Alleged Ponzi Schemes Leading Chile to Close Regulatory Vacuum

  • Four alleged pyramid schemes failed in less than a year
  • Contracts for difference are currently not regulated in Chile

Chile is moving toward regulating companies that trade in certain over-the-counter derivatives and foreign exchange, after a lack of oversight of the industry led to a spate of Ponzi schemes worth millions of dollars, a lawmaker said.

A Congressional commission investigating the Ponzi schemes will propose giving powers to banking and stock market regulators to oversee the companies, said Aldo Cornejo, president of the commission.

"We are already late for many investors, but the only way to avoid more collapses is to increase the powers of the regulators," Cornejo said by phone from Valparaiso on Tuesday. "As long as we don’t regulate it, the risk of the situation repeating is there every day."

Companies such as AC Inversions, IM Forex, Investing Capital and Rodriguez & Asociados were able to operate for years, offering returns of as much as 40 percent a year without any oversight by regulators. They convinced their clients that trading in foreign exchange and derivatives known as contracts for difference through unregulated brokers enabled them to provide succulent profits, even as interest rates fell and the stock market stagnated. The longer regulators left them alone, the more legitimate they seemed -- until they all collapsed in quick succession over the past six months.

Contracts for difference, or CFDs, are financial derivatives where the buyer bets on the future value of an asset and the seller agrees to pay the difference. If the difference is negative, the buyer pays the seller. These vehicles are illegal in the U.S. and highly regulated in most other countries. In Chile, anyone can sell or buy CFDs, there is no government body overseeing transactions and buyers can borrow as much as 99 percent of the investment.

For more on Chile’s CFD’s market, click here.

"There is a significant legal vacuum," Cornejo said. "We need to give regulators power to prevent these situations, and to act if they detect that they are happening."

Losing Money

In the case of AC Inversions, more than 5,000 people lost about 50 billion pesos ($74 million), according to the congressional commission. The firm attracted clients promising monthly returns of between 2.5 percent and 7.5 percent in the foreign exchange market.

During the months prior to the firm’s collapse, Chile’s securities regulator, the Superintendencia de Valores y Seguros, received as many as 15 questions and complaints from investors, director Carlos Pavez told lawmakers on the committee last week. The regulator was powerless to intervene though because the company wasn’t trading in securities.

"We don’t have the resources or the power to police activities outside of this area," Pavez said. “We can’t supervise every inquiry that comes to us, we receive about 15,000 every year.”

Even when a broker that traded the CFDs for AC Inversions warned them that the company was losing heavily, the Superintendencia de Valores failed to investigate. Pavez told lawmakers they needed proof of fraud before they could act.

Lawmakers will start drafting conclusions at the end of this week, Cornejo said. When the investigation finishes, at the end of July, they will coordinate with the Finance Ministry to introduce a proposal to Congress.

“Companies like that just can’t operate in Chile without oversight,” Cornejo said.

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