How to Spot a Forex Scammers? and How to Avoid Forex Scam
The FOREX market is the largest financial market in the world, made up of thriving and energetic FOREX traders and institutions from everywhere on the globe who collectively trade trillions of dollars every day. With so much wealth changing hands, it is no surprise that unscrupulous criminals and scammers lurk in the shadows of the market looking to make a buck off inexperienced traders.
There are many types of FOREX scams. We will discuss these later in this article. It is important to note that scams are not only perpetuated by criminal elements, but also by some online FOREX brokers who are supposed to be creating a safe and enabling environment for traders to prosper. The FOREX world has allowed many traders to enrich themselves through FOREX trading, but it also provides a haven for dishonest players to craft schemes and plans to prey on investors.
Online brokers are sometimes the biggest culprits in this area. Today, it is easy to set up an online brokerage with headquarters in a distant jurisdiction over which mainstream regulators have no control. In their excitement, some new FOREX traders neglect to perform the right amount of research, resulting in them falling into the hands of these illicit operators.
Although FOREX scams are harder to pull off today, it has not stopped criminal syndicates from trying. Granted, strong regulation has meant that many of the less sophisticated scams get weeded out, but smarter scams are still prevalent and are still catching people. Financial criminals will always be able to prey on the emotional weaknesses of traders and have been doing so for as long as trading has been a widespread activity.
In this article, we will describe the most common scams and tell you how you can spot them and avoid them.
What Is FOREX Trading and Is It Legit?
If you are a total newbie, you could be forgiven for wondering if FOREX trading is even a legitimate activity. FOREX trading is the practice of exchanging one currency for another on an open market. The FOREX market operates 24 hours a day and five days a week. Brokerage firms play a key role in this marketplace by enabling clients to buy and sell through a trading platform.
FOREX trading is an important part of international trade between nations; and by extension, retail FOREX traders, who speculate on the movement of different currencies in the retail FOREX trading market. So, is FOREX trading legit? Well, if you have heard the term mentioned now and again and you have wondered about its legitimacy: FOREX trading is definitely legit.
It is a legal activity in many countries in the world and proceeds are taxable. Retail FOREX trading takes place on a market designed to allow traders to buy and sell foreign currencies for a profit. This Over-the-Counter (OTC) market is not regulated by a central authority and does not belong to a single formal exchange, despite appearing that way when people talk of a single “market.”
In reality, currencies are bought and sold through a network of banks and other intermediaries. The Internet is the backbone of modern trading and payments can be made instantaneously across locations to keep the market functioning in a liquid manner. FOREX traders need to master the industry to thrive. This means knowing the language and the mechanisms that underpin it. Investors need to understand how macroeconomic factors, like a country's inflation rate, interest rates, economic and political stability, as well as national debt, impact its exchange rate.
Common Types of Forex Scams
Many once-common scams have fallen away due to tighter regulations, but some still prevail. As we have suggested, scammers can be divided into two camps – external criminals, and unethical FOREX brokers.
You might wonder why FOREX brokers would scam their own customers. The reasons vary, but in today’s profit-driven world, many brokers are driven to take advantage of consumers. After all, brokerages are not sentient organizations, they are run by people who have their own objectives and agendas. This is why the management teams within brokers must be vetted by regulators and licensers to ensure they are “fit and proper” to run these important financial institutions. They must be people with verifiable track records of performance and ethics in the industry. That said, here are some examples of the most common FOREX scams:
The Signal Scam
One increasingly prevalent scam is that of the signal seller. Signals are data-driven broker-generated information prompts that give traders improved opportunities to make profitable trades. Some unscrupulous brokerage firms or analysis companies charge a fee for the benefit of providing positive recommendations that will allow you to make amazing returns. Of course, this is a lie, as no company or person can guarantee trading success.
Many signal-sellers tap into our emotional tendency to want to get rich fast and with little effort. These firms work with traders for a limited time and then back down from their promises when they have taken their fees. Truth be told, these unethical operators are in the minority, and many companies that sell signals do so ethically and with great honesty and professionalism.
Multi-Level Marketing FOREX Scams
Multi-Level Marketing (MLM) companies are designed to use direct sales methods to sell products and services. These legally registered companies use a playbook that involves recruiting a sales staff and incentivizing them to sell their offerings to other individuals and bring on new recruits into the business. Sales staff are paid a percentage of their recruits' sales.
In the FOREX world, many MLM firms concentrate on FOREX trading as a product for sale. In some cases, FOREX MLMs require members to pay a monthly fee in exchange for daily signals and technical advice.
Where is the scam? Well, with this type of scheme, the emphasis is not as much on FOREX trading as it is on recruiting new members. These companies drive new sales as the end goal, without paying nearly as much attention to the success of the members they recruit. FOREX traders would rather self-educate or use the curated communities offered by their chosen brokerages than use FOREX MLMs.
The FOREX Pyramid Scheme
FOREX pyramid schemes are designed to attract new members into investment communities that promise advice and technical assistance on how to help turn people into successful FOREX traders.
They operate the same ways as FOREX MLMs, but are run by individuals. These schemes are not to be confused with social-trading communities created by online brokerages, or even MLM schemes, but rather they are private circles run by individuals who seek to profit by charging a subscription fee and encouraging new members to recruit fellow investors for the prize of a small commission payout.
In this scam, it’s the membership fees that create wealth for the organizers, rather than actual profits from FOREX trading. This scam is known as a pyramid scheme because the larger the community grows, the higher up the money-earning pyramid older members climb. You might wonder what is wrong with an organization such as this if members can share advice and earn money. The truth is that all pyramid schemes have a natural end state, where no more members can be recruited, at which time the leaders close the scheme and take what money is still available.
The Point-Spread Scam
This scam has been promoted by dishonest brokerage firms who manipulate the bid-and-ask spreads on their platforms for their own benefit. As brokers earn their commissions from the size of the gap between bid and ask prices, they make more money when the gap is bigger. If the market has not created such a situation as it responds to the forces of supply and demand, some brokers have been known to open the gap themselves by rigging the coding that displays the prices. This practice is very difficult for traders to uncover in such a fast-moving market.
If questioned, the broker could claim that their spreads are wider because the bank with which they are dealing cannot offer a better price. They could cite other reasons related to internal processes and pricing. The fact would still remain that traders would have to pay an unnecessarily high spread. This is why traders should verify with other brokers and see what spreads they are offering for the currency pair in question.
Slippage is known as a change in the bid and ask rates of a currency pair between the time a trade is opened and when it is executed. It could happen because of a network glitch that slows trade-execution speed and sometimes it is a function of currency riskto which a trader is exposed in a volatile FOREX market.
To avoid this, some brokers offer guaranteed stop-loss orders that a trader can buy to hedge against the risk of slippage. Responsible brokers that offer this failsafe are unlikely to be dishonest with their spreads. You can keep yourself informed by reading user reviews about brokers with which you want to deal. It is possible that users are complaining about manipulation of prices. If you read such reviews, you are advised to steer well clear.
This point-spread scam has settled down over the years as regulators are wise to it. EU regulations passed by the Markets in Financial Instruments Directive (MIFID) seek to stamp out practices like these by enforcing stricter reporting by brokers. The lesson for traders is that they should only work with regulated brokers who would find it impossible to run such scams due to proper oversight.
Robot Scamming
A recurring modern-day scam involves brokerage firms promising to program automated trades that allow you to earn money while you are not actively trading on your computer. The term “robot” refers to the automation of the process with software. The problem is that these systems are often not tested and proved. Traders often lose money.
It is always good advice to check with these brokers as to how their algorithms work. Sometimes, if the information is complex enough, even a detailed explanation may not give you the answers you seek. All the same, you must try. You may find that if you ask pointed questions about the workings of their algorithms, the broker may offer vague responses and claim the information is confidential. If you cannot grasp at a high level how the robot trader works on your behalf, then it is probably not a good investment.
Fake FOREX Funds
FOREX funds are an increasingly common type of product offered by financial service firms. They are designed to mirror index or mutual funds, except the clue is that they often come with an unrealistic promise of extravagant returns. The truth is that these firms cannot make these commitments as the FOREX market is so much more volatile and unpredictable than stable markets like index or mutual funds.
These financial firms offer managed FOREX accounts, where an “expert” FOREX trader invests currency on your behalf. You normally have to pay a handsome fee for this service. You will not be surprised to learn that fraudulent firms often use this method to steal your money instead. It is vital to research any financial service or platform before investing.
Extravagant Leverage
Leverage is an excellent tool for traders and is highly useful in FOREX trading. However, it is a dangerous method if not used correctly because you can earn big profits, but you can lose money just as quickly. Some brokers can give you leverage as high as 1:2000. While not technically a scam, this practice displays a level of professional carelessness that amounts to leaving you to the mercy of the market.
Dodgy Bonuses and Promotions
Bonuses and promotions are commonly offered by brokers around the world. Most European regulators have banned this practice as it can be abused. Even those regulators who allow promotions will tell the broker not to entrap or “lock in” the trader with their offer. However, this does not stop dishonest brokers offering bonuses that are not attainable and that can cause the trader to spend valuable time and energy pursuing them.
FOREX Mutual Fund Scams
Known as the Percentage Allocation Management Module (PAMM) scam, this scheme is inspired by the well-known hedge fund model, and when used right, is an excellent way for investors to take part in a managed fund. However, it is not always used correctly. This is why it is crucial to carry out proper due diligence first before investing. You must ensure that your account is being handled by qualified fund managers who are accomplished and experienced. Many scam funds will claim that their fund managers are skilled professionals, but, in fact, they are not.
Look out for inflated returns. Scammers often claim huge historical returns and will show numbers that far exceed market expectations to lure investors. Check that these claims are legit. Also, be on the lookout for high management fees, as these are also a sure sign of a scam.
Misuse of Personal Data
Under the rules of Know Your Customer (KYC) legislation, every trader must supply private and confidential information that often includes details like banking information and credit card information. Scam brokers may not protect your information in the way they are required to, and sometimes they could even sell it to a third party, who may try to lure you into another scheme.
Clone Websites
As the criminal world keeps up with technological advances, it is easier for them to create replica Websites that look very similar to legitimate broker Websites. These malicious actors lure in unsuspecting traders with promises of unrealistic returns, but the trader soon discovers that the Website does not perform as expected. By then, they have opened an account and deposited funds, which they will most likely never see again.
Broker FOREX Scams
In some instances, the broker is simply corrupt. In the Internet age, it is easy enough to set up an online brokerage that provides traders access to a trading platform to buy and sell currencies. A broker can white label much of their infrastructure and use third-party tools to create a façade that seems totally legitimate. The sad reality is that not all brokers are honest, and many will find ways to manipulate spreads, inundate you with fees, and generally profit from your patronage.
Further, if a broker is not regulated, they are not accountable to any governing body. In the event they go bust, you do not have any hope of recourse. In recent years, the number of brokers around the world who have gone insolvent when their illicit practices catch up with them is steadily on the rise.
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Warning Signs of a Forex Scam
As always, the best starting point with any due diligence is to make sure that your broker is regulated. Regulated brokers must, among other things, keep very clean and compliant records, as well as keeping their operating funds separate from trader funds. Regulators can also randomly check in on a broker’s operations.
The most stringent regulators also check that brokers are not making wild claims they cannot back up. In such a competitive industry that is not centrally regulated, it is common for brokers to try catchy marketing campaigns that massage the truth and mislead investors. Besides these front-line checks that you must carry out yourself, here are some other warning signs to guard against
Aggressive Sales Tactics
Most brokers operate professionally and conduct themselves in a manner becoming a company wanting to stay in business and protect its clients. This means you will never find a serious broker using overly aggressive tactics that put you under pressure to invest. Beware of anyone who pressures you by claiming there is a time limit on their offer, and you need to take advantage of it right now.
No Substantial Proof or Background Information
When scammers are working to attract new investors, they often show images of charts that demonstrate regular profits over a long period of time. Some FOREX scammers have been known to show charts from demo trading accounts that aren’t based on real trading.
It is, therefore, very important to not base your decision to engage with a partner on information that is difficult to interrogate. Be sure to ask for background information and full disclosure of the calculations behind profits and losses. If they cannot justify their claims or say it is too difficult to explain, or even take excessively long to provide the proof you need, it is likely a FOREX scam.
“Holy Grail” Returns
Responsible brokers will remind you time and again of the risks of trading. If you are promised high returns as elusive as the “holy grail,” this is a clear indication that your broker is not being honest with you. Anyone in the business knows there is no such thing as a guaranteed return, let alone consistently high returns. Profits are hard won, and experience is gained through as many losses as wins.
High Spread Offers
As a FOREX trader, you will know that spreads are the measurement of the difference in value between two currencies. If you take the USD/EUR as an example, a normal spread in pip terms would be two to three pips. If you are approached by a broker with significantly wider spreads than the rest of the market, then it is a warning sign of a company trying to take you for a ride.
Industry Jargon
A classic trick of scammers is to distract you with industry jargon. The investment industry already has more than enough acronyms! It is true that if a company is not willing to spend time explaining and breaking down complex concepts to you, then you cannot expect them to be on your side.
Withdrawal Rules and Restrictions
Withdrawing your earnings is one of the most exciting parts of trading. If you encounter restrictions when it is time to withdraw your money, this could mean your broker is trying to balance their own cash flow with your funds, which is not allowed under the rules of any respected regulator and is a clear warning signal.
Untraceable Brokers
In today’s world, it is easy enough to check the validity of any registration your broker claims to have. For example, most brokers proudly display the registration number assigned to them by a regulator. You can easily check it on the regulator’s Website. If a broker cannot provide this, or if you perform the check and come up with nothing, then you have every reason to be concerned.
Blacklisted Brokers
Be on the lookout for brokers who cannot provide proper credentials when you ask for them. When you perform your due diligence, and you most certainly should do this, you are looking for a trustworthy brokerage to manage your money. Always be sure to check with the relevant regulatory bodies to verify if a FOREX broker has a good legal standing in the foreign exchange market. Strong regulators, like the Financial Conduct Authority (FCA) in the UK, will have an archive of press releases of adverse findings they made against non-compliant firms, including details of the transgression and sometimes even the people involved.
Social Media Campaigns
More criminals are using social media to advertise fraudulent and non-existent investment opportunities. The imagery they use is often very enticing, with eye-catching luxury sets superimposed against a call to action to join the movement of newly wealthy FOREX investors. It sounds like an easy FOREX scam to spot, but so many people fall prey to campaigns such as these, only to be led to financial ruin.
Questions to Ask Before Dealing with a Broker
Here are some questions you should ask any time you think a broker might not be trustworthy.
Are You Regulated?
You should not only find out if the broker is regulated, but by whom they are regulated. Not all regulators are created equally. You should always favor brokers regulated by Tier-1 bodies.
How Trustworthy Is the Regulator?
There are three tiers of regulation. Tier-1 bodies include the likes of the UK’s FCA and have excellent reputations that come from a track record of strong oversight assisted by sweeping powers. Tier-2 bodies include organizations from slightly less-developed markets or organizations that serve multiple roles, such as central banking and licensing in addition to regulation, thus diluting their power. Tier-3 bodies usually come from developing economies, like the Seychelles, that are attractive to brokers for tax purposes but do not observe stringent standards
Are There Cash Rewards on Offer for Opening an Forex trading Account?
It should be obvious that if a broker is trying to attract you by all means, including by offering cash rewards to open an account, then they are trying to lure you in at all costs. The reason for doing this is hardly ever a good one.
Do You Guarantee Profit?
As we have mentioned, nobody, not even the latest algorithms generated by supercomputers, can guarantee profits. The FOREX market and, indeed, all other free markets, are driven by a range of factors that are well understood but are much harder to predict.
Where Can I Verify Your Company Details?
Most broker Websites have a dedicated section in which they display their regulation information, operating licenses, and industry affiliations. All these credentials come with registration numbers you can verify. This is one of the easiest ways you can check if the company you are about to deal with is legit.
Can I Verify the Authenticity of Awards?
Brokers very proudly tout awards, such as “Best FOREX broker in 2024.” This is simple enough to check and verify through the issuing authority. If you cannot verify a claim of award, it speaks volumes. Only dishonest companies and individuals would claim to be the recipient of a prize they are not.
What to Do If You Think You Have Been Scammed
It may already be too late, but you can still save yourself from serious financial loss if you follow a few basic steps if you believe you have been scammed. The first thing is to withdraw your funds from the broker involved. For obvious reasons, this may not be possible as the broker could confound you with rules about which you did not know that delay the process.
If you cannot withdraw your funds after complying with the broker’s rules, it is time to ring the alert bell. You should make every effort to get an audience with a senior member of staff at the broker itself. Again, you may find yourself frustrated in your attempts to do so, meaning you must take your complaint further.
The next possible step is to identify the industry representative body to which the broker belongs. The financial industry is known to have so-called charter organizations that represent the interests of its members. Depending on where your broker is based, you could approach the controlling body that represents all brokers.
Next, you can take your grievance to the regulator. Remember, you would need to have checked if your broker is regulated in the first place. If they are not, you may have left yourself with nowhere to go. Finally, you can pursue legal action. However, this is costly and could drag on for years, to no avail.
The Bottom Line
FOREX scams are always evolving, and even though regulators have tried to stamp them out, they are still out there. You need to be alert to avoid becoming a victim. You must exercise a great deal of caution when dealing with brokers, especially those that operate in unregulated spaces and those offering deals that are too good to be true. If you follow the advice we have given you in this article, you will vastly reduce your chances of becoming the victim of a FOREX scam. https://en.arincen.com/blog/forex-regulations/nfa-regulation
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FAQ
How can I protect myself from fraud?
You need to be vigilant at all times. Educate yourself on what the tell-tale signs of a FOREX scam are and exercise caution at all times. Staying ahead of FOREX scammers does not simply involve a one-time research process. You must continually check on the latest scams through your broker’s news feed to stay ahead of the game. Anything that seems too good to be true usually really isn’t true.
Is the whole FOREX market a pyramid scheme?
No. The FOREX market is not a pyramid scheme. It is a legitimate market, or collection of markets, that has been in operation for decades. If you use a legitimate broker that has all the correct licenses, you are on your way to having a long and trouble-free career.
How do I choose a FOREX broker?
We cannot say this often enough – make sure the broker you are considering using is licensed and regulated first by the local agency that authorizes companies to trade, and second the national financial broker regulator.
How do I spot a FOREX scam?
As we have mentioned in this article, FOREX scams come in all shapes and sizes. Educate yourself on what is the latest scam affecting traders like you. In general, you should always shy away from offers that seem too good to be true. Also, make sure you ask brokers for proof of any claims they make that sound dodgy or hard to believe.
Can I trust a managed FOREX account?
It is possible that there are people out there with proper licenses and certifications who can manage your FOREX account. After all, innovation comes in all forms, and who is to say an innovative professional trader would not make a good FOREX account manager? Remember, you might have a time constraint that means you cannot find a moment to trade, but through an account manager, you can have an active portfolio. Before you begin, you should find out if the person’s FOREX activities are regulated and by whom.
Can I make money using FOREX robots?
Robots can make you money; but because they are usually built for a specific set of conditions, their success depends on the market. As conditions are continually changing, robots can go on long profitable runs, but can also suffer consistent losses. You can make money from them, but you must also monitor them closely.
Who do I contact if I suspect fraud?
There are specific organizations to contact depending on where you live. For example, in the US, you can file a complaint through the Commodity Futures Trading Commission (CFTC) or the National Futures Association (NFA). In the UK, you can contact the Financial Conduct Authority (FCA). In Cyprus, where many European brokers are regulated, you can contact the Cyprus Securities and Exchange Commission (CySEC). This is not an exhaustive list of regulators. You simply need to contact the regulator in your area.
What are the most popular FOREX scams?
In today’s marketplace, robot scams and dodgy signal sellers are very active. This is not to say you cannot fall victim to another type of scam, simply that statistics currently point to heavy prevalence of these scams in many markets.
Written by
Marwan Kardoosh
The Editorial Department at Arincen makes an important contribution to the world-class content that can be found on the site. Arincen’s Head of Content and Chief Economist Marwan A. Kardoosh brings with him over 24 years of experience working in the...
Edited by
Adrian Ashley
Adrian Ashley is a seasoned business and finance writer. With a corporate career spanning over 20yea...
Fact Checked by
Bahaa Khateeb
Bahaa Khateeb is currently the CEO of Arincen, a start-up Fintech company based in Haifa. Baha...
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