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Is Forex trading a scam?

A discussion of whether forex trading is a legitimate or fraudulent activity.

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Is Forex trading a scam?

The trading of foreign exchange (FX or Forex) is a legitimate international industry. It is also exotic and complex. It has the lure of mystery, promising large financial returns for traders. But, it is also the home of unscrupulous fraudsters. So, is forex trading a scam? If so it could be the scam of the moment.

The scam of the moment

The scam of the moment in the 1980s was the Nigerian $10 million give away. I first came across it when I was working in Australia. It relied on the novelty of email. Email, that hi-tech wonder which enabled unknown people from all over the world to contact you with tempting promises.

Badly drafted and barely literate emails would arrive from a nearly- legitimate sounding bank in Lagos. You were advised that (amazingly!) you had been chosen as the beneficiary of a $10 million bank stash. This money was the unwanted surplus left over from an oil deal that needed a home.  All you had to do was acknowledge that you would be happy to have the cash and it was as good as yours! Oh, and by the way, could you please just send $2,000.00 to finalise the bank transfer? (This second bit of information only becoming apparent later.)

Anyone who had any sense would know this was rubbish. However, it was surprising how many people didn’t have any sense and believed it was true. One of my clients, a recipient of such an email, said to me: “Well, it might just be true, so I’ll reply and find out.”  I won’t bore you with the outcome.

Of course, we think we are far too smart today to fall for this sort of thing. We are too familiar with the clichés: “There is no such thing as a free lunch”, and “If it seems too good to be true, it probably is too good to be true.”

Well…perhaps we are aren’t so smart after all.

Frauds move on

Frauds move on. However, their success is still driven by the same old human weaknesses, namely stupidity, laziness and greed. We want more money, preferably without working too hard for it. We are also suckers for get rich quick schemes. While email is old hat, social media ubiquity and anonymity fill the gap nicely.

The current scam of the moment that ticks all the boxes is the trading of foreign exchange (FX). This is particularly true if it is coupled with pyramid selling and, perhaps, a bit of Mr. Ponzi thrown in!

Some statistics

Before we look at how some of the schemes operate, let’s look at some statistics.

  • The FX market is the largest financial market in the world, with over $5 trillion traded every day.  Traders can take advantage of a market that trades 24 hours a day, five days a week. The vast bulk of traders are, of course, completely legitimate. However, many trading schemes are run by fraudsters. 
  • In the UK the Financial Conduct Authority (FCA) said fraudsters stole a total of £27 million through crypto and FX scams in the 2018/19 financial year. Moreover, the number of reported crimes tripled compared with the previous year. It believes FX investment scams caused investors to lose an average of £14,600 each last year (2018/19).
  • The European Securities and Markets Authority says between 74.5% and 89% of retail investors lose money trading in FX markets.
  • The figure for losses in the US is 84%.

According to an Action Fraud media report, young people are being sucked into FX scams by Instagram and Facebook. This results in average losses of £9,000 each. A recent report in The Times newspaper says 79.5% of people lose money in FX trading schemes in the UK.  

How do FX scams operate?

Typically, a FX scam works like this:

  1. Initially, potential investors (punters? victims?) are contacted by promoters (who are friends, contacts, or influencers) through social media outlets, such as Facebook, LinkedIn or Instagram. The promoters tell of making large, easy and regular returns on their “investments” in a FX scheme. Usually, the principals of the scheme are licensed FX Brokers. (I will say more about licensing below.)
  2. Investors are told that money can be made through trading FX themselves, or allowing the FX broker to trade for them. They can also earn money by signing up their friends, relatives and contacts to the scheme.  “There are at least five sources of regular income” I have been personally told by an FX promoter.
  3. Claims by promotors such as: “I make regular money every week without doing anything”, or “I have never ever made a loss” are common.  
  4. Once an investor is in the scheme, he or she then becomes both a trader and a recruiter, bringing in other investors. The recruiter earns money from every new investor they bring in. They also earn money on the trades of the people they have recruited. The recruitment element is, of course, pyramid selling, or multi-level marketing.
  5. Some FX schemes claim they are training firms as well as trading firms.  Once trained, the investors can begin trading on their own behalf.  In the meantime, the broker will trade for them.   
A pyramid scheme?

Pyramid or MLM Selling

Pyramid selling traditionally has had a bad name. But, a cleaned up and rebranded version called multi-level marketing (MLM) has established itself as a legitimate and very effective marketing system. Profitable, well-established and reputable companies such as Utility Warehouse (Telecom Plus) use MLM to great effect. 

There is nothing wrong with MLM as such. However, FX scammers are cleverly incorporating it into so called “FX Investment” schemes. Consequently, recruitment income can for a time hide the actual FX investment losses, or indeed, be the only income earned by investors.

It is reported that some social media influencers who promote schemes (and boast that they are making millions from trading) don’t trade at all. They earn money by simply bringing in new investors, who in turn bring in new investors … and so on.  Like all MLM schemes, the original recruiters earn income from everyone brought in “downline” from them.

Part of the initial “investment” in FX schemes could be used to buy training tools, such as videos. It can also be used to pay fees for the actual training itself. Recruiters will, of course, also earn income from their share of these costs paid by their recruits.

OK it’s a way to earn a living, but is this really FX trading or just recruiting MLM-style?

Are FX trading schemes a Ponzi Scheme?

The next issue to consider in deciding whether forex trading is a scam is to decide if some FX schemes are, in fact, also Ponzi schemes?

Of course, FX trading per se itself is not a Ponzi scheme.  Most FX brokers and traders are perfectly legitimate, but are some Ponzi schemes?

I think the answer is yes, some fraudulent FX trading schemes do rely on the methods used by Mr. Ponzi. To remind you, a Ponzi scheme relies on fresh income coming into the scheme from new investors to pay the returns (of interest, or profit, or dividends), which are paid regularly to current investors, whether or not the investments are making money.

Some fraudulent FX schemes pay regular “profits” to their investors every month, or even every week. This is true particularly in the early stages of their investment. This re-enforces the promotors’ claims that “We never make a loss in trading”, giving both the investor and recruiters confidence in the scheme. Also, it boosts their willingness and ability to recruit new investors. As we have seen, the recruiting of new investors is vital to keep a Ponzi scheme going.

How do I know whether the FX scheme is a scam?

Amongst all the information and misinformation how would you know whether a particular FX scheme is a scam? There are two main areas to look at, namely:

  • The giveaway (or tell tale) signs, and
  • Formal licensing (or regulation).

Look out for the tell-tale signs

If are thinking of investing in FX, you can hire a regulated broker to invest for you. This is pretty straightforward. Find a regulated (licensed) broker and go ahead.

If you are thinking of joining a FX scheme where you are able to trade on your own account, the first thing to do is to look out for the tell-tale signs that show you it could be scam. Asking the following questions could help to establish its bona fides:

The questions

  • Is the scheme being promoted through MLM? You will know this if you are being recruited by a friend or a social media contact who tells that you will earn income not only from trading, but also from bringing in others into the scheme. If you are unsure, ask your recruiter. You might get an honest answer!
  • Does your recruiter make comments that, by applying common sense, you feel are too good to be true? These could include: “We never make a loss”, “I have made money every month from trading”, “I have doubled my initial investment in three months.” Remember, there is no certain way to make quick money in financial investment, otherwise we would all be multi-millionaires. Look at it another way: if the investment scheme is so fool proof and profitable, why is your recruiter bothering to recruit you and not just making their millions through trading?
  • Are there any other things joined to the trading that are being promoted as money earners? Does it involve selling products to new investors, fees for training and so on? If its true FX trading you are interested in, these things should be irrelevant.  
  • Is it claimed that “profits” from investment are paid out every week or every month? If so, how can this be true in a high-risk game like FX investment where 75% of traders lose money?  Is this really a Ponzi scheme relying on money from new investors to keep it going? Does this explain why there is such an emphasis on new recruitment?
Happy and not so happy pyramid sellers

Regulation or Licensing Licensing

Licensing (or regulation) is the next important issue to consider when you are concerned about the legitimacy of a FX trading scheme. The regulator of financial dealings in the UK is the Financial Conduct Authority (FCA). It has a comprehensive website that has a lot to say about FX schemes. However, does any of it help us to answer the question: “Is forex trading is a scam?”

The FCA

 The FCA on its web site has this to say about FX schemes:

“UK consumers are being increasingly targeted by unauthorised forex trading and brokerage firms offering the chance to trade in foreign exchange, contracts for difference, binary options, crypto assets and other commodities.

They promise very high returns and guaranteed profits, either through a managed account where the firm makes trades on the investor’s behalf or by trading using the firm’s trading platform.

Scammers

We are aware that scammers are targeting consumers searching for investments online, in particular through search engines like Google and Bing. Although some scammers offer high returns to tempt you into investing, they may also offer realistic returns to make their offer appear more legitimate. Those offering or promoting products or investment opportunities found through search engines are not necessarily authorised or regulated by the FCA. You can check the FCA Warning List for firms to avoid.

Many scam firms claim to be based in the UK and even claim to be FCA authorised.

Beware of clone firms

Many bogus trading and brokerage firms will use the name, ‘firm registration number’ (FRN) and address of firms and individuals who are FCA authorised. This is called a ‘clone firm’.

The scammers then give their own phone number, address and website details, sometimes claiming that a firm’s contact details on the Register are out of date.

Scammers might also claim to be an overseas firm, which don’t always have their full contact and website details listed on the Register.

Scammers may even copy the website of an authorised firm, making subtle changes such as the phone number.

How to protect yourself

You should check the FCA register of authorised firms before dealing with any firm. If they’re not authorised by us, it’s probably a scam. You can also check our Warning List of firms to avoid.”

Avoiding the need for a license  

Obviously, the FCA is aware of the ways bogus firms pretend they are licensed, or try to avoid being regulated. In my experience, a sneaky ruse some FC scammers use to avoid regulation is to claim they are training firms and not trading firms. While it is true that training could be part of what these firms do, it is not their main purpose. the main purpose (or at least the main advertised purpose) is to trade FX. So, why are they not registered or licensed as such?

Legal action against FX scammers

The FCA states that “To offer advice on regulated products, companies must be authorized”, and “to do so without authorization is a criminal offence”. However, there is little evidence of the FCA taking any meaningful legal action to shut down these illegal FX firms  

The Times, in the article I have already mentioned, says that part of the problem is that enforcement powers fall between HM Treasury and the FCA, resulting in a standoff between them. Some campaigners believe the answer lies in classifying FX investments as gambling, so they can be regulated by the Gambling Commission. Perhaps, that says it all!

Conclusion

The regulatory bodies know all about some fraudulent FX trading schemes, but they continue to trade unabated.  Does this mean that most forex trading is a scam and just nothing is being done about bit?

This is hard to tell, but undoubtedly, this lack of intervention makes it very difficult for individuals who want to trade FX legitimately to choose between the good and bad firms.

It seems it is up to the individual to exercise due diligence and their common sense. I hope you heed the warnings and wish you well in your research.

See also: https://www.freeforumofideas.com/blog/hsbc-tesla-a-tale-of-two-shares/

By John Hawkey

John is the founder and owner of Freeforumofideas.com.

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