Beware the unsolicited scammer that offers help in recovering lost funds

Chris Lee

It is an extremely painful experience to be the victim of financial fraud, but it can be even more painful when trained scammers return to take advantage of you for a second time around. Believe it or not, this scenario is now prevalent in Russia, and no doubt is playing out in many other global jurisdictions, as well. The local forex regulatory body in Russia is currently warning victims of the now defunct broker Forex MMCIS and its subsidiary MillTrade that fraudsters are contacting former clients of these two firms and posing as officials of the domestic regulator.

In post-Glasnost Russia, much has changed in the past three decades. In many ways, it has been a replay of the “Wild, Wild West” days where lawlessness was an accepted norm, as protections under the law were widely abused in both business and in public life. A new “Mother Russia”, however, has emerged based on the rule of law, but several of the approaches taken differ quite a bit from their western counterpart. Forex industry regulation in Russia is but one example of this phenomenon.

In this case, Russia opted for a self-regulatory body. As per its website, the “Centre for Regulation in OTC Financial Instruments and Technologies (CRFIN) is a non-profit self-regulated partnership aimed to make the retail off-exchange Forex market a rightful member of the Russian financial industry. Our mission is to promote creating effective mechanisms at the off-exchange segment of the Forex market which are necessary for development, transparency, civilized and convenient business environment and protection of interests for market participants.”

CRFIN is also responsible for developing and implementing business standards and regulations for its members, auditing compliance with those standards, improving education and transparency in the market, and acting as an arbitrator when violations of its rules and operating principles come into question between Partners and their clients. The organization is preparing for wide-sweeping reforms in Russian law that pertain to foreign exchange, scheduled for implementation on October 15th of this year. It has also published a “blacklist” to warn consumers of risky firms, including 48 brokers to date.

What exactly are the fraud issues with MMCIS and its subsidiary MillTrade?

Russia has a very active forex trading community, sometimes valued in the hundreds of millions of dollars, but they do not have the benefit of extensive legislation from the state to define and regulate the market. As a result, the goings on in this market can appear to be very fast and loose, when compared to say the U.S., the UK, or the Eurozone, for that matter. There has been work to enact a number of protective statutes, but the proposed laws have been hung up in committee since 2013.

The problems with MMCIS began in 2014 and came to a head in the latter part of the year. The details illustrate how third-party risk can escalate immediately. MMCIS was a leading forex broker, operating out of the Ukraine, with as many as 50,000 clients by some estimates. Despite its size, withdrawals were delayed, and customer service issues increased. CRFIN added the firm to its blacklist, a bad sign for sure. In early October, Roman Komysa, the President of MMCIS, admitted that the broker was experiencing financial problems.

On October 27, the broker abruptly cancelled all outstanding withdrawal requests, and announced a limit of $200 per request that would now take at least two weeks to process. Finger pointing ensued over social networks and the press with much of the blame assigned to Denji Online, a payment processor employed by MMCIS. To stir the pot even more, Komysa also announced that it would “absorb a rival scandal-prone Ukrainian broker called MillTrade.” All was for naught, however. On November 21, MMCIS and its subsidiaries closed their doors for business.

The press was quick to blast the firm for leaving 50,000 customers high and dry. There was little that CRFIN could do at this point. The Bank of Russia was also glib in its response, “The Forex market in Russia is not regulated at this point. The Central Bank service for the protection of the rights of consumers and minor shareholders receives complaints regarding the activities of Forex companies, including complaints concerning withdrawal problems. Once a law is in place, Russia’s Central Bank will be able to take measures to protect the customers of such services.”

Such are the problems when you have a self-regulating body without the power of law behind it. As one analyst noted, “Forex MMCIS case is the latest in the ever-growing numbers of suspected and actual fraud in Russian forex market. Some of the most well-known international forex brokers in the history of forex trading are also based in the country. Nevertheless, to date the regulation remains murky. Self regulation bodies like CRFIN are trying to monitor the industry, but they stand on no equal foot compared to government-enforced rules.”

The story could end there, but it did not. It is nearly a year later, and the latest news reports document that scammers are trying to fleece a second time the beleaguered clients of MMCIS. Telemarketers, claiming to be CRFIN employees, have approached the former customers of MMCIS to propose a recovery plan that entails a 20% fee, but can only start once they have bank account and other personal data. It appears that the fraudsters accessed private MMCIS data files and then proceeded with their identity theft plans. CRFIN quickly issued a warning of the latest attempt to defraud MMCIS clients.

What reforms are scheduled for the Russian forex market in October 2015?

It may be akin to closing the barn door after the farm animals have departed, but, as a final act in 2014, Vladimir Putin signed into law new regulations for the foreign exchange industry in Russia. The majority of the provisions will become effective on October 15, 2015, but there are a few items that took effect on January 1st of this year. All brokers wishing to do business in Russia must apply for new licenses before 2016 and must join CRFIN. This self-regulating body, or “SRO” under the law, will now have the power to expel a recalcitrant forex dealer and revoke its license, if it deems it necessary.

The new laws may be a bit late for the battered former customers of MMCIS, but the Russian central bank can now step in when the going gets rough. The “murkiness” has been dissolved, at least for the time being. CRFIN has also been strengthening its infrastructure and adding prominent industry participants in preparation for its more demonstrative role going forward. As noted in the press, “Traders will be able to take their disputes with Forex brokers to court, while companies face new standards for advertising their services and products, as well as maintaining their technological equipment and software.”

What are the fraud issues behind the situation in Russia?

There are several important lessons that can be taken from the evolving fraud containment issues in Russia. First, is it really worth it to pursue forex trading with a domestic broker when that broker is not subject to stringent regulatory compliance? It is always risky dealing with a foreign broker, but there are quite a few reputable forex brokers across the globe that actually do business in Russia, too.

Secondly, understanding the fundamentals at play in Russia should have provided warning signals, as well. After the annexation of Crimea was followed by hostilities with Ukraine, the fall in oil prices, and economic sanctions, the Ruble went into a classic currency collapse. This collapse might be the real reason behind the travails of MMCIS and other brokers for that matter. The fall in value began in October and gained momentum from then on, quickly resembling the fiasco that was to come with Swiss Franc pairings in January. Brokers in Russia would have sustained enormous losses, if they were on the wrong side of many domestically traded positions.

Lastly and more to the current point of this story, the first warning sign of a potential fraud is the receipt of an unsolicited approach via phone, mail, email, or over the Internet from a complete stranger. One should always be wary in these situations. Your first question to the caller should be, “How did you get my number or email address?” The fraudster has been well trained in how to avoid your queries and how to hook you with his marketing pitch. Identity theft is one of the most common frauds going. Once crooks have your personal data, it is only a matter of time before they try to clean out every one of your accounts with cash balances.

Concluding Remarks

Fraud never sleeps, especially in Russia, but do not be fooled. Many of these same tactics can take root in your domestic market, as well. Fraud prevention is an ongoing activity. You must be ever vigilant of your broker’s financial standing in your market and what might put pressure on his activities. If warning signals like poor customer service, delays in processing withdrawal requests, or constant re-quotes and slippage appear, then you might want to review your options and change direction. It is better to react early, than wait for the inevitable collapse when the going really gets rough.

As for uninvited solicitations, you have to be wary at all times. Do not believe the source of the communication at face value. Common fraud tactics today are to impersonate reputable brand names, completely down to creating a “clone” website that looks and feels like the original. Make no mistake about it, today’s crooks are well organized and well funded. They have significant resources and the latest technologies to ply their trade. Yes, there are a lot of low-tech criminals, as well, but do not be surprised if you are a victim of cyber crime.

As per one legal website that deals exclusively with fraud cases, “Victims of fraud generally face three options: (1) contact law enforcement to commence a criminal investigation, (2) contact a commercial solicitor to pursue a civil action, or (3) contact both to pursue parallel investigations/actions.” The legal experts go on to say that you may want to forgo the first option, since a civil action may get more action from a company that prefers to reduce any potential damage to its reputation.

The best approach, however, is to walk the other way when you are suspicious. Do not give the fraudster the opportunity to defraud, no matter how good his deal sounds.

Chris Lee

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