In recent months, more than JD500 million ($714 million) has evaporated into thin air as Jordan found itself plagued by a series of pyramid schemes.
“I have lost all my savings,” said Brahim, a taxi driver in Amman and one of the many victims of financial tsunamis that have washed over the Hashemite Kingdom.
Pyramid schemes are known as unsustainable business models, which are built on enrolling as many people as possible into the scheme, with the promise of high monthly interests without the delivery of any product or service. Youssef Mansour, CEO of Envision Consulting Group (EN Consult), who last month pegged the loss at about 500 million dinars, has now revised the estimate for this month to more than JD1 billion ($1.4 billion). “We are still in a blur, as we are missing accurate estimates and waiting for the release of official figures,” he said.
The economist underlined that lower income citizens have borne the brunt of the loss with about 80% of the pyramid schemes’ victims earning less than $425 a month. Taxi driver Brahim, for example, sold his car to invest in ‘foreign trading companies’ — the name given in Jordan to trading bureaus of which many have been accused of relying on pyramid schemes.
Raed, a vendor employed in a clothing store sold his wife’s jewelry and pooled his meager savings with his two cousins, lured by the high interest offered by Matrix, a Jordanian ‘foreign stock market trading company’. Mansour pointed out that many small investors have sold their properties to invest in such schemes, which has led to a drop in price of land in the rural areas where many trading companies have set up shop.
“Jordan’s small-time investors are familiar with the concept of co-ops and mistakenly believed that foreign trading companies were built on a similar structure. This might account for the location of ‘foreign stock market trading companies’ which clutter in impoverished areas such as Anjara , Ajloun and Irbid, while Amman has been relatively spared,” Mansour said. The economist believes that 200 to 260 of such companies exist in Jordan, offering their clientele a monthly return on investment of 15-25%. Amounts invested in some foreign trading companies such as Matrix are estimated at $357 million, with about 70 companies located in the Irbid region alone.
Easy come, easy go
A year ago, against the promise of monthly profits of 7-10%, Raed invested $12,700 in Matrix, which has recently closed down. The salesman was told the company essentially traded in gold and real estate in the West and Arab countries. “I trusted the Matrix brand name like many in my immediate circle of friends.” His cousin Muhammad said he knew the manager of the trading company personally and had had dealings with them for over a year. When the news of Matrix’s bankruptcy circulated, Muhammad was extremely surprised but he did not complain. “I have earned more than the 9,000 dinars [$12,700] initially invested. My cousin was less lucky, as he joined the venture only a few months ago,” he explained. He has also poured some capital into a another company, which remains up and running.
When Raed discovered Matrix had closed down, he filed a complaint with the Ministry of Industry and Trade and has since been waiting for an answer. Many trading companies around the Jordan are now seeing customers flocking to their doors asking for reimbursement of their capital.
In the last few months, the government has stepped in to stem the financial hemorrhage, prosecuting 18 companies and enacting a temporary legislation to reign in financial trading companies by imposing stricter measures. “Two trading companies have legalized their status and filed for bankruptcy,” Mansour said. Among the new requirements are a rise in capital to $7 or $14 million, depending on the company structure, as well as the filing of copies of contracts drafted between financial trading companies and their clients for compliance purposes.
Unfortunately, it seems a little too late, in spite of the intervention of the controller of the Ministry of Industry and Trade, who had been scrutinizing foreign financial trading companies for the last two years, denouncing their activities numerous times. “Financial trading companies flew under the radar, slipping between the cracks of the various legislations,” explained Mansour. Although trading companies fell under the jurisdiction of Ministry of Industry and Trade, the controller at the central bank had to step in and survey their operations. But trading companies sued the controller, and won, forcing the controller to register them despite reservations.
Lured by promised riches
Generally speaking, investors who profit from pyramid schemes are those who join the investment early on. Often being able to triple or quadruple their investment, they spread accounts of their miraculous riches among the people around them, who are lured in by the tales of easy money. “The credit crunch taking place around the world has led many investors to believe ‘foreign stock market trading companies’ were affected by the international crisis, when most losses resulted principally from embezzlement schemes. With cash running out, the pyramid simply hit bottom and toppled,” Youssef pointed out.
In addition, fraudulent schemes were committed by individuals who protected themselves by registering their companies in the name of their wives or daughters, often walking free while the spouse was thrown in jail. As an example, one such embezzler registered his trading company in the name of his teenage daughter who as a minor was able to escape the verdict, while her father left unharmed for Europe.
“The financial trading sector lacked the necessary transparency, operating away from governmental oversight. With the introduction of new regulations and the prosecution of trading company owners, I really hope I will be able to recuperate some of my funds,” Brahim still hopes.
