Foreign exchange trading, or forex trading, involves the exchange of currencies in a global financial market. The forex market is the largest and most liquid market in the world, where there are millions of participants and trading volumes of over $6 trillion daily.
The entry barrier to the forex market is exceptionally low, and this has resulted in suspicious entities entering the market, attempting to rob retail traders of their hard-earned capital by setting up elaborate scams.
Scams mimic legitimate business and trick traders into depositing their capital into the accounts held by malicious, fraudulent entities. These entities steal the money of unsuspecting forex traders, and once they have succeeded in their scam, it is often difficult for investors to get their money back.
Some of the most common forex scams include:
- Signal seller scams
- Forex Robot Scams
- Forex Broker Scams
- Managed Forex Account Scams
- Ponzi Schemes and several others
There is no centralized agency that regulates the currency trading industry; rather, various governmental and independent organizations monitor forex trading globally.
Several of them include, but are not limited to the following:
- Commodity Futures Trading Commission (CFTC)
- Cyprus Securities and Exchange Commission (CySEC)
- The Central Bank of Ireland
- The Financial Conduct Authority (FCA)
- Swiss Financial Market Supervisory Authority (FINMA)
- Financial Sector Conduct Authority (FSCA), and several more.
Regulated forex brokers are held to certain requirements by these market regulators. These include:
- Client Conduct – These insurance agents are not permitted to make implausible or deceptive statements or promises. Additionally, it prohibits brokers from recommending customers to engage in dangerous trades or enter positions that are not in their best interests.
- Keeping client funds in segregated bank accounts – These limits ensure that the broker is prohibited from using any of the client's cash for operational or other expenditures. This legislation stipulates that all deposits must be kept apart from the broker's bank accounts.
- Reporting and full disclosure – These guidelines ensure that clients of the broker are fully informed about their account's status and the dangers connected with Forex products.
- Maximum leverage ratio limits – These restrictions help clients maintain a manageable level of risk. As a result, corporations may be unable to provide customers with increased power.
- Minimal capital requirements provide traders with the peace of mind that they can withdraw their cash at any moment, including in the case of the broker's insolvency.
- Frequent audits must be done to ensure that the forex broker's financial risk remains tolerable and that funds are not misappropriated. This requires that all regulated brokers submit periodic financial and capital statements that prove their adequacy.
What are the most elaborate forex scams?
The most elaborate forex scams that are currently in circulation include the following:
- Signal Sellers
- High Yield Investment programmes
- The Manipulation of Bid-Ask Spreads
- Software Scams
- Managed Account Scams
- Ponzi and Pyramid Schemes
- Boiler-room Scams
- Robot Scams
1. Signal sellers: Forex signals services are a subscription-based service that allows you to get buy and sell alerts in the foreign exchange market.
The premise of this scam is identical to the premise of the forex robot scam, with the exception that, instead of paying a one-time price to purchase the robot, signal services charge a monthly membership fee in exchange for receiving buy and sell signals.
There are legitimate forex signal services, just as there are legitimate forex robots, that provide a valuable service, but they often demand some judgment from the customer. To be most effective, trading signal services should be utilized as a pointer to potential trading opportunities.
2. High yield investment programmes: A good indicator of a scam is when the broker or scammers demand immediate action from you.
For instance, the person/organization may offer you a scheme that promises to triple your money in a week trading forex or CFDs, but you must deposit the money within 30 minutes to take advantage of the offer.
Scammers take advantage of the fact that users have no idea whether a broker or organization is legal or not. The average population is often enticed by programs that promise to double or treble their money in a short period.
3. Manipulation of bid/ask spreads: A classic sort of Forex fraud, the bid/ask spread scam involves con artists offering astronomically enormous (and often fictitious) spreads on certain currency pairings.
Computers are used to manipulate bid-ask spreads in an old point-spread forex fraud. The difference between the bid and ask price indicates the broker's fee for facilitating a back-and-forth transaction.
For each currency pair, these spreads might be different. Scamming happens when the point spreads change from broker to broker.
For example, when trading the EUR/USD, some brokers provide spreads of seven pips or more instead of the standard two- to three-point spread. It is the lowest price movement that a certain exchange rate makes according to the market convention.
The smallest variation in the price of a major currency pair is that of the final decimal place.) For every profitable deal, you will need to factor in four or more pips in commissions, which may quickly eat away at whatever gains you might have made.
4. Scams through software: A mentor-like connection with successful traders may be sought after by new and inexperienced traders – and some platforms enable traders to set up trading accounts that others may follow and duplicate to learn from their mistakes.
These scams are based on trading platform software that provides copy trading or social trading opportunities to traders. When the platform software reports performance, only that of the copied trades will be considered, and not the copiers.
The platform software does not provide information on commission or lag experiences that harm the performance of the copiers when the platform reports on performance.
This will encourage riskier trading behaviour from unsuspecting traders, and it will make long-term success unlikely.
5. Managed accounts: Investors can be enticed to deposit large quantities of money for their trades to be managed by ‘highly-skilled' traders in exchange for a part of the profits.
The control over the trader's money is transferred to the fund managers, who can then use the money to further their own business interests.
One individual is persuaded to invest by the account manager. It makes no difference how much money is involved. Guaranteed returns range from a few percent per month to as much as 20 or even 30 percent per month, depending on the market. Here's when things become interesting. NONE of the funds is ever used to invest in the foreign exchange market.
The money can be buried in a mattress for ten months if the account manager offers a ten percent monthly return on investment. Though this is an inefficient means of earning money for the management, this is not the case. He convinces his first victim that by reinvesting half (or more) of that 10%, the account will grow at a quicker rate than otherwise.
When the manager is apprehended, he is unable to repay the entire amount of stolen funds, resulting in dissatisfied consumers and multi-million-dollar lawsuits against him.
6. Ponzi and pyramid schemes: The Forex Pyramid Scheme is a risky and unsustainable business strategy that has been outlawed in most countries. Because its structure mimics that of a pyramid, it is dubbed a pyramid scheme.
Top-level investors (the scheme's owner) recruit new paying members who pay the recruiter's upfront fees in a Forex pyramid scheme. The recruited members then recruit their own subordinates, who pay their individual recruiter's upfront fees, and so on.
In other words, of trading Forex, the owner and subsequent recruiter profit from the fees paid by freshly recruited members.
The further up in the pyramid a trader is, the more money they will make. It is crucial to note that while this business strategy is comparable to MLM (Multi-level marketing), it does not include the selling of actual objects.
7. Boiler room scams: Investment fraud is frequently perpetrated by a group of persons who work together in a temporary office known as a “boiler room.” To persuade you that their firm is legitimate, they may direct you to the company's website, which is quite professional.
They could also establish a toll-free number and a reputable mailing address to give the impression that the organization is authentic.
The corporation, on the other hand, does not exist. Everything on the website is a hoax, and the business is nothing more than a post office box or temporary office space.
Scammers lock their doors and move on to another scam by the time you notice you have been duped out of your money.
8. Robot Scamming: Forex robots are trading programs that use specialized algorithms as technical signals to open and terminate deals in the foreign exchange market.
Not all Forex robots are rip-offs, though. In the case of Forex, Expert Advisors (EAs) may be used to create robots that can be used within the popular MetaTrader suite of trading platforms.
It may be beneficial to look for a Forex robot scam list online to assist you to avoid some of the more well-known fraudsters.
What are the common facts about forex scam methods?
- They always sound too good to be true
- They promise unrealistic gains
- They have a sense of confidence and urgency
- The website is not informative, or it does not contain crucial information
- The brokers who are scams do not have valid regulations or licenses
- Customer support on the website takes very long to respond or does not respond at all
- Online broker reviews report problems with the broker and with fund withdrawals
How to spot a forex scam
To spot a forex scam, traders can look out for the following scams:
- The offer seems too good to be true
- The broker's background and management team cannot be verified
- The broker does not have a legitimate license
- There is a “Get-Rich-Quick” mentality
- Success is guaranteed
- There is no way to contact the broker
- Unsolicited marketing
- There is a low trust score for the entity on online review websites
- No information on historical performance
- There is no live trading data
- There are claims of a “Secret Winning Formula.”
- Offshore headquarters
- The broker is under regulatory disciplinary action
How to avoid forex scam
To avoid a forex trading scam, forex traders are urged to check the register listed on their region's market regulator website. Consult the “Warning List” on the local market regulator's website to see if the forex broker is listed there.
Always evaluate a broker to ensure that it is not a clone of a legitimate firm by asking for a firm reference number and contact details.
Traders should heed caution when forex brokers contact them unexpectedly. Forex traders must always consider seeking professional financial advice before they invest.
What can you do when you have been scammed in Forex Trading?
Traders must immediately contact their bank to reverse the transfer of funds to the scam broker's account. Next, traders must report the broker to their local market regulator so that an investigation can be done, and they can try and recover funds.
What are the laws involved with Foreign exchange fraud?
Trading in the forex market fraudulently, also known as forex trading fraud, is defined as the employment of any type of trading plan to mislead currency traders by telling them that they may expect to make a large profit by doing so.
The following regions have strict laws against Forex fraud:
- United States
- United Kingdom
1. The United States: The United States is the world's second-largest sales desk, accounting for 19.5 percent of worldwide OTC FX turnover. The Forex markets, as well as other derivative and OTC markets, are regulated by two major regulatory authorities, the NFA and the CFTC, which collaborate.
The National Futures Association (NFA) works to safeguard investors. Additionally, the NFA seeks to ensure that its members adhere to their regulatory duties, which include promoting market integrity and combating scams and fraud via the use of best financial practices.
Additionally, the NFA cooperates with the Commodity Futures Trading Commission (CFTC). They work in tandem to combat systemic risk and reassure traders about the quality and dependability of the Forex businesses they supervise.
To obtain regulation and licensing through the NFA and the CFTC, forex brokers must:
- Offer a maximum leverage ratio of 1:50
- Never trade against clients
- Never allow hedging for clients
- Follow the First in, First out (FIFO) rule
- Submit all relevant reports and financial statements
- Use facts that can be proven in advertising and promotional materials
- Hire staff who are knowledgeable and professional
2. Australia: The Australian forex market is overseen and regulated by the Australian Securities and Investment Commission (ASIC). It collaborates with several agencies and organizations to safeguard consumers and investors.
For example, ASIC collaborates with the Australian Prudential Regulation Authority (APRA), which oversees financial institutions, to ensure their safety.
To conduct business in Australia, forex brokers must meet the following criteria:
- Have at least 1 million AUD in operating capital
- Possess a representative office in Australia
- Comply with the organizational competence obligation in s912A(1)(e) of the Corporations Act 2001 (Corporations Act).
- Adhere to the professional indemnity insurance cover
- Ensure that there is complete financial transparency and that periodic audit reports are submitted
- Ensure that only Tier-1 banks are used, and that client funds are kept in segregated bank accounts.
3. The United Kingdom: The United Kingdom, with its trade centre in London, maintains the world's largest sales desk. It accounts for 36.9 percent of worldwide OTC Forex volume on its own.
To protect traders against broker scams, financial misconduct, and other sorts of fraud, the UK has two significant financial regulatory bodies: the FCA and the PRA.
To provide financial services business in the United Kingdom, a broker must be approved by the Financial Conduct Authority (FCA). This national regulatory agency protects consumers while ensuring the integrity of the UK's financial markets.
To become an FCA-regulated forex broker, firms must comply with the following criteria:
- Have at least 1 million GBP in operating capital
- Submit frequent audit reports and financial statements
- Ensure that investor protection is done through the Financial Services Compensation Scheme (FSCS).