Jamaica's 1990s Banking Crisis: Blaise Financial Fraud

Introduction: Jamaica's 1990s Financial Crisis

In the 1990s, Jamaica was dealing with a major crisis in its financial sector. A series of events converged simultaneously to create a situation in which the economy faced tremendous challenges. At the heart of these issues were rising inflation, skyrocketing interest rates, a devaluation of the Jamaican dollar, a lack of fiscal restraint at the government level, and limited regulation of the financial industry. The combination of these factors produced an economic collapse ("FINSAC Commission of Inquiry," 2010; "Zooming in on the 90s Meltdown," 2011).

In the case of the financial sector, an outside consultant named Ted Avey was brought in to investigate the collapse associated with Blaise Financial, a large financial holding company that functioned as a traditional bank, a building society, and an intermediary for currency transactions. In early 1996, Avey began what would become a 12-year investigation into the firm. What he discovered was that the owner had been using the bank's money to support his lavish lifestyle. This occurred during a period when no one was aware of these activities — until the economy began to face a number of challenges. Once that happened, it became difficult for the company to hide its losses from shareholders, investors, and regulators.

To fully understand what took place requires examining Avey's role as an expert witness for the Jamaican government, the techniques he utilized, an analysis of the bank's underlying issues, and strategies to help prevent such incidents from occurring in the future. Together, these elements offer the greatest insights into how the issues at Blaise Financial contributed to the economic crisis of the 1990s (Orienstein, 2006, pp. 54–62).

Avey's Role as Expert Witness for the Jamaican Government

Avey was an international forensic accountant. His role was to examine the balance sheet of Blaise Financial and determine where the fraud had taken place. He accomplished this by carefully evaluating the bank's transactions going back to the early 1980s — a period during which many of the policies that allowed executives to hide illegal activities were first enacted. During the course of legal proceedings, this analysis helped him to pinpoint precisely where the fraud occurred. This allowed the Jamaican government to link the various facts together, and Avey was ultimately able to provide a detailed picture of the fraud and the tools that enabled it to continue over such an extended period (Orienstein, 2006, pp. 54–62).

The most effective technique Avey employed was tracing where depositors' funds were going. He began by comparing the assets the firm carried on its books against its liabilities. The results showed that the bank had negative liquidity, despite the appearance of holding tremendous assets. Upon further examination, he determined that funds were being diverted to support the personal business projects of the majority shareholder, Paul Chen Young. Chen Young was investing this money in real estate projects considered highly risky, with promises of above-average returns. The problem was that these projects never turned a profit and required continuous infusions of capital (Orienstein, 2006, pp. 54–62).

Techniques Used to Discover Connectivity Between Blaise, Century, and Eagle

At the same time, the bank had invested heavily in the real estate sector through aggressive lending practices. When the financial crisis began — triggered in part by the devaluation of the currency — interest rates rose sharply. This caused consumer confidence and economic activity to decline. It also made it increasingly difficult for borrowers to keep up with loan payments, causing the total number of foreclosures to rise. The result was a wave of foreclosures accumulating on the firm's balance sheet. The fraud made the underlying situation worse by causing the company to appear stronger than it actually was. It was at this point that the losses and illegal lending activities were finally uncovered. The large volume of real estate holdings on the books helped Avey track exactly where the company had been investing its money and determine how the broader financial crisis had impacted the firm (Orienstein, 2006, pp. 54–62).

The bank's troubles began with a lack of regulation governing how depositors' funds were accounted for. This regulatory gap made it easy for Chen Young to begin slowly diverting funds toward his personal projects. At first, the amounts were small relative to the firm's total assets (Orienstein, 2006, pp. 54–62).

However, as time passed, the diverted amounts grew so large that off-the-books partnerships were established to hide the losses from investors and regulators. This was compounded by irresponsible lending standards that the bank had employed over many years. When the economy began to face major challenges — including a lack of fiscal restraint at the government level and the elimination of currency pegs — the situation deteriorated further. The fraud severely strained the firm's underlying financial position by directly eroding its liquidity. This made it extremely difficult for the company to adjust to changes in the macroeconomic environment and prevented regulators and investors from fully understanding the bank's problems until it was too late (Orienstein, 2006, pp. 54–62; "FINSAC Commission of Inquiry," 2010; "Zooming in on the 90s Meltdown," 2011; Swaby, 2011).

The best strategy the Jamaican government can employ to prevent these issues is to establish minimum reserve standards for all financial firms. Alongside this, bank examiners should conduct unannounced visits to financial institutions to carry out spot checks of their books. If implemented, these measures would allow regulators to identify potential problems early — while they are still manageable — rather than after a crisis has developed (Orienstein, 2006, pp. 54–62; "FINSAC Commission of Inquiry," 2010; "Zooming in on the 90s Meltdown," 2011; Swaby, 2011).

Conclusion

Zooming in on the 90s Meltdown. (2011). Jamaica Gleaner. Retrieved from