Foreign exchange fraud

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Foreign exchange fraud is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading "has become the fraud du jour" as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission.[1] But "the market has long been plagued by swindlers preying on the gullible," according to The New York Times.[2] "The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records" according to The Wall Street Journal.[3] The North American Securities Administrators Association says that "off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud."[4]

The foreign exchange market is at best a zero–sum game,[5] meaning that whatever one trader gains, another loses. However, brokerage commissions and other transaction costs are subtracted from the results of all traders, making foreign exchange a negative-sum game.

"In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists."[6]

US Government interventions[edit]

In August 2008, the CFTC set up a special task force to deal with growing foreign exchange fraud.[7] In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on " a number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals."[8]

In 2012, Christopher Ehrman, a SEC veteran was selected to run the new Office of the Whistleblower for the CFTC.[9] In an interview published in the Wall Street Journal, Mr. Ehrman is quoted: "One is just understanding enforcement. I’m an enforcement guy and I did investigations and brought cases for a number of years. I understand what folks in enforcement are looking for. Whistleblower complaints have no intrinsic value. When they’re just sitting here with me, they just don’t mean anything. They’re valuable to the enforcement division so that they can bring investigations."

Types of fraud[edit]

Frauds might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,[10] improperly managed "managed accounts",[11] false advertising,[12] Ponzi schemes and outright fraud.[4][13] It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.[14]

Increase in fraud[edit]

The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.[15] An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically."[16] Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds.[1] CNN quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

Not beating the market[edit]

The foreign exchange market is a zero sum game[5] in which there are many experienced, well-capitalized professional traders (e.g. working for banks) who can devote their attention full-time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.

Retail traders are, almost by definition, undercapitalized. Thus, they are subject to the problem of gambler's ruin. In a "Fair Game" (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole, which has vastly more capital, they will almost certainly go bankrupt. The retail trader always pays the bid/ask spread which makes their odds of winning less than those of a fair game. Additional costs may include margin interest or, if a spot position is kept open for more than one day, the trade may be "resettled" each day, each time costing the full bid/ask spread. In some variations of foreign exchange trading, forex dealers serve as the counterparty to the contracts sold to the retail customer. The underlying contract is not traded on an actual exchange such as the Chicago Board of Trade, but rather entered into off-exchange. Thus, if the investor loses money, while the dealer makes money.[17]

Although it is possible for a few experts to successfully arbitrage the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbitrages themselves are a rival good. (To draw an analogy, the total amount of buried treasure on an island is the same, regardless of how many treasure hunters have bought copies of the treasure map.)

Paul Belogour, the Managing Director of a Boston-based retail forex trader, was quoted by the Financial Times as saying, "Trading foreign exchange is an excellent way for investors to find out how tough the markets really are. But I say to customers: if this is money you have worked hard for – that you cannot afford to lose – never, never invest in foreign exchange." [18]

High leverage[edit]

By offering high leverage some market makers encourage traders to trade extremely large positions. This increases the trading volume cleared by the market maker and increases their profit, but increases the risk that the trader will receive a margin call. While professional currency dealers such as banks and hedge funds tend to use no more than 10:1 leverage, retail clients may be offered leverage between 50:1 and 400:1.[2]

Fraud by country[edit]

To aid with transparency, some regulatory authorities publish in to public domain the following: list of regulated companies/firms, warnings to regulated companies, cases opened against regulated companies, fines levied to regulated companies, revocation of companies license as well as general news announcements.

United Kingdom[edit]

The Financial Conduct Authority (FCA) website lists guides to aid with avoiding fraud/scams as well as public list of warnings recorded by the FCA.


The Cyprus Securities and Exchange Commission (CySEC) provides public access to information regarding the process for how to obtain a CIF authorisation as well as listed the current and past CySEC authorised companies.

Convicted scammers[edit]

See also[edit]


  1. ^ a b Lindsay, Daniel (2014-01-20). "Regulatory Holes Provide A Playground For Forex Fraudsters". MahiFX. Retrieved 2014-01-28. 
  2. ^ a b Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100". The New York Times. Retrieved 2007-10-30. 
  3. ^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits". The Wall Street Journal (Dow Jones and Company). Retrieved 2007-10-31. 
  4. ^ a b "Forex Fraud Investor Alert". North American Securities Administrators Association, accessed January 12, 2008
  5. ^ a b Douch, Nick (1989). The Economics of Foreign Exchange. Greenwood Press. pp. 87–90. ISBN 978-0-89930-499-1. 
  6. ^ "Regulators Join Forces to Warn Public of Foreign Currency Trading Frauds". U.S. Commodity Futures Trading Commission. 2007-05-07. Archived from the original on 2007-11-05. Retrieved 2008-03-18. 
  7. ^ "CFTC establishes task force on currency fraud". Washington Post. 2007-08-11. 
  8. ^ The Federal Register Section E. The Commission's Proposed Rules
  9. ^
  10. ^ SOFTWARE VENDOR CHARGED CFTC News Release 4789-03, May 21, 2003
  11. ^ CFTC complaint Forex Advisory Firm and Trade Risk Management Firm Charged With Fraud
  12. ^ Fraud charges against multiple forex Firms Commodity Futures Trading Commission (CFTC) Release: 4946-0
  13. ^ Foreign Currency Fraud Action Commodity Futures Trading Commission (CFTC) vs. Donald O’Neill
  14. ^ FOREX Advisory Commodity Futures Trading Commission's FOREIGN CURRENCY TRADING FRAUDS
  15. ^ Forex Information Commodity Futures Trading Commission (CFTC) Forex Information for investors
  16. ^ National Futures Association (NFA) NFA launches learning program
  17. ^ "Foreign Exchange Controls". Top Forex News. Retrieved 17 December 2013. 
  18. ^ Garnham, Peter (2006-05-17). "FX gamblers geared to win (or lose)". Financial Times (The Financial Times Ltd). Retrieved 2008-03-10. 
  19. ^ Finnish Police News Release
  20. ^ Helsinki Times Over 700 criminal complaints on WinCapita -Finnish police, August 13, 2008

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