[This article was originally written with JJPTR as a reference point. Information presented in this article may still apply to other investment schemes.
Recently, a gold investment scheme called Royal Gold joined the financial scheme controversy when 80 investors lodged a police report against the company after failing to get the returns on their investment as promised.
This came about barely two months after controversial financial scheme operator JJPTR (or 'JJ Poor to Rich') made headlines when several news portals reported that the scheme had collapsed. Investors, who were promised 20% returns on their investments monthly, were unable to log into their accounts on 20th April 2017; and JJPTR founder Johnson Lee and two senior aides have been detained by the police following raids by several government agencies in 8 JJPTR offices in Penang. There may also be a move to freeze the company's assets under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, explained later in this article
As evidenced by Royal Gold, JJPTR is not the only get-rich-quick scheme around - commonly referred to as pyramid or ponzi schemes. For purposes of this article, we will be using the term "pyramid scheme", though you can read more about the similarities and differences here.
Since the news broke of JJPTR's collapse, more Forex schemes are reportedly falling apart. In fact, Bukit Aman Commercial Crime Investigation Department's statistics showed a recorded 1,883 cases of investment scams from 2015 until April 2017 that resulted in around RM379.1 million of losses nationwide. It is common to hear of such schemes collapsing and investors losing everything, but not so common to hear about investors getting their money back.
Many who have been following the news are perplexed at why investors are not taking stronger action against the operators of the scheme, but instead continuing to have faith in them. Reports show that many investors are keeping silent out of fear they may lose their money. They are worried that the company’s account will be frozen by the authorities if police reports are made. Some are fearful that action will be taken against them for taking part in “illegal activities.”
Three big questions arise from this:
1. Are the investors doing the right thing by not going to the police?
2. Is there any way to get their money back from operators of these pyramid schemes?
3. Is it a crime to invest in a pyramid scheme?
In order to answer these questions, we first need to establish the fact that...
Pyramid schemes are illegal
Image from Computerknacks.
Section 27B of the Direct Sales and Anti-Pyramid Scheme 1993 states:
(1) No person shall promote or cause to be promoted a pyramid scheme.
(2) Any person who contravenes subsection (1) shall be guilty of an offence...
Like JJPTR, many of these collapsed schemes were in fact pyramid schemes disguised as forex trading schemes. According to Bank Negara’s 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 kind of scheme involves the act of buying or borrowing foreign currencies from (or selling or lending foreign currencies to) a non-licensed onshore bank.
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 its intended destination.
Are investors in pyramid schemes participating in an "illegal activity" ?
In cautioning the public against unlicensed forex trading schemes, Bank Negara has listed down some consequences of dealing with unregulated entities or persons:
1. Consumer protection under the laws administered by BNM IS NOT APPLICABLE should the members of the public choose to deal with the illegal financial service providers.
2. Members of the public who participate in the illegal financial activities could also BE CHARGED under the law as abetting the operators of such illegal activities.
To get a better understanding of this, we consulted Nizam Bashir, a lawyer experienced in litigation cases involving, amongst others, fraud and conspiracy:
I am not sure about the veracity of item 1. Nevertheless, I am prepared to concede that pursuant to Section 2(2)(g) of the Consumer Protection Act 1999, the Act does not apply to trade transactions effected by electronic means.
As for item 2, the statement appears to be somewhat misleading. Co-organisers and their employees can be charged. But I don't seem to see a section in the Financial Services Act, 2013 or Direct Sales and Anti-Pyramid Scheme 1993 prohibiting members of the public from making deposits and/or investments in such companies. Conversely, Section 27B of the Direct Sales and Anti-Pyramid Scheme 1993 states that "no person shall promote or cause to be promoted a pyramid scheme."
Quite telling in my view that the law is skewed against administrators or operators of pyramid scheme. - Nizam Bashir, Nizam Bashir & Associates, in interview with ASKLEGAL.
In Nizam's view, those who have invested money need not fear because there still are avenues through which they may recover their money.
Recovering the money through contract law
Bank Negara has outlined how illegal forex trading schemes are typically conducted:
- 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.
Lets suppose for a minute that a contract exists. If it is an illegal scheme (not approved by Bank Negara,) this contract becomes a “void agreement” or an agreement which is not in existence from the very beginning. Under Section 24 of the Contracts Act (in part):
"The consideration or object of an agreement is lawful, unless —
(a) it is forbidden by a law;
(b) it is of such a nature that, if permitted, it would defeat any law ...
The effects of a void agreement is such that the contract is not enforceable by law, and any person who has benefited from it must compensate the person on the losing end. This is stated in Section 66 of the Contracts Act 1950 :
"When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it."
In other words, because the contract is void, operators of such schemes will have to compensate the investors.
Compensation in this case would come in the form of damages. Damages is basically financial compensation. The aim of the court, in awarding damages, is to place the party who has suffered loss due to the breach of contract, in (as much as possible) the same position as he/she would have been in if the breach had not taken place.
If there was no contract, Nizam Bashir is of the opinion that investors may still bring an action under Tort Law. In a nutshell, the purpose of Tort Law is to compensate people who have been hard done by and they may be applicable even in the absence of contracts. These laws are there to make sure people behave cautiously (especially when it’s possible for their actions to injure other people).
[Read more: What is Tort Law?]
However, in order for this to happen, investors first need to initiate an action against the operator, which bring us to the next point:
What options do investors have if they want to recover their money?
1. Make a police report, let the authorities investigate
Image from The Malay Mail Online
Many investors are reluctant to make a police report out of fear that they would not be able to get their money back if the authorities take action and freeze the scheme operator's accounts. The fact is, the freezing of accounts may be the best chance investors have of seeing their money again.
"Initially, many people who lost money in such scams would want to lodge police reports but later, they would be stopped from doing so or threatened by other investors who didn’t want to ‘lose’ their money. But please lodge police reports." - MCA Public Services and Complaints Department head Datuk Seri Michael Chong
Making a police report is the first step to kick off an investigation into the matter. It also enables law enforcement agencies to freeze the assets or seize the properties of the illegal operators pending an outcome to the investigation. The reason this is good for investors is because there is no point trying to recover the money if the operators have managed to dissipate their assets before the investigation is completed. Under Section 44(1)(a) of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLATFA):
44. (1) Subject to section 50, an enforcement agency may issue an order to freeze any property of any person, or any terrorist property, as the case may be, wherever the property may be, and whether the property is in his possession, under his control or due from any source to him, if—
(a) an investigation with regard to an unlawful activity has commenced against that person...
Bear in mind, the timelines for obtaining a freezing order will depend on the enforcement agency that is in charge of investigating the case. In addition, an order issued under Section 44(1) is only valid for a period of 90 days if the perpetrator is not charged in court with an offence under the ALMLATFA. The Section implies that if the person is charged, the freezing order will remain in force until the conclusion of the trial.
2. See a lawyer, commence legal action.
While you can engage a lawyer of your own, it can be a pretty expensive affair. To keep legal costs under control, investors may also sue the operator(s) as a group (Class Action Suit). This process can be outlined as follows:
Step 1: File a police report.
Step 2: Gather other investors together. Pyramid schemes rely on members recruiting other members, so there should be a network in place. This can also be done easily via a WhatsApp chat group to keep everyone in the loop.
Step 3: Set up a meeting with an experienced lawyer. Any interested parties can attend, or the group can also send representatives and be updated later via the group chat. The lawyer will be able to look through any relevant documents and advise investors on steps to bring legal action.
Alternatively, those interested in finding out more about initiating a Class Action Suit can also fill in this form. An independent team (not affiliated with AskLegal) will then contact those who have registered an interest to get the ball rolling.
Moral of the story: Be careful when investing!
For various reasons, making money grow is an important part of life for many people. With knowledge on how challenging it can be to deal with unscrupulous operators of illegal schemes, it is imperative for any investor to do thorough checks before putting their money anywhere. There are two relatively easy ways you can do this:
Bank Negara's Financial Consumer Alert List
In the case of JJPTR and Royal Gold, a quick check on Bank Negara's Financial Consumer Alert list would have revealed that the scheme is illegal under the relevant laws and regulations administered by Bank Negara. In fact, Royal Gold had been on the list since 2012 - the same year the company was incorporated.
Do a background check with the Companies Commission (SSM)
On May 1st, the company behind JJPTR, JJ Global Sdn Bhd, was revealed to be a "RM2 company" registered with the Companies Commission of Malaysia (SSM). Investigations showed that JJ Global Sdn Bhd, set up in 2015, had also failed to file its financial accounts with SSM since it was formed. If you're putting your money into a company that's promising substantial returns, you should ensure that it is well-managed, with substantial capital to begin with.
But most importantly, you should also be extra careful when someone is offering incredible returns that even the best financial managers in the world would not be able to achieve (e.g. 20% - 35% return on investment monthly.) As the saying goes, if it sounds too good to be true, it probably is.