VZCZCXYZ0000
RR RUEHWEB

DE RUEHAM #2928/01 2971315
ZNR UUUUU ZZH
R 231315Z OCT 08
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC 3713
INFO RUEHGB/AMEMBASSY BAGHDAD 6087
RUEHLB/AMEMBASSY BEIRUT 2928
RUEHEG/AMEMBASSY CAIRO 3811
RUEHDM/AMEMBASSY DAMASCUS 3991
RUEHJI/AMCONSUL JEDDAH 0839
RUEHJM/AMCONSUL JERUSALEM 5203
RUEHRH/AMEMBASSY RIYADH 2039
RUEHTV/AMEMBASSY TEL AVIV 1367
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS AMMAN 002928 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA AND EEB 
 
E.O. 12958: N/A 
TAGS: EFIN ECON SOCI JO
SUBJECT: PYRAMID SCHEME HIGHLIGHTS PAST REGULATORY FAILURES AND 
COSTS CITIZENS MILLIONS 
 
REF:  AMMAN 504 
 
¶1. (SBU) Summary: Independent of the U.S. sub-prime crisis and the 
global financial crisis, as many as 70 Jordanian firms falsely 
claiming to broker and manage funds composed of financial 
instruments listed in markets outside Jordan collapsed in late 
September.  Such "brokerage" firms were not regulated prior to the 
issuance of a current temporary law in September.  The new law 
highlighted the risk to customers and may have prompted the 
resulting run on these institutions, which hurried their collapse. 
Thus far, 18 firms have been referred to the prosecutor general at 
the State Security Court for suspected fraud and more could be 
prosecuted.  End Summary. 
 
Financial Scams Hurt Thousands of Citizens 
------------------------------------------ 
 
¶2. (SBU) As many as 70 firms may be implicated in a financial scam 
and are accused of fraud, operating pyramid schemes, and mismanaging 
of funds.  It is believed that many of these firms mimicked market 
movements and transactions without actually executing clients' 
orders in real markets.  The extent of the problem is not known, but 
it is estimated that it runs into the hundreds of millions of 
dollars and involves thousands of clients.  The most troubling 
aspect is that it penetrates deep into Jordanian society at all 
levels and across all geographical locations.  Most firms hired 
retired civil and military servants and trusted clergy to promote 
the services among their communities, promising 10 percent monthly 
returns.  Most depositors risked, and many of them lost some or all 
of, their life savings, real estate and other family assets.  There 
are legitimate firms operating in this market. 
 
Temporary Law Changes Licensing and Prompts Run 
--------------------------------------------- -- 
 
¶3. (SBU) A temporary law, issued in September, changed the 
regulation and licensing of all such financial companies.  Many 
observers believe that the new temporary law, which banned further 
deposits until the licenses were updated, triggered the domino-like 
collapse of these firms by alerting investors to the risks and 
prompting withdrawals.  In the past, these firms operated under 
simple trade licenses from the Ministry of Industry and Trade (MoIT) 
without being regulated by either the Central Bank of Jordan (CBJ) 
or the Jordan Securities Commission.  The new law places stringent 
regulations on foreign exchange companies requiring them to obtain a 
license from the newly established Foreign Exchange Regulatory 
Commission.  Requirements for licensure include a $14 million 
capital for privately owned firms and $21 million for public firms 
and a $700,000 license fee.  Also under the new requirements, 30 
percent of the firm's capital must be deposited at the CBJ.  Still, 
the government has been criticized for acting too late and too 
hastily in enacting an inadequate law because of pressures to 
address an immediate need. 
 
¶4. (SBU) While some press opinion pieces have called the law too 
draconian, Senator Rajai Mouasher, Head of the Upper House of 
Parliament's Finance and Legal Committee and also Chairman of the 
Jordan National (Ahli) Bank, told EconOffs he supported the measure. 
 He is hopeful that some of the savings of scammed Jordanians will 
be retrieved and welcomes a transparent and well-regulated market in 
international financial instruments where investors are aware of the 
associated risks.  He further added that he believes most of the 
firms were retailers for larger but similar organizations based in 
Egypt. 
 
18 Firms Already Being Investigated 
----------------------------------- 
 
¶5. (U) Thus far, 18 firms have been referred to the prosecutor 
general at the State Security Court for suspected fraud, and more 
could be prosecuted.  The MoIT's Companies' Controller Department 
has said publicly that investors will not be able to recover their 
money for at least six months due to prolonged judicial processes, 
but the Comptroller further declared that depositors will eventually 
be partially reimbursed. 
 
¶6. (SBU) One licensed junior financial advisor who runs a legitimate 
business described the technicalities of the pyramid scheme to 
EconOffs.  He said that most firms would acquire software that 
allowed them to operate a brokerage service of instruments listed in 
 
international markets, but the fraudulent ones would have the 
software mimic market movements without actually linking their 
systems to actual floor brokers.  As a result, many transactions 
never entered the market.  Some commentators believe that the local 
economy and Jordanians have yet to recover from the shock and 
realize the far-reaching damage.  Others believe that the worst is 
over. 
 
Not Related to Sub-Prime Mortgage Crisis 
---------------------------------------- 
 
¶7. (SBU) While the scandal and associated crimes are not linked to 
the sub-prime mortgage crisis, the subsequent fall in international 
indices contributed to the crimes' exposure, since customers and 
regulators were paying increasing attention to financial markets. 
The Amman Stock Exchange (ASE), which has fallen more than 50 
percent since this summer, has felt the effects of both the world 
financial crisis and the scandal but has likely also fallen due to 
its own market forces (reftel). 
 
Visit Amman's Classified Website at 
http://www.state.sgov.gov/p/nea/amman 
 
BEECROFT