III. Ponzi Schemes in the Caribbean ¹

1. In several Caribbean states, unregulated investment schemes (UIS) grew quickly, particularly during 2006–08, by claiming unusually high monthly returns and through referrals by existing members. Such high returns are usually associated with Ponzi schemes, in which returns may be paid to investors out of the money paid in by subsequent investors rather than from genuine profits. Such schemes emerge on a regular basis even in developed countries with strong regulatory frameworks, as highlighted by the recent experience in the United States with a US$50 billion alleged Ponzi scheme run by Bernard Madoff. However, their impact has been greater in countries with weaker regulatory frameworks. This is illustrated by the well-known case of Albania, and by more recent and ongoing cases in the Caribbean, Colombia, and Lesotho (Table 1).

Table 1.

Some Speculative Data on Selected Investment Schemes

Source: IMF Working Paper 09/95.

^1/Number of accounts for Dafiment Bank.

Table 1.

Some Speculative Data on Selected Investment Schemes

Country	Name(s)	Years in Operation	Promised Rate of Return	Amounts Invested/Lost		Number of Investors/Accounts
				In U.S. dollars	In percent of GDP	Number 1/	In percent of population
Jamaica	OLINT, Cash Plus, World Wise, LewFam, etc.	2004-08	6-20 percent/month	1-2 billion	12½-25	50,000	2
Grenada	SGL Holdings	2006-08	7-10 percent/month	30 million	5	…	…
United States	Madoff Investment Securities	−2008	10-17 percent/year	50 billion	0.3	13,000	<0.01
Colombia	DRFE, DMG, etc.	2005-08	300 percent/six months	1 billion	0.4	up to 4 million	<8
Lesotho	MKM Burial Society	−2007	60 percent/year	42 million	3	100,000	4
Albania	VEFA, Gjallica, Kamberi, etc.	1991-97	4-19 percent/month	1.7 billion	79	2 million	57
Macedonia	TAT Savings House	−1997	4-5 percent/month	80 million	3	25,000	1
Romania	Caritas	1992-94	800 percent/six months	450 milion	1.5	2-3 million	9-13
Russia	MMM	1993-94	7,000 percent/six months	1-1.5 billion	0.5-0.8	1-2 million	0.6-1.3
Peru	CLAE	1978?-93	5 percent/month	200 million	0.3	300,000	1.2
Serbia	Dafiment Bank	1990-93	15 percent/month	600 million	…	14 million	133

Source: IMF Working Paper 09/95.

^1/Number of accounts for Dafiment Bank.

View Table

Table 1.

Some Speculative Data on Selected Investment Schemes

Country	Name(s)	Years in Operation	Promised Rate of Return	Amounts Invested/Lost		Number of Investors/Accounts
				In U.S. dollars	In percent of GDP	Number 1/	In percent of population
Jamaica	OLINT, Cash Plus, World Wise, LewFam, etc.	2004-08	6-20 percent/month	1-2 billion	12½-25	50,000	2
Grenada	SGL Holdings	2006-08	7-10 percent/month	30 million	5	…	…
United States	Madoff Investment Securities	−2008	10-17 percent/year	50 billion	0.3	13,000	<0.01
Colombia	DRFE, DMG, etc.	2005-08	300 percent/six months	1 billion	0.4	up to 4 million	<8
Lesotho	MKM Burial Society	−2007	60 percent/year	42 million	3	100,000	4
Albania	VEFA, Gjallica, Kamberi, etc.	1991-97	4-19 percent/month	1.7 billion	79	2 million	57
Macedonia	TAT Savings House	−1997	4-5 percent/month	80 million	3	25,000	1
Romania	Caritas	1992-94	800 percent/six months	450 milion	1.5	2-3 million	9-13
Russia	MMM	1993-94	7,000 percent/six months	1-1.5 billion	0.5-0.8	1-2 million	0.6-1.3
Peru	CLAE	1978?-93	5 percent/month	200 million	0.3	300,000	1.2
Serbia	Dafiment Bank	1990-93	15 percent/month	600 million	…	14 million	133

Source: IMF Working Paper 09/95.

^1/Number of accounts for Dafiment Bank.

2. The experiences of different countries show that such schemes can lead to large-scale economic and institutional damage. The negative consequences include: undermining confidence in financial markets; diverting savings from productive to unproductive uses; incurring fiscal costs; diverting deposits from banks and increasing nonperforming loans; causing swings in consumption; inducing socio-economic strife; and undermining the reputation of political authorities, regulators, and law enforcers. However, controlling and closing down schemes is often difficult for a variety of reasons. In many countries, regulatory frameworks are not sufficiently developed to detect and shut down UIS at an early stage. Once schemes become large, the authorities can become increasingly reluctant to trigger their collapse.

3. Jamaica experienced rapid growth in the number and size of UIS, especially during the period 2006–08. A study conducted by the Caribbean Policy Research Institute (CaPRI), an independent think tank, identified 21 UIS which were operating in Jamaica by January 2008. The business opportunity behind the schemes varied, although a majority of them claimed to be engaged in foreign exchange trading. Some of the schemes were conduits to invest in other better-known schemes. A few claimed to be investing in a variety of assets, including real estate. The schemes share a number of common features. They all offered returns significantly higher than those offered by regulated entities; for example, many offered a 10 percent monthly return, a level usually seen only in Ponzi schemes. Neither the operators nor the schemes were licensed or registered by either the Jamaican Financial Services Commission (FSC) or the Bank of Jamaica (BoJ). They provided limited or no information on their business model that would explain such high returns: investors were not provided with a prospectus or with audited (or even unaudited) financial statements. A number of these features are “red flags” for investment fraud.

4. Two of the main schemes were OLINT, which claimed to be a club to invest in foreign currency trading, and Cash Plus Limited, which claimed to be part of a conglomerate with subsidiaries engaged in many sectors. As has been the case in many other jurisdictions, the UIS engaged in highly visible public relations campaigns. These campaigns involved donations to charitable causes and sponsorship of high profile events. The UIS succeeded in obtaining support from prominent individuals in Jamaica as well as the media to the point that in January 2007, a business newspaper named OLINT’s founder business personality of the year. There was considerable debate in Jamaica concerning whether the activities of the UIS constituted issuing securities or deposit-taking, and thus required action by the regulatory authorities, or whether they were simply private clubs.

5. Initially all actions taken against OLINT and Cash Plus came from the FSC, beginning March 2006. They encompassed: (i) issuing cease and desist orders against schemes for alleged breaches of the registration/licensing requirements; (ii) providing warnings informing the public of schemes that were not registered with or licensed by the FSC; and (iii) undertaking a public education campaign “think and check before you invest”. In late 2007, the BoJ issued warning letters to schemes that purported to be carrying on foreign currency trading, stating the need for a license. The schemes were able to defer regulatory action as well as closure of their bank accounts through court appeals. In 2008, the criminal authorities filed charges against the founder of Cash Plus. OLINT began failing to make payments to investors in 2008, and closed its offices in Jamaica.

6. OLINT and its offshoots also operated elsewhere in the Caribbean. In April 2006, OLINT claimed that it had been authorized to conduct investment business in St. Kitts, and the St. Kitts Financial Services Commission issued an advisory that this was not the case. However, the founder of OLINT subsequently established a company called OLINT TCI in the Turks and Caicos Islands. Schemes were established in Grenada, Dominica, and St. Lucia to channel funds into OLINT TCI. The Grenada regulatory authorities invited the Eastern Caribbean Securities and Regulatory Commission (ECSRC) to determine whether the latter had jurisdiction, and the ECSRC issued cease and desist orders against schemes in Grenada and Dominica in May 2008. In July 2008, the Financial Crimes Unit of the Royal Turks and Caicos Islands Police Force raided the offices of OLINT TCI and froze its assets. In February 2009, the founder of OLINT was arrested in Turks and Caicos and charged with forgery, false accounting, and theft.

7. Key policy lessons for addressing UIS include: being proactive in investigating unregulated schemes; seeking emergency relief such as an asset freeze; bringing charges, both civil/administrative and criminal, if necessary; coordinating and cooperating locally and internationally; and keeping the public informed. Preconditions for an effective response include: independence of financial regulators; broad authority to investigate and prosecute unregulated schemes; authority to cooperate and exchange information with other financial regulators, both locally and internationally; adequate resources for enforcement; and specialization and speedy disposition by the courts.