Forex Fraud News Roundup: Israel gets tough, CySEC alerts, and more

Fraud never sleeps, as many security professionals will tell you. By its nature, foreign exchange is global, involves more money on a daily basis than any other market, and is a constant target of the organized crime element of our society on a “24X7” basis. Much of the news during 2016 has been driven by an all out attack by the global regulatory establishment to rid our industry of the growing patch of crabgrass related to both fraud and low grade business practices that actually constitute outright fraud, as well. Not every article deals with the seamier side of business. There are positive ones, too.

Recent trading news flashes have dealt with Israeli regulatory officials finally stepping up their game to stamp out the misgivings in the binary options industry that are taking place on their home soil and impacting thousands of foreign citizens. CySEC, which has been pressured to take a more active stance in the public eye, has recently warned against more impersonators in our arena and their steady stream of tricks designed to defraud you. Compliance remains top of mind, especially with cyber crime waves on the rise and concerns over anti-money laundering (AML) and counter-terrorism financing (CTF), but there are also more pleasant headlines dealing with the secrets of top brokers, the antics of Playtech and Teddy Sagi, and a new style of sports sponsorship tactics.

Here is a brief summary of many of the more cogent headlines in the forex fraud space:

#1 – Israeli regulatory officials go on the attack over binary option violations

The reputation of the binary options sector of forex trading has been tarnished during 2016 by an avalanche of customer complaints regarding unfair business practices, especially from member states across the EU. The hotbed of these illicit activities has been Israel, where call centers have blossomed like mushrooms to support out-of-country brokers. The Israeli Security Authority (ISA) has conveniently looked the other way, since Israeli citizens have not been victimized, but pressure from foreign legal entities for ISA to shut down these fraudsters seems to finally be working.

ISA initially required license registration from all FX brokers as a first step, while it considered banning binary options altogether. A ban followed, as have two material enforcement actions. In the first case, ISA fined D.G.I. Media Ltd over $125,000 for operating as a binary options dealer without a license. The offending company was the first to be prosecuted under the new regulations. It also signed a settlement agreement and returned funds to its former clients.

In the second action, ISA conducted a raid on the offices of iTrader Israel, a local FX and CFD brokerage. Seven defendants were arrested, who were accused of “running a well oiled scam machine and exploiting clients that did not understand investing and blindly followed the false show they were presented by employees of the firm, supposed trading coaches, which know how to tell falsehoods to activate them to give their money.”

#2 – Other regulators continue to make headlines

Regulatory officials at CySEC received praise after adopting much stiffer regulations, following the financial crisis on the island of Cyprus in 2013. Praise turned to criticism, however, when the recent tirade over bad practices in the binary options space erupted. CySEC was one of the few major brokers with oversight over the digital arena and became an obvious target for having allowed such bad behaviors to persist and grow well beyond acceptable limits.

In most other jurisdictions, binary option brokers must abide by local gaming or gambling commissions that are more interested in tax revenues than in operating shortcomings. The FCA has been rumored to soon take over responsibility for binary options broker oversight, but it has yet to happen. CySEC, on the other hand, has responded to many of its critics by instituting new rules and publishing alerts. Their latest missive is directed at impersonators in the forex industry. These were not “clones”, but were groups using fake credentials to scam their victims. The impersonator promised “to assist those investors to be compensated for damages incurred, in exchange for a “legal fee”.

CySEC is not the first major regulator to warn of “impersonators” or of “follow-up” type con games. We reported a while back that, “The Financial Industry Regulatory Authority (FINRA) has recently warned both U.S. citizens and those living outside of the country that these types of “follow-up” schemes are pervasive.” The FCA has also been demonstrative in publishing “clone” alerts for the past year. Most recently, the FCA warned against fraudsters using the “mj-ansen.com” website to appear as if they were legitimate employees of “Michael Johannes Ansen”, a firm authorized to do business in the UK and the EEA. If a non-authorized firm scams you, the UK national investor protection scheme will neither cover you nor refund your losses.

#3 – The face of compliance is changing across the globe

As the regulatory establishment has become more pronounced in their respective oversight activities, the rise of the compliance officer within the brokerage community has changed the face of compliance in the foreign exchange world for some time to come. Technology may be the driver behind new threats and prevention measures, but, as one security consultant recently noted, “I have seen a shift in the Compliance/Risk Management role, moving from a reactive approach to a much more proactive role. From the board of directors to Compliance/Risk Managers, there is now a focus on setting up risk frameworks and controls.”

A more proactive approach is the only way to stay ahead of the crime wave, so to speak, as compliance risk managers focus on AML/CTF measures, the risks related to leveraged products like CFDs and forex trading in general, and, of course, cyber crime and its impact on the FX trading industry. Regulators are concerned that FX trading products are not suited for everyone and that more risk disclosures would be appropriate. New cross-border payment services appear weekly and present further challenges for policing capital flows, and consumer complaints have skyrocketed of late and require adequate resources to follow up on any transgressions. Expect many more changes in the regulatory environment in the months and years to come.

#4 – Secrets that distinguish the really great forex brokers from the pack

Have you ever wondered why some brokers achieve greatness while others flounder? In an exclusive interview with Leaprate, Yael Warman, a longstanding creative writer in our industry and current Content Manager at Leverate, shared her insights from years of investigative reporting. She lists eight traits as common ground for the brokers that prefer the long-term view and accept that, “Greatness is an aspiration, not a destination.” How does your broker stack up against these “success” prerequisites.

1. “They don’t compete on price.” The best focus on quality for the right price, knowing that customers that only want the lowest price in town will not be loyal ones.
2. “They don’t limit themselves to affiliate traffic.” Affiliate agents may deliver 70% to 90% of the leads for a broker, but the smart ones know that they must attract a loyal fan base based on their own merits, not those of an agent.
3. “They worry about their reputation.” Forex brokers need a steady stream of new clients, and the best way to ensure success is via the power of referrals.
4. “They automate.” Automation reduces labor costs that must be passed along to customers in higher fees. Playtech recently received abuse in the press for cutbacks due to the desire to use more automated methods. They knew what they were doing.
5. “They know retention is more powerful than conversion.” A small investment in retaining existing clients is one-fifth the cost to acquire a new one.
6. “They have a mindset of contribution.” The best focus on the needs of their customers at all times.
7. “They are market focused.” If you want global success, the best must adapt their offerings to local needs and local demographics.
8. “They make conscious decisions about building versus buying.” Attempting to build and maintain proprietary technology can be arduous, expensive, and distracting. Only firms with that core competency onboard should try. The best buy or rent

#5 – Other positive developments in the forex arena

We have consistently reported on the activities and travails of Playtech and its effervescent leader, Israeli billionaire Teddy Sagi, over the past two years because this entity represents how major players are reshaping our industry in the background. Playtech went on an acquisition binge in 2015 in an attempt to expand greatly its presence in the retail space, but the FCA and the Bank of Ireland blocked Sagi’s expansionist plans on two major deals (Plus500 and AvaTrade). Sagi has reverted to buying smaller firms outside of the UK and recently announced a deal to acquire institutional Forex player CFH Group for $120 million. The focus here is more “B2B” and not retail, one reason that regulators are not resisting.

While Playtech continues to make material profits in the background, two brokers have announced unique sponsorships in the sports arena. Traders are prudent to be suspect of brokers that sign large endorsement deals. The “CWM FX” debacle in 2015 demonstrated how a high-flying broker that had signed several large sponsorship contracts, most notably with the Chelsea FC in the UK’s Premier League, could come crashing down and cost its customers millions in losses. The new style seems to be signing individual stars to promote their brand and associate with the star’s obvious excellence. XM has signed Usain Bolt, the world’s fastest human of Olympic fame, and LCG has inked a partnership with top-ranked tennis player, Stan Wawrinka.

Concluding Remarks

The regulatory establishment has responded forcefully to the rising level of complaints from consumers in the forex trading arena, whether they arise from traditional forex brokers or from the burgeoning sector of binary options. As a result, compliance activities have taken on a higher level of importance in our industry. Technology has increased the pace of change in every aspect of our business, and, with it, the potential for widespread fraud, the likes of which we have never seen.

The time is now to step back and review how you interface with your broker, whether it displays the business behaviors that will translate into success for you, and if it is time for a change. The key step in the decision making process that is sometimes forgotten is that we must always monitor our choices after the fact over time, always conscious that risks can change, better options can appear, and that change may be the right choice.

Chris Lee

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