Forex trading is the new craze to hit Kampala. For many speculators, this could be a profitable if they land on the right side of a transaction. However, there is no doubt that this is a very risky investment vehicle, which, of late, has been used to perpetrate fraud all over the world. The risks herein are two-fold:
i) The first risk is the ordinary market risk that every investor bears-if you are on the wrong side of a transaction, you could lose your entire investment.
ii) The second risk, which is the focus of this note, is the risk of market abuse or fraud by the broker or trader. Since the Traders in Uganda are mostly unlicensed, the investor is the first and last line of defence.
A potential, or actual investor must conduct a due diligence and know his or her Trader.
I recently received a proposal and a contract from a forex trader, who promised a potential investor a return of 20% per month for an investment of USD 2,500. Apart from the fact that this return seemed to be too good to be true, and the trader had not bothered to clearly declare the risks to the potential client, I noticed a number of things that made me suspect that the trader was not looking out for the interests of the client or worse- was probably operating a ponzi scheme and would defraud the potential investor.
I would like to share afew tips on what you should look for and how to identify red flags to avoid being ripped off.
1. Is the trader licenced? For one to be authorized to take deposits from the public, he should be licenced by Bank of Uganda. Alternatively, for one to act as an investment advisor, with discretion to invest funds on behalf of clients, he must have an investment advisor class (a),(b) and (c) licence from the Capital Markets Authority. If one is not licenced, he is unregulated and any clients that lose their money as a result of the malfeasance of the trader have no recourse to the CMA or BOU for compensation. However, CMA and BOU can take action against such traders to prevent loss.
2. Does the Company have Sound Corporate Governance Practices? Have you seen its incorporation documents, particulars of directors, company filings, audited accounts, procedures manual, investment policy. The trader's failure to meet its legal and regulatory obligations is a red flag.
3. Do the contract documents reflect the intent of the transaction? I noted that the documents relied on were investor or preference share agreements which transferred the risk from the trader to the client. I also saw some clauses that were to the effect that "the trader has no obligation to give the investor information relating to the investment." This lack of transparency is very suspicious since it does not give the investors an opportunity to assess the suitability of the investment, and in effect, renders them blind. This could also allow the Trader to carry out fictitious trades and do a "Bernie Madoff" without being checked by the client.
I also noted that the contract did not expressly state that the "Investor" was entitled to the 20% return promised, but rather to dividends. In my experience, dividends are tagged to profits and paid on an annual basis and not monthly as promised by the trader. The investor would therefore not be able to prove his/her entitlement to the monthly returns.
4. Are you satisfied with the resources and financial capability of the Trader: Traders are trustees of their clients' funds and "a necessitous man cannot be a trustee". Check your trader's assets because you might need to liquidate them to recover your money in case of a loss and his bankruptcy. Please note that the money you give the trader is a liability and therefore does not fall within his assets. If the Trader mixes the funds (e.g. by using one account for his operations and client funds) this is already a breach of trust.
5. Are you satisfied with the skill levels or experience of the Trader: Traders should provide you with proof of capability. Why would you trust an amateur with your hard earned money?
If you have been cheated out of your hard earned money by any unregulated Forex Traders, please contact BOU or CMA or the Police. You could stop the loss of money and prevent large scale fraud
On 3 February 2011, The weekly Observer Carried a story about over 300 Ugandans trying to recover up to $4.9m from a Forex Trading scam carried out by a little known company called Mint Consult. This company induced a number of people to invest between $2,500 and $20,000 with them and guaranteed irresistible returns of up to 30% per month. This trader ran afoul of all the things I raised in my article and now they have to sell his assets to cover a very small part of the money he took. I wouldn't be surprised if he spent some time as a guest of the state for obtaining goods by false pretences
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