Foreign exchange fraud is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading became a common form of fraud in early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission.
The foreign exchange market is at best a zero-sum game, meaning that whatever one trader gains, another loses. However, brokerage commissions and other transaction costs are subtracted from the results of all traders, making foreign exchange a negative-sum game.
Interventions By US Government
In August 2008, the CFTC set up a special task force to deal with growing foreign exchange fraud. In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on ” a number of improper practices” in the retail foreign exchange market, “among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals.”
In 2012, Christopher Ehrman, an SEC veteran, was selected to run the new SEC Office of the Whistleblower.
Types of fraud
Frauds might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, improperly managed “managed accounts”, false advertising, Ponzi schemes and outright fraud. It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.
Increment in fraud
The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry. Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds.
Fraud by country
To aid with transparency, some regulatory authorities publish in to public domain the following: list of regulated companies/firms, warnings to regulated companies, cases opened against regulated companies, fines levied to regulated companies, revocation of companies license as well as general news announcements.
The Financial Conduct Authority (FCA) website lists guides to aid with avoiding fraud/scams as well as public list of warnings recorded by the FCA.
- Official FCA Investment Firm Warning List
- Online guide on how to avoid scams
- FCA Guide on how to report a scam
- FCA Investment Scam support website
- FCA News on Investment Firms
The Cyprus Securities and Exchange Commission (CySEC) provides public access to information regarding the process for how to obtain a CIF authorisation as well as listed the current and past CySEC authorised companies.
- List of current ‘Cyprus Investment Firms’ (CIFs)
- List of former Cyprus Investment Firms
- List of issued CySEC Warnings
- List of announced Board Decisions (including fines)