Forex scheme woes

Investors fall for plans that promise up to 250% returns, raising questions about their sustainability

SALMAH, a retired secondary school teacher, ploughed her entire gratuity money into the country’s infamous gold investment scheme Genneva Gold. It was her second investment after her first reaped a return of more than 30% per annum.

A few weeks later, a joint-effort by the police, the Companies Commission of Malaysia (SSM) and Bank Negara came knocking on the doors of the Genneva Gold office in Kuala Lumpur.

That was five years ago. Salmah, along with a few thousand other people who had invested in the scheme, are still waiting and hoping to get their money back.

 “Each day, that hope of recovering my money gets smaller and smaller,” Salmah laments.

The amount investors ploughed into the Genneva Gold scam is estimated to be more than RM1bil.

The latest craze is the “foreign exchange” (forex) trading scheme that guarantees returns that, when you think about it, are considered just “too good to be true”. And nobody has an idea on the amount that has been invested in the schemes, although some estimate it to be between RM3bil and RM4bil.

The returns range from 110% per annum to 250% per annum – staggering figures that cannot be matched by the world’s best hedge fund managers.

In comparison, the Top 20 best-performing hedge funds in the world registered a return of just above 3% on a total fund size of RM465bil in 2015. According to LCH Investments, a company that ranks hedge funds, the Top 20 hedge funds only made a profit of RM15bil for their investors last year. Included in the Top 20 are funds managed by household names such as George Soros, Steve Cohen, Ray Dalio and Bill Ackman.

What’s worse is that the other hedge funds outside the Top 20 collectively lost some US$99bil of their investors’ money.

“So how do forex schemes, which are the playground for hedge funds, give such returns is a wonder. Such schemes provide returns that are clearly not tenable,” says a fund manager.

According to Bank Negara’s website, a forex trading scheme refers to the buying or selling of foreign currency by an individual or company in Malaysia with any person who is not a licensed onshore bank, or who has not obtained the approval of the central bank, subject to the Financial Services Act 2013 or Islamic Financial Services Act 2013.

“This scheme involves the act of buying or borrowing foreign currencies from or selling or lending foreign currencies to a non-licensed onshore bank,” says Bank Negara.

It says that operators usually operate on a small scale and claim they can provide remittance services efficiently, without the need for any documents or identification. They rarely use documents to validate and verify the transactions

“By engaging in these transactions, customers run the risk of being cheated and their funds may never reach their intended destination.”

The operators usually target job-seekers by placing attractive advertisements to lure them to join the company, after which they use the employees to solicit for new investments.

“Often, the employees will be encouraged to approach their families, relatives and friends before targeting members of the public,” says Bank Negara.

Untenable returns

One representative for an offshore forex trading firm says an investor needs to place a minimum initial investment of US$1,000 (RM4,000).

“Returns are 4% per day for 80 days, so the amount bloats to US$3,200. At the end of 80 days, the company takes 30% and the investor takes the rest, which is US$2,240,” says the trader, who requested anonymity.

Assuming that conversion is done at RM3.50 to the dollar, US$2,240 would amount to RM7,840.

This would mean that for an initial investment of RM4,000, you make RM7,840 in 80 days, or 96% in just under three months. If this were the case, then on an annual basis, your returns would be 384% (96% per quarter times four).

The trader assured that his operations have been running smoothly over the past six months “without any hiccups”.

Meanwhile, Leong, an entrepreneur, says he has been “investing” in a forex trading scheme for about a year and has been “very happy” with the gains.

According to him, the investors only need to put in US$1,000 and are then guaranteed a 20% return every month. Unlike the earlier mentioned scheme, which has an 80-day tenure, this one runs indefinitely.

“There is no duration. You can reinvest your 20% or you can keep topping up your investment,” says Leong, who calls the scheme his “sweet investment”.

Leong says the scheme is run by a New Zealand-based firm and has been operational for about five years.

“We try to accumulate as many people as possible so that the investment pool can get bigger.”

Asked if he ever gets sceptical, Leong says: “If you understand forex trading, you can trade and always make money.”

One lawyer says that the fact that “some unlicensed broker” is taking money from Leong is already wrong.

“Deposit-taking is illegal, unless you’re licensed by Bank Negara,” he says.

According to Bank Negara’s website, illegal operators usually operate on a small scale and claim they can provide remittance services efficiently, without the need for any documents or identification.

They rarely use documents to validate and verify the transactions. By engaging in these transactions, customers run the risk of being cheated and their funds may never reach their intended destination.

“Illegal operators usually portray a professional and reputable image, a high-tech office layout and advanced IT facilities, such as LCD screens displaying movements in exchange rates to provide the impression that a legitimate and real business is being conducted. These facilities are merely a false front,” says Bank Negara.

Says one victim of a now-gone-bust forex trading firm: “When I first heard of this company, it was represented by a smooth-talking Malaysian businessman who owned super-fast cars, who claimed to be earning millions of ringgit per year and was living the ultimate dream lifestyle.

“I was sceptical at first but after two seminars, I was so convinced by what he had to offer that I jumped in without thinking twice. His company was offering double-digit returns per month with a capital guarantee on the original investment. As an added incentive, you were also offered cash bonuses being invested by people you introduce.”

The company, he was told, was registered in Australia.

Holding a financial services licence overseas is different from being registered as a forex broker, says one corporate lawyer.

“This does not mean that the forex firm that’s running the scheme can be scrutinised or is endorsed by the authorities in the country where it is supposedly registered.”

He points out that the registration process was merely “a formality” for financial services companies.

Exploiting a loophole

Forex schemes have been on the rise in Malaysia and the modus operandi has always been the same – the company that eventually receives the money is based outside the country, while the intermediaries tend to be locals.

“Because the company receiving the money is outside the country, the authorities cannot do much. In previous cases, the companies that collected the money were within the country and the authorities raided and charged them with illegal deposit taking and anti-money laundering laws,” says an official close to Bank Negara.

According to the central bank, licensed onshore banks that can conduct foreign currency trading in Malaysia are commercial banks, Islamic banks, investment banks and international Islamic banks.

According to the corporate lawyer, many of these forex trading “experts” will set up their own servers (which they control themselves) to lure investors and trick them into believing that ridiculously big gains can be made over a short period of time.

“To get these investors to pay more money, these so-called experts will persuade the victims to part with more money or arrange for them to borrow or introduce more people into the scheme.

“Because they control these servers, they have the ability to manipulate the trading outcomes into losses for the early investors that made it big.”

Bank Negara’s website reveals that in some cases, investors are allowed to operate their accounts via the Internet.

“Investors are also required to sign a business contract which is normally entered between the investors and a principal company overseas. In most instances, the operators will inform the investors that they will have to send these contracts to its principal company overseas for signing.

“However, such contracts are usually left unsigned. As such, in the event the investors are unhappy with future dealings and transactions, no action can be taken against the company, as there is no binding contract between them.”

Nobody can really put a finger on how much money has been invested in these forex trading schemes.

As for the Genneva Gold scheme, Bank Negara has started scrutinising the scheme in 2011 following complaints of dubious gold trading and raided the company a year later.

The company was also investigated for breaking several banking and financial laws, including money laundering, taking deposits without giving gold in return, evading taxes and misrepresenting itself as an investment firm.

The central bank has frozen the company’s accounts and other assets worth RM99.8mil. It also seized gold bullion weighing 126kg from the company.

According to a statement on Bank Negara’s website regarding the Genneva Gold scheme, initial forensic accounting had uncovered considerable losses being experienced by the company in 2012, and that the company had liabilities exceeding 10 times its assets – which would put the figure at around RM1bil.

Hands are tied

No doubt, when it comes to get-rich-quick schemes that promise untenable returns, taking preventive measures is necessary.

In the case of the forex trading scheme operators, since they have their headquarters outside of Malaysia, there is little that the local authorities – Bank Negara and SSM – can do.

“This is because the central bank cannot regulate offshore companies. Bank Negara can only regulate or recognise financial institutions such as banks and finance firms that are based here,” says a banking lawyer.

When it comes to financially-related plans or schemes, one should only deal with authorised dealers or licensed financial institutions, advises one wealth planner.

“Be vigilant and check with the relevant personnel and authorities before investing your money. Don’t rush into anything or be pressured to invest if you’re not sure. Always do your homework or background checks,” she says.

The wealth planner adds that with the gradual rise in online scams, one should be careful when investing over the Internet.

“Be sceptical of any purported schemes or investment opportunities that are not in black and white.

“Also, always keep records of your investments.”

At the end of the day, sometimes, all that is required is really common sense. Bank Negara, on its website, sums it up best: “Remember the golden rule – if it sounds too good to be true, it’s probably a lie.”