Security professionals are always reminding us that fraud never sleeps. The criminal element of our society is very organized, and like any other business entity on the planet, it must devote resources to research and development activities. Unfortunately for all of us, the crooks have welcomed the Internet culture with open arms, invaded every aspect and corner of social media, and incorporated new technology in all of their “old tricks”. Even though the fraudsters have adapted to new market conditions and created a cyber-wave of crime like never before seen, their schemes still require you, as a potential victim, to respond to their initial “siren call”.
In two decades and a bit more, the Internet has become one of the greatest enablers of innovation the world has ever seen, but it has also enabled the criminals among us to accumulate mountains of ill-gotten loot at our expense. It is so much easier to dupe a potential victim when they cannot look you squarely in the eye, observe your body language, and feel their own gut cringe at the prospect of being conned. Crooks are well educated in human psychology and know how to manipulate their marks to make that all-important first move, and they have become more brazen in today’s culture.
Greed and the desire to get rich quick are engrained in human nature, and fraudsters know exactly which buttons to push to reel in an unsuspecting individual, cloud their thinking, and acquire their trust almost instantly. If you are blind to these first steps, then you are almost too far down the rabbit hole to crawl out. And worse yet, crooks today tend to come back for a second bite of their victims, posing as recovery experts that will hunt down the bad guys, take back your money, and make you smile again, but only for a small fee paid up front, of course.
As retail forex traders, we have to be wary of risk on several fronts. Aside from basic volatility risk in the market, we must always be on the lookout for forex scams, shady brokers, crooked salesmen, and even what we might call third-party risk, the kind that can bankrupt your broker and leave you high and dry, wondering if you will ever be able to withdraw your account balance.
We have been taught in our early tutorials that market risk must be addressed with risk management techniques that include such measures as having a defined trading strategy that you have practiced for many hours, using stop-loss orders to protect your downside, and preparing before you enter the market with risk/reward considerations that suggest the prudent size that your position should ultimately be. These procedures ensure that you can survive the bad days and come back to win again in the market.
Third-party risk can come in many forms, including new rules and regulations that the regulatory establishment deems necessary from time to time. If you are with a broker that is just hanging on by his fingernails financially speaking, the imposition of new rules might just put him over the edge. Communication and withdrawal delays tend to follow, along with wider spreads, slippage, and re-quotes, but how can you protect yourself? Your domestic regulator will typically have capital adequacy requirements to ensure that a broker can survive bumps in the road. You can check these tables, read articles about your broker, review regulator “Black Lists”, and be sensitive to support changes.
What are the latest flavors of forex fraud and scams in the marketplace?
It is amazing that, as much as things change, they still remain the same. Ponzi schemes are alive and well, as are shady money managers that will disguise their fraudulent back offices with slick marketing materials and fake monthly accounting statements. There are still salesmen with tempting “trading systems” or “robots” that will make you an overnight millionaire (NOT!), but, once again, today’s marketing is a step above previous versions.
And then we have brokers based in exotic foreign locales that can still offer enormous amounts of leverage, bonus compensation to beat the band, and seem totally legitimate, without even disclosing the management team or their actual location. The old schemes, once spruced up, still work, as do new tricks, i.e., clones, malware, and binary options.
Let’s take a brief look at these scams:
- Ponzi Schemes: One of the oldest frauds ever perpetrated has been given the moniker of “Ponzi Scheme”, after its famous originator. Sometimes called a High-Yield Investment Program or “HYIP”, the basic story is to offer returns much better than possible in the marketplace. Forex has an added twist – it is complex, so the ruse usually claims to have some expert in the background that is making millions off the market. Early deposits pay early returns, but sooner or later the money runs out. Today’s Ponzi ruse offers more reasonable returns, but still fails.
- Shady Money Managers: In many regards, these schemes are like Ponzi, but the establishment is not so much a “smash and grab” exercise. They attract victims with slick marketing brochures, detailing wonderful returns, but for some reason, you never experience such success. Your account churns, your balance dwindles to zero, and you walk away, none the wiser. More due diligence and reliable references are required on the front end.
- Signal-Seller Fraud: Forex trading is complicated, but if you have no desire to hand over your money to a manager, then you can do the next best thing and follow professional signals or let a “robot” do the work. These options can be quite expensive, but rarely deliver the goods. Yes, Big Banks have made billions with their “Black-Box-Robots”, but these are much more sophisticated than anything a salesman might have. Be wary. Test them first. Eventually, even the good ones fail, because they do not adapt to changing market conditions.
- Offshore Broker Mania: Regulators in the U.S., the U.K., and the EU have come down hard on brokers with new rules and capital requirements, stemming from massive fraud in the binary options arena. Leverage has been severely cut back. Sales promotions have all but been eliminated. As a result, foreign-based forex brokers are making a come back. Before you take the leap, your local regulator may have already chastised the broker for soliciting its citizens with a license. These brokers also tend to be in exotic locales where gambling casinos are prevalent and where the House always wins. The same is true for the forex brokers, too. Casualty rates are in the upper nineties.
- Clone Wars: The trick here is to lure you to a website that looks like one that you recognize and respect. There may only be one letter off from the correct web address, but every effort has been made to look like the real thing. Contact numbers may be different, but the crook is after your deposit, which will never be seen again. Virtual ruses like these are very convincing and are typically in some remote part of the world, where law enforcement looks the other way. The FCA in the UK has amassed a long list of these “clone-sters”.
- Malware Tricks: Malware is the most insidious of the new cyber weapons to hit any facet of the financial world, the reason being that you may not even know that you have been targeted for fleecing now or later. Be careful of going to mysterious websites, answering intriguing emails that include attractive links, or responding to tempting ads on social media. Your computer or handheld device will be directed to a server, which will insert the malicious software into the heart of your device. It will report back to its server with keystroke information, anything it can find in your private files, commandeer your computer for use in other nefarious services, or even replace transfer addresses for money payments with crooked ones. Further processing of your data could yield login and passwords for your financial accounts, private keys to cryptocurrency wallets, and more, which can be used then or sold to the highest bidder on the “Dark Web”.
- Exotic Trading Products: Binary Options have been the scourge of the forex industry, resulting in billions of dollars of consumer losses and a mountain of complaints filed with regulatory agencies across the globe. Regulators, like the SEC, CFTC, FCA, ESMA, and CySEC, have cracked down hard on these shady operators or “bad actors”, as they are referred to, but the programs have relocated to more accommodating locales. You may still be solicited by one of these outfits, but beware. Regulators are beginning to feel ambushed again by Contracts for Difference (CFDs) and especially anything to do with inventive ways to trade cryptocurrencies. The crypto space is primarily unregulated, so you may encounter a “Wild, Wild West” type of environment, similar to retail forex trading in the nineties, when anything went and fraud was rampant. Be cautious.
A word about cyber crime – The threat is real
As much as we and security professionals speak to the threat of cyber crime, it often falls upon deaf ears. A new hacking incident happens every 39 seconds. The probability that you will be approached or targeted is nearly 100%, not to mention multiple attack odds. A crude estimate of total losses due to cyber crime through 2018 is $1 trillion, and the attacks are coming more quickly than law enforcement and security officials can react to reduce the global exposure of this modern crime wave.
In the forex trade, attacks are being directed at brokers, their suppliers, and now you as a customer. Small businesses account for 43% of all cyber attacks, because their defenses are down. Government, retail, and technology are the three main targets of these data breaches, since a great deal of personal information resides there, and it is unprotected. The crooks may already know more about you than you are aware of, and an added boost from malware will close the deal. Social media platforms are the playgrounds of today’s fraudster. Question everything you see before acting upon it.
Fraud never sleeps! Today’s modern electronic world demands that you be ever vigilant at all times, since a personal attack is always a possibility, whether crooks are plying old ruses and schemes, or employing new technology to rob you of your private personal information to enable a future theft down the road. Just remember that you must respond in order for the crook to have his way with you. Be skeptical of any unsolicited advance, whether it comes in the form of an email, an ad on social media, or even advice from a trusted friend. Only you can protect yourself from these crooks, when they try to overtly blindside you.
To be forewarned is to be forearmed!