Speaking at the Global Association of Risk Professionals (GARP) Caribbean Chapter Meeting held at the Jamaica Pegasus Hotel in New Kingston on Wednesday, former Deputy Executive Director of the Financial Services Commission and now Vice President of Compliance for Scotia Group Jamaica George Roper chose as his subject, “Compliance Risk Management: Is it worth the hassle?”

Both compliance and risk management appear to have been totally overlooked as unregulated financial organisations were allowed to proliferate and breaches of the Securities Act were committed, with no criminal action taken to date. Last week it was reported that moves are being made to extradite Noel Strachan of WorldWise, and we recall that David Smith of Olint did not face criminal proceedings in the country where Olint originated and where most of its investors lost their money.

At the meeting, Roper posed the pertinent question, “Can we afford to allow non-regulated players to provide banking services without appropriate prudential safeguards?”

With so many Jamaicans’ lives ruined and people losing so much money, it is incumbent on the government to ensure that this phenomenon is not repeated and that those who persisted in committing egregious acts in the guise of offering FX trading gains be brought to book.

Roper pointed out that the Jamaican Securities Act includes within the definition of the term ” securities” a number of readily familiar financial instruments such as debentures, stocks or bonds. The definition also includes something called an investment contract.

The salient issue here and what should have stopped these rogue outfits in their tracks should have been the Securities Act to which this government turned a blind eye.

The Securities Act makes it a criminal offence to carry out a business of dealing in securities without being licensed under the Act as a securities dealer. It is also an offence for someone to issue or create securities and offer them to the public without first applying to be registered to do so. Back in 2006, in the early days of these Ponzi schemes, the FSC raided the premises of Olint located in the New Kingston shopping Mall and served a cease and desist order (CDO) on Olint’s lead principal for breaching the Act by offering and dealing in investment contracts.

Olint appealed the CDO in the Supreme Court, maintaining it was not offering securities but rather was conducting foreign currencies trading which did not require a licence.

The initial hearing by Justice Norma McIntosh in 2007 held in favour of the FSC. Smith took the matter to the Court of Appeal in 2009 and that appellate court upheld McIntosh’s ruling. In that ruling McIntosh held fast to the Howey test.

The former FSC boss made it clear that the landmark case of SEC VS. W.J Howey (1946) was the pre-eminent authority when determining whether or not a particular arrangement is an investment contract, and therefore whether or not that arrangement is a security that is subject to the laws and regulations governing securities. In this case, the US Supreme Court determined that an investment contract exists when (a) an investor invests money (b) in a common enterprise (c) with an expectation of profit (d) and that profit is to arise solely or primarily from the efforts of the promoter or a third party.

So why didn’t the authorities take their lead from the FSC and secondly, bearing in mind losses incurred by Jamaicans, why wasn’t the law upheld? Indeed it is rather puzzling. In the United States , it is clearly seen that authorities there moved quickly on Bernie Madoff, Allen Stanford and Marc Dreier with each of these Ponzi-scheme perpetrators now serving jail time. However, in Jamaica a blind eye was turned on the schemes. So what is there to stop them surfacing again and why the reluctance on the part of the government? Perhaps we may never know the answer to those questions.

At the meeting Roper declared; “Carrying out proper know your customer (KYC) due diligence is a requirement of the law that is placed squarely on the shoulders of regulated financial institutions and certain designated non-financial professionals by the Proceeds of Crime Act (POCA). In striving to meet the POCA KYC requirements, regulated financial institutions must take steps to understand the business of their customers.

“Is there any evidence that a customer may be dealing in investment contracts? If so, a financial institution should take steps to confirm that the customer is licensed to carry out a securities business with the FSC. Members of the public should avoid handing over their funds to unlicensed securities dealers offering unregistered investment contracts as such funds could be subject to forfeiture pursuant to court orders made under section 5 of the POCA. It suits us all to know the laws of the land and do our own personal Compliance Risk Management.”