Saturday, 16 July 2016

Forex scheme woes

by m. shanmugam
HTTP://WWW.THESTAR.COM.MY/BUSINESS/BUSINESS-NEWS/2016/07/16/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
countrys 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 worlds 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.
Whats 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 Negaras 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 youre licensed by Bank Negara, he says.

According to Bank Negaras 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 thats 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 Negaras 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 companys accounts and other assets worth
RM99.8mil. It also seized gold bullion weighing 126kg from the company.
According to a statement on Bank Negaras 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. Dont rush into anything or be pressured to invest if youre 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, its probably a lie.
Related story:
Getting the lowdown on trading

Saturday, 16 July 2016

Illogical returns of forex schemes

BY M. SHANMUGAM . . . THE ALTERNATIVE VIEW

THE number of people who have placed their money in foreign exchange (forex)
schemes in return for double or triple-digit returns is simply mind-boggling.
In recent times, the topic at most social gatherings is about the whopping returns that
the forex schemes are dishing out to their investors. It is said that the returns range
from 100% per annum to more than 250% per annum.
The returns are indeed stupendous, provided the scheme is sustainable for the longer
term. Insightful investors know guaranteed returns of triple digits per annum with the
capital intact is certainly not tenable.
Perhaps, prospective investors and those who are already in the schemes should ask
themselves a few basic questions before placing their money.
They can start by questioning the investment strategy adopted by the managers of
the forex schemes in order to generate a double-digit guaranteed return on the
amount invested every month.
As far as capital markets are concerned, steady risk-free returns only come from
mundane investments such as fixed deposits. The going rate now in Malaysia is less
than 4% per annum.
Even the worlds top hedge fund managers, who normally put their money in the forex
market, are not able to generate double-digit returns, let alone provide any guarantees
to their investors.
According to a survey by LCH Investments, the worlds top-20 hedge funds returned
only 3.2% in 2015. In absolute amount, the top-20 hedge funds made a return of
US$15bil on an investment size of US$465bil. The top-20 includes the famous
Quantum Endowment Fund managed by George Soros.
What is startling is that hedge fund managers outside the top-20 lost US$99bil for their
clients.
Forex trading is a high-risk investment with the potential of high returns and heavy
losses. Nobody makes money every year. There are good years and bad years. Clearly,
2015 was a bad year for the hedge funds.
Hence, how can forex schemes guarantee their investors returns every year?
The second question to ponder on is the generosity of the scheme promoters in
sharing their good fortune.
Banks generally do at ultra-low interest rates. In Malaysia, the borrowing rates are
between 4.5% and 8% and it depends on the credit profile of borrowers. In other
countries such as Singapore or Japan, it is so much more less.

If an investment generates more than 100% return and the cost of borrowing is hardly
8% at the most, it is only logical to question why are the promoters sharing their pot of
gold with a large number of people and not making all the money for themselves?
Thirdly and finally, investors should ask themselves why established funds such as the
Employees Provident Fund (EPF) is not putting its money in forex trading instruments.
The simple answer is forex schemes generally do not have underlying assets. For
instance, there are no stocks or property to back up the investment.
It is a highly leveraged game where the capital can be wiped out. So, it does not fall
into the asset classes of investments that the EPF would undertake.
There are three types of forex traders. The most common ones are those who deal
with the requirements of companies for forex currencies in their course of doing
business.
The second category is known as market makers where they cater for banks and large
financial institutions. Minimum trade normally is US$3mil.
The third category is proprietary traders who go into the forex market to make money
for themselves or the fund they work for. Personalities such as Soros fall into this
segment.
The constant in all three types of forex traders is nobody makes double-digit returns
consistently or provide guarantees.
There are various schemes and most offer returns of more than 100% over a period of
one year, something that even the best of hedge fund managers are unable to
achieve.
The forex schemes are a stark reminder of the gold investment schemes that sparked
a craze four years ago.
Investors of Genneva Gold still rue their losses. A retired teacher parted with her entire
gratuity money of RM130,000 to invest in a gold scheme managed by Genneva Gold,
despite being advised against it by her close friends.
A few weeks later, the Genneva Gold office was raided and the authorities carted away
cash of RM99.8mil and seized gold amounting to 126kg. Investigations revealed that
the liabilities or amounts owed to investors exceeded 10 times more than the amount
seized.
Put simply, what they are saying is that although the company had collected a
staggering RM1bil, only 10% of the amount was seen when the raid took place.

In addition, more than 8,000 customers of the company had paid for the gold leaf but
not received it. Also, thousands have surrendered their gold but have not received
their cash reimbursements of RM80mil.
According to the authorities, the company sustained its operations mainly on new
monies coming from new clients. When the new clients dry up, the operations will run
short of cash and redemptions would be a problem. The investments involving forex
schemes are bigger and growing fast. And the most alarming part of it is that the
authorities are unable to do much to prevent its rapid growth because the company
receiving the money is normally based overseas.
Bank Negara can only advise people on the risks and hope they can learn from past
episodes such as Genneva Gold.
However, the cautionary words seem to have fallen on deaf ears so far. Now, the
promise of guaranteed returns and huge profits is music to many.
The music will stop when some are unable to get their principal, or the monthly
guaranteed sums stop coming. Only after that will investors wake up.
The damage would surely run into billions and those who went in last will bear the
brunt of it and will only have themselves to blame.

Saturday, 16 July 2016

Getting the lowdown on trading

BY TEE LIN SAY

TRADING in foreign exchange (forex) is not easy. It requires a lot of research on

matters ranging from macro-economic factors to political changes. Hence, very rarely
do individuals trade in forex on their own.
It is done by financial institutions such as banks for their customers who may want to
hedge their profits or cost.

Below are some details on the nitty-gritty of trading in forex markets.

What is the minimum trade size for forex trading?
For banks, the requirement to trade in the forex market is a minimum amount of
US$1mil for spot market trading. Banks do not offer the service of trading forex to
individual investors. Individual investors who trade on online platforms can start
trading with a trade size of US$100. However, it is largely an unregulated market
unlike the platform that banks conduct their trades on.
The currency traded will typically be in G7 currencies such as the US dollar, pound
sterling, yen and euro. They too buy on spot prices.
What is the difference between forex trading and dual currency accounts
offered by banks to individuals?
Individuals who trade on online forex platforms must typically have a foreign currency
account with a bank. Banks will not trade on behalf of the trader. The trader has to
trade himself and takes all the risks and returns. The forex services provided by banks
to individuals are essentially similar to the services provided by the moneylenders
which is simply to convert one currency to another.
As for the dual currency account, it is only for high-net-worth individuals who need to
hedge their ringgit position against a foreign currency because of their need for it. For
instance, it can be to support the education of their children or purchase a property
overseas.
Under the dual currency account, the minimum transaction is RM50,000 and the
strike price is determined a week ahead.
The strike price is the price the customer is willing to pay for the conversion of the
ringgit into the foreign currency. Exactly one week later, if the conversion does not
take place, the customer earns an interest on the ringgit amount. If the conversion
takes place, then the customer gets the foreign currency.
Typically, how long is a trade in the forex market? Is it a few days to a few
weeks?
Due to the volatility of the forex market, the duration of a trade could be as short as a
few seconds. Once a trader makes money on a few basis points, he may decide to
close his position.
Why is it generally risky to trade in forex?
Whether or not an investor trades on a real or bogus platform, there is a very high
chance of losing money simply because of the volatile nature of the forex market.

One reason for this could be the fact that plenty of novices have extremely easy
access to these platforms. Trading on an online forex platform is easier than most
people think. All a person needs is to ensure that he has a foreign currency account.
Even high school students can trade on forex platforms by using their parents foreign
currency accounts.
Is leverage used in forex trading?
Leverage is basically the ability to control large amounts of capital using very little of
your own capital. The higher the leverage, the higher the level of risk. The leverage
system is similar to the one used in equity markets. For example, if a trading position
has dropped below its maintenance margin, this will trigger a margin call and the
trader will need to top up with more capital.
How risky is leveraging in forex trading?
Forex trading carries above average risk because when a person trades on leverage,
this means that a trader can lose more than his initial deposit. The amount of leverage
on an account differs depending on the account itself, but most use a factor of at least
50:1, with some being as high as 250:1. A leverage factor of 50:1 means that for every
dollar you have in your account you control up to US$50.
How can a trader minimise risk when trading in forex?
Traders must have a sound risk management plan such as stop losses. This is because
a trader can potentially incur significant losses very quickly when trading on margin. If
the market moves drastically and the stop loss has not been put in place, losses could
exceed the total amount invested very quickly.
This is made worse by the fact that traders can have multiple leveraged trades open
concurrently. So, seemingly small or low-risk trades can add up when these positions
are combined.
How soon can a trader get back his money once he closes his position?
Many forex trading platforms allow individuals to withdraw their money from the
trading accounts within two working days.
How to differentiate between a legitimate trading platform and an illegal
scheme?
Something suspicious could be taking place if the platform offers an individual to
undertake trades. If the platform asks for a certain amount of money and provides a
guarantee on a certain return, this is most likely a scam because forex markets are too
volatile and it is extremely hard to predict the potential returns.

Traders should check whether their online platforms are legitimate by to Bank Negara,
which has a list of legal and illegal forex trading platforms.
According to the Bank Negara website, an illegal 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 any person who has not obtained the
approval of Bank Negara under the Financial Services Act 2013 or Islamic Financial
Services Act 2013.