David Smith, CEO of the high yielding forex trading firm, Olint Corporation Ltd, which is now at the centre of a high-level fraud investigation in the Turks and Caicos Islands. - File

Federal regulators have formed a task force to investigate and prosecute fraud in the retail market that trades foreign currencies outside of commodity exchanges. Regulators believe unscrupulous operators are rife in the field.

The Commodity Futures Trading Commission, which regulates the United States futures markets, said it was establishing the task force, within its enforcement division, to focus on fraud in the off-exchange retail foreign currency market, as well as to work with other federal and state regulators and criminal authorities.

Against regulation

In Jamaica, the island's Financial Services Commission (FSC) has raised similar concerns about a raft of foreign exchange traders that have mushroomed here in recent years, but have fought vehemently against being regulated by the commission.

Just last week, the commission ordered one such company, World Wise Partners, to end its operations, except for repaying clients, who, for months, have had difficulty getting money from the scheme.

Another company, David Smith's Olint Corporation, which lost a court fight against regulation, is also being investigated by the authorities in the United States and the Turks and Caicos Islands.

Its clients, too, who for a long time were guaranteed returns of upwards of 10 per cent a month, have had difficulty recovering their cash. Olint has blamed its problems on heavy-handed regulators.

One study by a Kingston-based think-tank, Caribbean Policy Research Institute estimated that Jamaicans had up to $200 billion in these schemes - most of which have apparently gone bust.

Creation of the Forex Enforcement Task Force follows the June enactment of legislation that strengthened the CFTC's jurisdiction over that market, the agency said in a news release.

In the United States, Michael Dunn, head of a separate agency task force that deals with foreign-exchange education, said the announcement "sends a clear signal that the CFTC is on the beat, and that our continued and increased cooperation with law enforcement authorities will help put these (foreign exchange) dealers where they belong - in jail".

The CFTC and state securities regulators have warned the public to be cautious before trading foreign currencies, especially outside of major exchanges, saying it is at best very risky and, at worst, fraudulent.

Swings in prices

When an investor buys a foreign exchange contract, he or she buys the right to buy an amount of foreign currency at a fixed price in dollars. Investors hope to profit from ups and downs in currency markets, but sharp swings in prices also can cause large losses.

That is especially so when people borrow money for investments, which makes them liable to wind up owing more than their initial investment was worth.

Regulators say fraudulent schemes often come in the form of unsolicited phone calls and efforts to persuade an investor to transfer cash quickly.

The CFTC says it has brought close to 100 enforcement actions, since 2000, against companies and individuals accused of selling illegal foreign-exchange futures and options contracts.