People traveling abroad must exchange their home country’s currency for money accepted in the country they visit. Several websites offer discounted exchange rates. However, many of these sites are fraudulent and seek to defraud you. Sadly, many people have been scammed by these sites. However, there are several things you can do if you have been defrauded by a fake foreign money exchange website.
Forex is, at best, a zero-sum game, meaning that whatever one trader gains, another loses. Brokerage commissions and other transaction costs are subtracted from the results of all traders, making foreign exchange a negative-sum game.
What Can I Do If I Have Been Defrauded?
Here are steps you can take if a fake foreign exchange website has stolen your money:
- Contact the Police: Since money exchange websites can constitute fraud, the local law enforcement officials may be able to locate the founders of the scheme to return money to the rightful owners.
- Contact the Federal Trade Commission: The Federal Trade Commission (FTC) regularly helps the Justice Department prosecute money exchange fraud. Whenever internet exchange websites reach across state lines, the federal government has jurisdiction to investigate and prosecute these individuals.
Types of Fraud
The various types of fraud may include churning of customer accounts to generate commissions, selling software that promises large profits to the customer, improperly managed accounts, false advertising, Ponzi schemes, and outright fraud. It also covers retail forex brokers who promote foreign trading exchange as a low-risk, high-profit investment.
Increases in Fraud
Unscrupulous activities in the non-bank foreign exchange market have increased recently, according to the U.S. Commodity Futures Trading Commission (CFTC). Between 2001 and 2006, the CFTC prosecuted more than 80 cases involving more than 23,000 customers who lost US$350 million in fraud. From 2001 to 2007, about 26,000 people lost US$460 million to forex fraud.
There’s No Beating the Market
For example, in the foreign exchange market, many experienced, well-capitalized professional traders (e.g., working for banks) can devote their attention full-time to trading. Inexperienced retail traders will have a significant information disadvantage compared to these traders.
Traders in the retail sector are undercapitalized. Due to this, they are subject to gambler’s ruin. In a “fair game” (one without information advantages), the player with a lower amount of capital has a higher probability of going bankrupt than the player with a high amount of capital. Retail traders always pay the bid/ask spread, making their chances of winning less than those in a fair game. Other costs may include margin interest or, if a spot position is kept open for more than one day, the position may be “resettled” each day, costing the full bid/ask spread each time.
In some forex trading variations, the customers do not receive fungible futures but make a contract with a named company. Despite acting as the retail customer’s “forex dealer,” the company is financially interested in making the retail customer lose money. Because the contract is directly between the customer and the pseudo-dealer, it cannot normally be registered and traded on futures exchanges; therefore, it is off-exchange.
The fact that a few experts can arbitrage the market for unusually large returns does not mean that a larger number would be able to do the same, even with the same tools, techniques, and data sources. The arbitrages are essentially drawn from a finite pool; information about capturing arbitrages is a nonrival good, but the arbitrages themselves are a rival good. Analogously: the amount of buried treasure on an island is the same, regardless of how many copies of the treasure map have been sold.
Certain market makers encourage traders to trade extremely large positions by offering high leverage. Increased trading volume increases the market maker’s profit but increases the risk of a margin call for the trader. Banks and hedge funds use no more than 10:1, whereas retail clients may be offered leverage as high as 1000:1.
Fraud by Country
To improve transparency, some regulatory authorities openly publish the following: a list of regulated companies/firms, warnings to regulated companies, cases opened against regulated companies, fines imposed on regulated companies, as well as general news announcements.
The Financial Conduct Authority’s website offers guides on how to avoid fraud/scams, as well as a public list of warnings recorded by the FCA:
- FCA’s official investment firm warning list
- A guide to avoiding scams online
- FCA Guide on reporting scams
- The FCA Investment Scam website
- FCA’s Investment Firm News
- Cyprus Securities and Exchange Commission (CySEC) provides public access to information regarding the process for obtaining a CIF authorization and a list of current and past CySEC-authorized companies.
- Current list of Cyprus Investment Firms (CIFs)
- Former Cyprus investment firms
- CySEC warnings issued
- Announced Board Decisions (including fines)
Fraudulent Sales Pitch Signs
Avoid these fraudulent pitch sales:
- Make you believe you can profit from current news already known to the public.
- Recommendations from friends, family, members of community organizations, churches, or social groups.
- You are asked for personal information, including your name, phone number, email address, and home address.
- Assuring that there is no “down-turning market” with forex.
- Persuasion tactics you may encounter
- Presenting you with the possibility of wealth and enticing you with something you want but
- cannot have.
- “This Euro/dollar deal will increase your investment value by twice what it is now.”
- Trying to build credibility by claiming to be with a reputable firm or possessing a special qualification or experience.
- “As a 10-year vice president at this firm, I would never sell something that didn’t produce.”
- Making you believe that other savvy investors have already invested.
- “My neighbor down the street got his start this way. I know it’s a lot of money, but I’m in and so is half our club. It’s worth it.”
- “I will do you a big favor in exchange for a small favor.”
- “If you buy now, I’ll give you a 50% discount on my normal forex commission.”
- By claiming a limited supply, a false sense of urgency is created.
- “There are only two units left, and the Asian market is about to open. I’d sign up now.”
These red flags will help you identify foreign currency trading scams:
- Promising that there is no “bear” market with forex
- Companies that claim you can or should trade on the interbank market
- Requests to send or transfer cash quickly through the Internet, the mail, or another method
- Finding out background information about the person or company is difficult
What Should I Do if I’m Unsure Whether an Internet Money Exchange Website Is a Fraud?
Be aware that money exchange fraud can be very deceptive, and you should be on guard when considering using an online money exchange service. If you are unsure whether or not a site is fraudulent, you should avoid using it and visit a bank or physical money exchange instead. You can also look at consumer protection sites to see whether or not there is a trustworthy money exchange website.
Should I Consult an Attorney?
If it turns out that an online foreign money exchange has defrauded you, a fraud attorney can help to advise you on a course of action. You will need a fraud attorney to file a civil suit against these operators. Furthermore, an attorney might be able to help you recover any money you might have lost by suing any operators who can be located.