Regulators across the globe beef up fight against cross-border forex fraud

As much as retail forex trading has changed over the past two decades, it is amazing that one debilitating aspect of it continues to prosper – the prevalence of scams and bad business practices that operate across a border from a foreign jurisdiction. The regulatory community has actually performed a yeoman’s task over the years, cleaning up most of the outrageous pockets of criminal intrigue, while educating the public on the risks involved and setting tough standards for domestic brokers to follow.

When it comes to policing brokers operating in foreign jurisdictions, however, regulators still have their hands tied. They must rely on the actions of the regulator in the foreign land, if one even exists, to clamp down upon the sources of complaint in their respective region of the world. Cooperation tends to be the only avenue that works, if the resources and the will to prosecute exist on both ends of the equation. Valuable time is often lost building these cooperative relationships before any demonstrative actions can be considered.

Unfortunately, the crooks are wise to the ends and outs of this law enforcement process. They are often careful not to defraud any citizens in their home country, thereby reducing any chances that local officials will pry into their affairs. If the heat does get turned up, then these enterprises are also very adept at moving in the dead of night and opening up shop in another jurisdiction, free to continue on with their nefarious ways. The complaints from consumers fall by the wayside, and the cycle of discovery, investigation, and prosecution gets pushed back to square one.

Major banking scandals over the past few years have only heightened the pressure on regulatory institutions to perform their duties, as difficult as stamping out foreign-based fraud can tend to be. The tepid global economy and the apparent overcrowding of many popular retail forex trading arenas have only exacerbated the problems. Consequently, many brokers  are having a tough time financially and have had to get more aggressive in their solicitation campaigns to find new customers. Regulators, however, have lately assembled a full-court press around the globe to go on the offensive. Their tactics, as well intentioned as they might be, are causing problems in the industry for legitimate, as well as for their desired targets – the crooks that prey on unsuspecting consumers.

The call to arms is not just happening with the FCA in London or with the CFTC in the United States. Regulators across the four corners of the globe are joining the fray, as well. Here is a brief recap of activities in a few other jurisdictions:

France

The financial market regulator in France is the Autorité des Marchés Financiers (AMF). It, along with France’s banking and insurance companies regulator ACPR, have recently released reports that express major concerns over the rise of complaints for the past five years. According to these two groups, “Between 2010 and 2015, the number of unauthorized sites operating brokering and other types of financial scams has risen from 4 in 2010 to 360 in 2015. Last year alone the AMF received 1656 claims, while in 2010 they were 64.” The subset of this figure belonging to forex and binary options brokers was 228, a figure that increased five-fold since 2010.

Concerns have been growing about consumer losses to date from highly speculative trading activities. Some observers estimate the losses over the past few years to be in the hundreds of million of Euros. The AMF report noted that, “Highly-speculative trading is the most widespread and worrying example. Numerous adverts, displayed on sites with high audiences and targeting the largest number of people possible, flaunt unrealistic promises about gains to be made: companies operating with very dubious, or even illegal, practices are behind these commercial approaches.”

The AMF report went on to reveal that, “85% of the complaints in 2015 were against CySEC-regulated forex and binary options brokers.” One can assume for the moment that there had been many heated discussions behind the scenes between the AMF and CySEC. On the same day that the AMF released its report, CySEC went public with a circular, establishing a new set of tougher standards for the forex and binary options brokers under its domain. Within the next 90-day period, these brokers must:

1)     Provide more transparency related to the underlying asset that is being traded related to the trading venue and the specific identity of the asset;

2)     Present a continuous flow of Bid/Ask spread information on the asset during the complete holding period up until the expiration point, such information to be easily visible on the trading platform;

3)     Disclose how the final strike price is calculated and from what source it has been obtained;

4)     Provide price history charts or graphs that are “accurate, clear and understandable to the average investor as to the describing illustrations”;

5)     With the exception of 30-second options, provide a capability of canceling the option within a reasonable amount of time, such time to be greater than three seconds after the binary option is executed.

These rules are tough and will be a barometer for legitimate brokers, as opposed to the ones that avoid these new standards. The new rules will also help CySEC to appease many of the regulatory agencies across Europe that object to Cyprus-based entities being given a free “passport” to operate across the EU. It will be interesting to see how these changes play out over the next three months.

Canada

The Canadian Securities Administrators (CSA) has taken a tougher stance. According to this group, there is not one single company that is currently registered or authorized to offer binary option products to citizens of Canada. Any attempt to do so by a foreign-based entity is patently illegal from the CSA’s perspective. The agency’s message to Canadians is simple: “Beware of binary options platforms.” Canadians, however, like consumers in other countries, find this new genre to be exciting and popular.

Louis Morisset, the Chair of the CSA, commented in a recent press release that, “Canadians are exposing themselves to the high risk of identity theft and fraud when signing up for these platforms that often request their credit card information. The CSA warns investors that if they deal with these platforms, they risk the threat of thousands of dollars in unauthorized withdrawals on their credit cards and of being stuck with high-interest payments for a non-existent investment.” He scoffs at the use of investment terms in relation to binary options, describing them as nothing more than gambling.

New Zealand

New Zealand’s Financial Markets Authority (FMA), the country’s primary watchdog over all investment matters, has received over 2,000 complaints since mid-2014. These complaints have been related to “scams from unregistered or unlicensed companies, some of which are operating offshore,” and the majority of complaints seem to be sourced from retail forex trading services. The FMA intends to step up its oversight in the foreign exchange arena.

Israel

The “Times of Israel” has been running a series of articles, exposing the ugly underbelly of shady binary options operators. These entities prey only upon foreign-based consumers, in order to avoid any conflicts with local regulators. The recent news is that a law firm in London intends to sue these Israeli firms on behalf of over 2,500 victims.

The lawyer for these claimants has stated that, “The Israeli regulatory and enforcement authorities have so far failed to take any action, despite the widespread knowledge of where these companies are based, which offices they are operating from and who are the individuals behind it. It appears that none of the regulators are interested, so investor protection falls down the chasm between the net.”

Japan

The Financial Futures Association of Japan (FFAJ) has followed the lead of regulators in the United States. Consumers can only trade binary options on a regulated exchange within Japan. Binary options are very popular in Japan, but the rigid regulations enforced by the FFAJ have caused trading volumes for these instruments to stagnate and drop back to levels seen in 2014. Japanese traders, who tend to be very sophisticated, have been protected, and complaints are non-existent.

What actions should you take to protect yourself?

Active due diligence is the most often heard refrain from regulators and law enforcement officials. If your broker’s name has appeared in the news, then you should want to know why. What do other traders think of your broker? Is it totally transparent on its website, as to who they are, where they are located, and who their primary regulator is? If you are using an offshore broker, does a local one exist that is more reputable? Are complaints on associated Internet websites increasing for your broker? You might also ask for a small withdrawal, just to test those waters before you really need the money.

You will not always be able to acquire all of the information that you might want for an accurate assessment. Judgment will be required at some point. You also must remember that the forex industry is high risk. Many people, primarily the untrained and impatient among us, become casualties everyday. These gamblers are quick to shift into the blame game, declaring their broker to be a crook or scam artist. They rarely take responsibility for their own actions or inability to read the fine print in their broker’s agreement, especially the section about promotional bonuses and the commitments that must occur, if and when you want to make a withdrawal.

Concluding Remarks

Regulators are definitely our friends, but they can also be over zealous in many of their broad-brushed approaches to stamp out crime. Legitimate firms and our industry can suffer as a result of these so-called “shotgun” methods. Yes, a few bad guys get apprehended, but many good firms may also become collateral damage, wounded unnecessarily by public scorn when government officials overstep good judgment.

In order to protect yourself in these questionable times, you may need to be ever vigilant of what is happening in your broker’s legal jurisdiction, if you even know where that is. Do review your broker’s financial condition, if possible, and check in with other traders to see where their issues lie. When was the last time that you reviewed your local regulator’s website for warnings and alerts?

At the end of the day, due diligence is an ongoing process, since conditions can change so quickly, especially when a regulator goes into high gear. Conscious awareness at all times is the most prudent path to take to ensure the trustworthiness and financial stability of your chosen brokerage partner.

Chris Lee

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