Cut the budget, hike interest rates, IMF tells Jamaica

Cut the budget, hike interest rates, IMF tells Jamaica
By Jamaica Gleaner published: Friday | May 16, 2008

Left: The IMF has advised Finance Minister Audley Shaw, seen here in a November 2007 Gleaner photo, to cut non-productive spending from his near half a billion dollar budget. Right: Derick Latibeaudiere, Bank of Jamaica governor, has been advised by the IMF to raise interest rates. – File

The International Monetary Fund (IMF) this week gave thumbs up to the Jamaican government’s efforts at creating what it referred to as ‘a virtuous cycle of lower debt and higher growth’, but suggested the administration could better meet its fiscal targets by spending less.

At the same time, the IMF, in the wake of Cash Plus’s collapse, has again placed on record its disquiet about the rise of unregulated financial schemes and their potential for harm.

But this time the multilateral has gone further to suggest cross-border collaboration among financial regulators to help contain them and greater vigilance domestically in apparent concern over contagion.

The Bruce Golding administra-tion has crafted a $497 billion budget, but with a near $8 billion of fees generated by ministries that are not required to be remitted to the treasury – referred to as appropriations in aid – has $489 billion of spend to finance.

The recurrent side

The IMF has not said what government ought to cut from the budget, but the tone of its public information notice published Tuesday suggests it should be on the recurrent side or otherwise skewed to programmes that consume revenues but generate none.

“Most directors considered that a stronger fiscal adjustment in the current budget year would make a good start to the substantial effort needed over the coming three years to implement the authorities’ programme,” the agency’s board of directors said, referring to Jamaica’s medium term plan to balance the budget by 2010/11.

Weakening primary surplus

“Against this background, they encouraged the authorities to examine carefully the scope to reduce non-productive expenditures, noting that this would help reverse the weakening primary surplus projected for FY 2008/09.”

In that regard the IMF, which has urged swift movement toward investment spending, would likely endorse the investments being made in funding sources for small businesses but frown on programmes such as subsidised health care.

This year’s budget is split $304 billion in recurrent spending, which is most heavily weighted to wages and debt servicing, and $185 billion for capital programmes.

To fund it, government is going after close to $263 billion of taxes, and $183 billion of new debt issues.

On the monetary side of the economy, the agency has proposed another hike in interest rates, saying a moderate adjustment may be needed to stem capital flight and act as a check on inflation, which edged close to 20 per cent last year, and is projected at 14.5 per cent in the current period.

It also wants the Bank of Jamaica to give freer rein to the currency – the BOJ has generally ignored such entreaties in the past – saying the JMD should be allowed to adjust if pressure builds on the balance of payments.

That pressure is expected to come from still rising commodities – largely grain/food and oil – which last year widened the current account deficit by 15 per cent on the back of a bigger import bill.

The central bank has already hiked interest rates twice this year in defence of the dollar, but only after sustained pumping of hard currency in the system failed to steady the exchange rate.

The benchmark treasury bill is now at 14.2 per cent.

The IMF’s recommendations came alongside its pronouncement that the country, overtaken by external shocks and buffeted by a devastating storm, grew by only one per cent in the fiscal year just ended – Finance Minister Audley Shaw had reported 0.9 per cent growth – against a target of 2.5 per cent.

Below expectations

It also assessed the fiscal deficit at 4.9 per cent, slightly worse than the 4.7 per cent reported by Shaw.

Jamaica’s primary balance – the metric used to weigh the country’s financial health outside of its debt servicing obligations – was below expectations at 9.0 per cent of GDP, the IMF said. While this outturn bettered the 8.1 per cent balance in 2007/08, it was more than a point off the original 10.25 per cent target.

On the plus side, the IMF has also pronounced Jamaica’s banking system healthy, saying the institutions appear to be in control of a growing credit market, but twice referenced its concern about unregulated financial institutions and promised technical assistance for greater monitoring of the wider financial sector.

“The growth of unregulated investment schemes promising implausibly high rates of return has been a worrisome financial development with potentially adverse macroeconomic cons-equences,” said the IMF.

“Given the cross-border risks posed by such schemes, directors also encouraged enhanced regional cooperation among supervisors.”

lavern.clarke@gleanerjm.com

Olint at the crossroads

Olint at the crossroads
Al Edwards
By Jamaica Observer Friday, May 16, 2008

Smith… Olint Corp fighting a court case against NCB

The alternative investment scheme Olint Corp headed by David Smith now finds itself at a crossroads, with its next move determining the very existence of the popular foreign currency trading outfit.

For the better part of this year it has been unable to honour all its payout commitments, with many of its members exhibiting steadfast forbearance while the club’s founder attempts to put things right.

At the same time Olint is fighting a court case against NCB, reports are that in the United States, banking house Wachovia is conducting a protracted due diligence report, thus making it impossible for Olint to provide timely payments to its members. To compound matters further, the Financial Services Commission (FSC) continues to call for Olint to register and publish audited financial statements.

On Wednesday night at a Mayberry Investor Seminar, tax specialist and secretary of the Institute of Chartered Accountants of Jamaica (ICAJ), Ethlyn Norton-Coke, said that when Olint’s premises at the New Kingston Shopping Centre were raided some years ago, its files were handed over to the tax fraud department.

While all these circumstances keep Olint embattled, many of the unregulated schemes seem to be unravelling, with Cash Plus leaving many of its investors embracing nothing more than the audacity of hope.

The word out of Olint is that Wachovia has placed it under a due diligence exercise which has taken longer than expected. But why would the reputable US banking house do such a thing and why would it take so long?
A former Wachovia banking executive, speaking under condition of anonymity, sought to shed some light on the situation.
“It has been said that Wachovia has been conducting a due diligence report on Olint for the better part of five years, but as far as I am aware that’s not the way Wachovia goes about it,” said the banking exec. “I know of no banking rules that allow a commercial bank to freeze customer accounts without the authority of a Government agency or court. Also, to inform a client of the existence of an investigation would be illegal.
“Due diligence is required prior to the opening of an account. A bank can certainly refuse to allow any further activity and request that a client take their business elsewhere; however, if the reason for that request is based upon suspicious activity it would potentially run the risk of being accused of “tipping off” the client,” he added.

“I think it would be instructive for you to have a look at the requirements on page 19 ‘Identifying the Customer’. These are typical due diligence questions that clients must address prior to funding an account. Occasionally banks will allow accounts to be opened without complete due diligence and require it to be completed shortly thereafter. I have never heard of a bank freezing an account (of the size you would be talking about) for non-completion of basic due diligence. I would think that the fact that a foreign bank has refused to maintain an account for the client would be a huge issue for a US bank,” the banker said.

The Wachovia issue has been cited as a reason why Olint has been unable to make payments, but the company has not made it unequivocally clear exactly what the position is vis-à-vis its broker’s relationship with the United States bank and what implications that has for the investment club. Perhaps it needs to issue a release clarifying its position regarding Wachovia.

Indeed, Olint did refer to a due diligence exercise in a statement issued earlier this month, but that, too, was rather opaque.

The statement read:
“Dear Club Member,

As you may be aware, your customer service provider Olint Corp experienced many challenges since March 2006. This has affected the operations of the club, but we remain committed to the goal of change, and helping to position club members to positively contribute to the development of their families and their societies. We intend to continue these efforts even as we face the recent challenges of the due diligence exercise which started late last year. We are confident that it will all work out for the good of our club and that we will be rewarded in due course.

“We wish to take this opportunity to once again state how much we regret the long wait that you are experiencing in getting your encashments. As we have communicated to you before, we are committed to resolving this situation beginning at the end of May 2008, and will be meeting with the brokers and with their bankers, in a little over a week to this end.”

Attempts to contact David Smith for comment were unsuccessful at the time of going to print.
A Wachovia spokesperson speaking with Caribbean Business Report said that the banking house does not freeze or conduct extensive investigations or due diligence exercises on existing accounts unless so instructed by the US Treasury Department, more specifically the Financial Crimes Enforcement Network, which comes under the Treasury Department. He also said that it is mandatory, where necessary, to meet Suspicious Activity Reporting Requirements (SARs).

“We are not at liberty to discuss individual accounts with members of the press,” he said. “A due diligence exercise will generally take between six days and a month where a request is made to form an account. We do not open accounts for entities that say, trade FX but refuse to submit audited financial statements and other required information. You should take a look at the SAR requirement.

“An effective Banking Secrecy Act compliance programme includes controls and measures to identify and report suspicious transactions in a timely manner.

“In the United States, a financial institution must apply due diligence to be able to make an informed decision about the suspicious nature of a particular transaction and whether to file a Suspicious Activity Report. SARs can be filed on any transaction occurring in any bank department.”

In February 1996, The US Treasury Department and the other federal bank regulators enacted suspicious activity reporting regulations. The Treasury implemented 31 CFR 103.18 and the OCC, 12 CFR 21.11. As of April 1, 1996, banks must file a SAR WITHIN PRESCRIBED TIME FRAMES FOLLOWING THE DISCOVERY OF: . The reluctance of a business that is establishing a new account to provide complete information about the purpose of business, its prior banking relationships, names of its officers and directors, and information about the location of the business;

. A customer’s refusal to provide the usual information necessary to qualify for credit or other banking services;

. A spike in the customer’s activity with little or no explanation;

. The customer’s background is at variance with his or her business activities;

. Absence of conformity with recognised systems and controls, particularly in private banking;

. Lavish lifestyle;

. Increase in large amounts of cash without a corresponding increase in the filing of mandatory currency transaction reports;

. Inability to track the true account holder of correspondent or concentration account transactions;

. A customer is reluctant to provide the information needed to file the mandatory report, to have the report filed, or to proceed with a transaction after being informed that the report must be filed;

. Wire transfer activity to/from financial secrecy haven countries without an apparent business reason;

. Periodic wire transfers from a personal account(s) to bank secrecy haven countries;

. Frequent or large volume of wire transfers to and from offshore banking centres;

. Transfers routed through multiple foreign or domestic banks;

. Unexplained repetitive or unusual patterns of activity;

. Instructions to a financial institution to wire-transfer funds abroad and to expect an incoming wire transfer of funds from other sources; and

. Regular deposits or withdrawals of large amounts of cash, using wire transfers to, from, or through countries that either are known sources of narcotics or whose laws are ineffective in controlling the laundering of money.

Olint has not made payments for several weeks, but last month some members reported interest payments as high as 20 per cent per month. The organisation seems to be afflicted by many of its members all seeking encashments at the same time, thereby putting pressure on the foreign currency trading outfit. It is not entirely clear at this point whether this is a contagion of the Cash Plus debacle, club members getting the jitters as a result of unsubstantiated information, or just as a result of a downturn in the economy and escalating inflation.

“Olint has never said how much money it has under management, and its operations are shrouded in the dark,” said a reputable local financial analyst who asked for anonymity. “Therein lies the problem, because both local and US regulatory bodies view Olint warily. Smith would do himself a big favour if he were more forthcoming.

“Recently we have heard that two club members encashed substantial funds but that shouldn’t make Olint wobble if, as I have heard, it has close to US$1billion under management. The problem is, no one really knows what is going on, and club members are seeking solace in their faith in David,” added the analyst.

A club member declared: “Olint has faced a run before and it paid out everybody and it will do so again. People have to be patient and remember when times were good. The banks have ripped off Jamaicans for years and Smith has found a way to provide better returns. I think the banks are acting in collusion to bring down Olint. What it will find difficult to contend with is that the entire professional and middle-class of this country has some connection to Olint.”

An executive at Bear Sterns who resides in Manhattan said: “With the fall of Cash Plus, Smith has to be very careful. People are anxiously awaiting the end of this month and they expect him to be true to his word. If the goal post starts shifting, club members will voice their disgruntlement.

“Olint is far too embattled. It is in the courts with NCB, it is unregistered and has not submitted financial statements, which means both the central bank and the Financial Services Commission view it as a non-compliant organisation that should be dealt with accordingly. It is not making payments to its club members on a timely basis. Does Olint need all these dramas taking place at the same time? It is bound to take its toll.”

A common criticism aimed at Olint is that its back office could be better organised. What started as a club has, for all intents and purposes, transmogrified into the biggest private fund in the Caribbean. Smith has indicated that Olint may well reduce its membership and this may well go some way in alleviating the stresses placed upon the club. It would make the organisation more manageable and its management corps could be proactive rather than reactive.

If Olint were to register and become a legitimate player it could attract the best professionals in the business, thus freeing up Smith to concentrate solely on trading. It must be incredibly arduous to focus upon running the company’s operation, albeit with the help of his brother, Wayne Smith, and trade currencies. Olint has the potential to be one of the best hedge funds in the Caribbean and that may be the way to go, provided its activities are not shrouded in ambiguity.

“David (Smith) is a hero to many people although he is an outlaw figure to the established financial institutions in this country. Why? Because through foreign currency trading he makes them handsome returns,” said Anthony Minvielle of Barclays Capital Markets. “He has never guaranteed returns of above 10 per cent a month but consistently produces above average returns. He has not promised – rather he has delivered – and that is rare in corporate Jamaica. This explains the faith reposed in him and that is where he needs to reside.

He must not go the way of Cash Plus and the other unregulated financial organisations that appear to be coming apart at the seams.”

Added Minvielle: “With FX trading, your inventory is cash. It’s not like you have to liquidate assets to make payments. It is the one area where available assets can readily match your liabilities. That’s why I find Olint’s inability to make payments at this time disturbing. He has to make it irrefutably clear that unlike Martin Tremblay his organisation is not just some unscrupulous ruse or a Ponzi scheme, for that matter. It’s time that question be put to bed or it will forever dog Olint.”
A former club member who has decided to pull funds said: “It has weighed heavy on my conscience for some time that Olint refuses, after all this time, to provide necessary audited statements. There should be nothing to hide, particularly as Olint will at some point have to interface with both the local and international financial institutions that require salient information as a mandatory requirement. The running of Olint as a going concern leaves a lot to be desired.”

Added the former Olint member: “Club members should be provided with a slip showing how trades were made resulting in returns gained. To provide a statement indicating you made a set gain in US dollars is, quite frankly, not acceptable. Now I have heard the argument that Olint is simply an investment club, but with the number of members it has and the funds under management supposedly on its books, it must be deemed as more than just a club. It is in fact a rival to many of the country’s leading financial houses and should conduct its business accordingly.

“If David (Smith) does pay out everybody what he should rightfully pay them, then there will be a huge sigh of relief right across Jamaica. He would be regarded as a hero and his reputation will be enhanced both professionally and personally. If he does not, he will be stigmatised as a charlatan and rendered a pariah. His fate lies in his own hands. His word, dare I say it, has to be his bond.”

No cash to pay – Cash Plus must recover funds on failed transactions – receivers’ report

No cash to pay – Cash Plus must recover funds on failed transactions – receivers’ report
By Jamaica Gleaner published: Tuesday | May 20, 2008

Cash Plus boss Carlos Hill will return to court on July 17.

CASH PLUS lenders have received more bad news as the report of the receiver/manager for the failed entity found that the company will not be able to repay its depositors until it acquires a substantial portion of the real estate and recovers deposits it made on failed transactions.

According to the findings of a report, which was submitted to the Supreme Court last Tuesday, the alternative investment scheme currently has no available cash to repay its investors.

No documentation

The receivership team has found that Cash Plus was not operating as a growing, financially viable and diversified conglomerate.

The report states that the receivers were unable to find any documentation to support the scheme’s management philosophy, methodology or financial plans.

Overall, the team found that there were poorly maintained accounting records, inadequate internal controls, inadequate financial planning and an unsustainable business model, including minimal revenue-generating activities.

Lack of due diligence

The report points out that, in several instances, Cash Plus entered into transactions to acquire companies, real estate and other tangible assets.

However, the majority of these transactions were never completed and often stalled after preliminary discussions and tendering of initial deposits.

In addition, a number of companies, land and other assets were bought above the reasonable market price, presumably because of a lack of due diligence and independent valuation.

Cash Plus Limited was incorporated on May 5, 2003 and, during the period 2004 to 2007, received lenders’ funds totalling $22 billion.

The number of lenders affiliated with the company has been estimated at between 35,000 and 45,000. Further, the report states that, up to March 31, the company’s cash and liquid assets amounted to less than $3 million.

The receivers say the money used for repayment appears mainly to have come directly from the funds received from lenders.

According to the report, Cash Plus did not appear to have had sufficient income-generating activities to support the interest payments and to pay staff. Cash Plus boss Carlos Hill, his brother, Bertram, and chief financial officer Peter Wilson, who are currently on bail following fraud-related charges, are to return to court on July 17.

Cash Plus investors march on Jamaica House

Cash Plus investors march on Jamaica House
By Radio Jamaica Thursday, 15 May 2008
Cash Plus investors have again taken their plight to the streets.

A handful of Cash Plus investors, some armed with placards, staged a peaceful march at the entrance to Jamaica House on Thursday morning.

A spokesperson, who asked not to be named, said Thursday’s protest is the first in a series of similar demonstrations planned across the island.

The spokesperson said while the march did not achieve the desired results, the small group of ten managed to get their voices heard.

“The police were very cooperative, they understand our situation. Mr. Bruce is not here he has gone to Chile…and there is no one to speak to us. We did talk about what is bothering us the [lack of] transparency, the lack of dialogue and no one seems to be telling us what is going on,” said the spokesperson.

She said plans are now underway to mobilise overseas investors as they seek answers on the financial status of Cash Plus.

“I am going to New York to mobilize investors in Bronx, Brooklyn and Queens and the people here will mobilize the Jamaican people so that we can get more transparency into what is going on,”

“We found that [the receiver managers] are getting US$50,000 per day and we think it is madness because by the time they are finished being paid there will be no money left for the investors,” she continued.

On Thursday morning’s protest was incident free and lasted for 15 minutes.