated over the past 15-30 years,but that only a fraction of the population had gained from that. He gladly stated that he had money in Cash Plus, and had got a lot of nice stuff at their launching in Mandeville: pen, book, bag, etc. He takes his interest out each month and has already recovered his capital after 10 months. When I asked him how he would feel if it folded, he replied "I didn't put the kitchen sink into it. And while the going is good, me happy." So, if investors have done what they should, in risking what they are prepared to lose, then whatever the outcome there may be less of a sense of disaster amongst ordinary people.