UK payment fraud up 25% -Is forex fraud a growth industry, too?

While the combined efforts of developed economies across the globe can barely eke out annual GDP growth of 1%, it appears from recent statistics that payment fraud in the UK has grown during the first half of 2016 by a whopping 25%, year over year. This shocking report comes from a new ombudsman type agency in the UK called Financial Fraud Action UK (FFA UK), “an organisation under which the financial services industry co-ordinates its activities on fraud prevention, representing a united front against financial fraud and its effects.” If bank payment cards, online banking, and paper checks are recording such fraud growth, what does that say about foreign exchange fraud?

Unfortunately, there is no easy answer to this question. With payment cards and online banking fraud, there is a process to report a loss and recoup your loss, per local law that has been put in place to protect consumers. There is not a similar process when it comes to a fraud loss involving foreign exchange, whether from a broker, a crooked fund manager, or a clever con artist. Many of these crimes go unreported, but headlines have been rampant in 2016 regarding the attempts of global regulators to police a massive outbreak of financial fraud in all arenas, including foreign exchange. We could by inference alone suggest that forex fraud is up by 25%, as well, but our intuition is telling us that the annual growth rate has to be something, much, much larger.

Billions in fines have been assessed for fixing forex rates at our largest financial institutions, and these fees have nothing to do with customer restitution. As for retail forex fraud, there is no one spot where a consumer can file a claim and expect something to happen. Yes, complaints can be filed with local regulators, but these may not include details of the actual losses for all impacted consumers. We do know, however, that complaints have skyrocketed in 2016, especially in the binary options arena, where a number of bad business practices have taken place, resulting in enormous losses.

Can we put a number on these losses? In France, the Autorité des Marchés Financiers (AMF), France’s securities regulator, revealed that complaints about binary options had gone through the roof, and, when they appealed for victims to come forward, 25,000 answered the call, accounting for losses in excess of €4 billion in alleged fraud in the past six years. This data is only from one country and may, according to experts, be only the tip of the iceberg. Consumers are also coming forward in the UK and the remaining countries in the EU to complain about being scammed by high-pressure sales calls emanating out of Israeli-base call centers in Tel Aviv.

What were the highlights from the FFA UK report?

Payment industry fraud is nothing new. It has been prevalent since the birth of plastic payment devices back in the fifties, but the industry has always responded with new technology to combat and control the problem. Lost and stolen, counterfeit, purchase, and card not received fraud is a staple of organized crime on a global basis, but the use of electronic authorizations, mag-stripe encoding, online fraud detection algorithms, and now chip cards have reduced payment card fraud to below one-tenth of one percent on an overall volume basis.

Even with technology, in the UK alone, payment fraud grew from £321.5 million for the first six months of 2015 to £399.5 million for a similar period in 2016, or nearly half a billion dollars if you prefer that currency. Approximately one million reports were filed, leading to the conclusion that roughly $500 was the loss sustained by each cardholder. This figure is fairly close to what has been stated as an average forex fraud loss, although many recent reports have estimated that the figure is more like $2,000 for the more aggressive scams in the binary space. By any measure, trying to extrapolate payment fraud data to what is happening in the forex world seems to be more an exercise of understating the problem.

What is important is that the sources of the fraud are not that different. According to Katy Worobec, Director of FFA UK, the source goes back to malware robots and data breaches. Even banks are perplexed. She notes that, “Banks use a range of robust security systems to protect their customers but as these systems become more sophisticated, criminals have increasingly been turning to scams and exploiting data breaches to con victims out of their personal and security information, as well as money”. Once data is obtained, it is only a matter of time before the criminal “monetizes” the personal information to his gain, the lingo used to describe how cash is created.

What is worrisome is that, if you combine the FFA revelations with what the UK’s National Crime Agency (NCA) reported recently, then you must conclude that a large wave of fraud is building on the horizon. When will the wave hit shore? The NCA notes that, “In a notable sign of the times, cybercrime has now surpassed all other forms of crime in the United Kingdom.” The UK, in other words, is a hotbed of criminal activity, where the game is identity theft by whatever means possible. Our banks and our other financial service providers, i.e., brokers, are under siege. As Ms. Worobec states: “Banks cannot stop all fraud on their own. It is essential all organisations with a role to play work together to better protect individuals and companies.”

If Malware and Identity Theft are at the core, how is it “monetized” in forex?

Our modern day cyber-fraudster is very patient. He understands that one thing leads to another, and he is willing to wait until the time is right to convert his advantage into cold hard cash, the final act that has been named “monetization” by security specialists. The use of malware robots is widespread. The software can be bought and sold on the black market of the Internet. It does not require an IT guru to deploy it, but it helps. These mal-bots attach themselves to your PC, via nefarious web links or pop-ups, and report back your keystrokes to the crooks, who know how to discern key account login information.

This information can be sold to others that are more proficient at draining your financial accounts or kept for future use. In any event, you may have a ticking time bomb on your hands, especially if your data was compromised by way of a data breach of a third-party processor that you may not even know about. Another type of malware is now being used to facilitate a newer and quicker way to monetize gains – “ransomeware”. In this situation, the software literally holds your data files in “lock up mode” until you pay over a “ransom” to receive the “key” to unlock your files. This threat is happening to both brokers and their clients, a sign that innovation is alive and well in the world of crime.

As we wrote recently, security professionals are perturbed by this new twist in fraud strategy. As Ed Cabrera, vice president of cybersecurity strategy at Trend Micro, noted: “Ransomware has changed the entire model of how these criminal enterprises make money. If you look at the criminal handbook on how to make money, the first chapter is targeting, the second chapter is the attack — but there are multiple chapters on how to monetize the data that is stolen. It usually takes weeks or months to monetize that data. Ransomware is like direct sales. They go after a victim, and they can monetize in days.”

The highest risk for forex fraud today rests with devious Binary Option Brokers.

Yes, there are many legitimate binary option brokers out there, but there are several desperate and devious types that are resorting to every trick in the book to separate you from your money. Regulators have labeled these bad business practices as outright fraud and have gone on a global mission to “cleanse” the market of these lowlifes. Most of these crooks hide behind a façade of credibility, using investment terms and well-crafted websites to appear worthy of your consideration. Behind the scenes, they are unregulated, resort to aggressive marketing tactics to acquire deposits, and, more often than not, prey on the elderly and other vulnerable segments of our society.

The broker may set up shop in a far off jurisdiction or near to your time zone. It may also change registrations overnight, quickly becoming a virtual vulture ready to strike. The most tried and true strategy follows these three steps:

1)    You will receive an unsolicited email or cold call, either one touting enormous profits to be made with binary options (Your name is already on a list of potential targets, acquired via malware or data breach);
2)    You will then be handed over to a more aggressive, hard selling salesman, whose job it is to convert the call to a deposit, and lastly
3)    Once the initial deposit of $200, an average taken from real cases, then a more experienced, ruthless seller will attempt to persuade you to raise your deposit level, perhaps by thousands more. These sellers receive large commissions for their efforts, which are paid from your subsequent losses.

Actual numbers are sketchy at this point, but estimates suggest that only 10% of traders actually walk away with profits in this field. If the broker keeps the remaining 90%, then the losses are substantial in an industry with approximately $15 billion in annual turnover. The 90% casualty rate in this example, which could be lower, means that these brokers must aggressively seek out new clients or go out of business. A “cleansing” is actually in process, driven by market forces and aided a bit by regulatory intervention.

As critics have claimed: “A ‘greed is good’ culture permeates binary options sales centres, often based in Tel Aviv or Bucharest, Romania.” On a more positive note, Professor Shmuel Hauser, Chairman of the Israel Securities Authority, “moved to amend the law to make it a felony to market binary options from any corporate structure within Israel, vowing to put an end to firms purporting to offer FX trading to retail customers which in reality were stealing funds, never processing orders, before cutting and running.”

Concluding Remarks

Forex fraud is growing at enormous rates in a variety of forms. Safeguard your login and password information. Avoid unsolicited approaches, whether via email or cold call. Lastly, choose your binary options broker wisely. We can help with that effort!

Chris Lee

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