Are Unregulated Offshore Brokers Illegal?

Forex Fraud Analyst Team

Are Unregulated Offshore Brokers Illegal

In your quest for a safe broker, you might have encountered several offshore brokers with various financial instruments across asset classes. They promise massive leverage, low spreads, zero commissions, speedy order execution, quick deposits/withdrawals, and other enticing offers.

In your urge to quickly open a trading account, have you ever thought about the risks of signing up with these brokers? If not, here’s a comprehensive write-up of the unregulated offshore brokers that often entice clients but are highly risky. We advise you to read the entire article to learn why these brokers open registered offices overseas and the pros and cons of trading through them.

What Are Unregulated Offshore Brokers?

Many countries have stringent regulations that govern brokers, and although they might be overreaching sometimes, the intention is to protect investors from unscrupulous elements, excessive trading, overleveraging, etc. However, some brokers sidestep these regulations and operate from countries with little or zero oversight, providing brokerage services to anyone who wishes to trade in these markets. These brokers are referred to as Unregulated Offshore Brokers since they are primarily licensed to set up an office, and what they do afterwards is their concern.

Unregulated offshore brokers generally operate from countries like Seychelles, Vanuatu, Saint Vincent and the Grenadines, the British Virgin Islands, and others. While most brokers set up alternate offices at these popular offshore destinations because of low tax regimes and the ease of doing business, others have registered offices in the jurisdictions because there’s almost zero oversight.

For instance, the website of Saint Vincent and the Grenadines Financial Services Authority (SVGFSA) clearly states that the government does not “regulate, supervise, monitor, or license any forex/CFD brokers”. So, if a broker claims to be regulated in the offshore countries mentioned above, it should immediately raise a red flag.

Are Unregulated Brokers Illegal?

Several brokers operate from the unregulated regimes in Seychelles, Vanuatu, Saint Vincent and the Grenadines, and the British Virgin Islands. They set up offices at these popular offshore destinations since the tax rates are low and it’s easy to do business. In addition to operating from these offshore jurisdictions, several brokers also have registered offices in the UK, Europe, Australia, Singapore, etc., where they come under the oversight of the financial markets regulator. So, if you think all unregulated brokers are illegal, you’re wrong.

unregulated offshore brokers

However, some clients still prefer unregulated offshore brokers due to their advantages compared to regulated brokers despite the risk.

Here are some of them:

  • Minimum paperwork – Clients opening trading accounts with regulated brokers have tons of information to fill out in the Know Your Customer (KYC) form, including their identity and address. The main idea behind the verification is to restrict money laundering. However, when you open an account with an unregulated broker, the KYC process is way simpler, and you don’t need to share all your personal information.
  • Sign-up bonuses – Unregulated brokers generally entice clients with several offerings, and a sign-up or welcome bonus is something you would see them offering frequently. However, there are strings attached to withdrawing these bonuses, so don’t get carried away by them.
  • Unrestricted trading – Regulated brokers prevent traders from carrying out specific trading strategies, such as scalping, copy trading, etc., primarily due to regulatory compliance. However, most unregulated offshore brokers permit all trading styles.
  • Narrower spreads – Regulated brokers have substantial costs in running their business. For example, they must have employees managing compliance, customer support, legal, and other key positions, as part of the regulatory framework. Due to these high costs, regulated brokers might be unable to offer low spreads or commission-free trades. In comparison, the cost incurred by unregulated offshore brokers is tiny, so they can afford to offer low spreads and zero commissions.
  • Massive leverage – One of the primary reasons traders are drawn to unregulated offshore brokers is because of the leverage they offer. Regulated brokers generally offer max leverage ranging between 30:1 to 50:1 on some forex instruments, primarily because of the restrictions of the oversight committee. However, unregulated brokers have no such limits, and they provide leverage to the extent of 1000:1 or even 2000:1 in some instances. Always remember leverage multiplies profits and losses alike.

However, while these offshore brokers can accept clients from anywhere, it’s illegal for them to sign-up residents in Europe, the UK, or other countries where they are not permitted. So, before opening an account with an unregulated broker operating from an offshore destination, make sure it is legal for you to do so. For instance, if you are a resident of the United Kingdom, register only with a broker regulated by the Financial Conduct Authority (FCA).

The Risks of Using Offshore Brokers

As mentioned above, trading with unregulated offshore brokers has several advantages. But, on the contrary, the risks are immense.

  • No capital requirements – Brokers operating in some regulated jurisdictions are compelled to maintain additional capital or an emergency fund in the event of adverse market conditions. On the contrary, offshore brokers have no such requirements, making them vulnerable to huge losses and insolvency.
  • Lack of transparency – All information about regulated brokers, including their registration and potential complaints, is easily accessible on the regulator’s website. In other words, there is an official record of the broker’s past activities, which traders can look up before signing up. However, when it comes to offshore brokers, there are no such official warnings or red flags. Besides, bad reviews are easily scrubbed, allowing them to operate with impunity for years.
  • Absence of comprehensive risk disclosure – Forex trading is hazardous; if you’re not careful, you could lose significant amounts of money in the blink of an eye. Regulated CFD brokers typically publish the risks involved with trading CFDs, with some even having a banner stating the percentage of traders losing money in the markets. Unregulated offshore brokers generally don’t provide such disclosures, while some go the extra mile to highlight the profits that can be made.
  • No dispute settlement mechanism – In the event of issues related to deposits/withdrawals, trading, settlement, or any other problems, regulated brokers are compelled to have dedicated personnel to help customers. However, if a client is dissatisfied with the broker’s response to the dispute, they can take it up with the market regulator, who ensures prompt and unbiased resolution.
  • If you face an identical issue with an unregulated offshore broker, there’s no one to listen to your grievances. To put it simply, you’re on your own.
  • Risk to deposits – Several unregulated offshore brokers exist only to scam investors. So, even if you’re going with one, ensure the broker is fully regulated in at least one jurisdiction. The chances of losing your deposit are very high if you don’t.

Recommended Offshore Brokers

Registering with offshore brokers has several advantages but comes with huge risks. Unregulated brokers do not provide financial protection to their clients even if they say they do. Besides, they lack transparency, are lax in dispute settlement, and don’t maintain capital requirements to cushion them during adverse market situations.

However, if you still prefer offshore brokers for the various benefits they offer, go through some brokers we have selected for you. Make sure you carry out due diligence before depositing funds with them.

Broker Features Min Deposit EURUSD Spread  
Number One Broker XM LogoYour capital is at risk US Clients: No Regulated : Yes
  • CySEC, IFSC, ASIC Regulated
  • MT4, MT5, WebTrader platform
  • $50% and 20% deposit bonus up to $5,000(t&c apply) *Cleints registered under the EU regulated entity of the Group are not eligible for the bonus.
$5From 0.0 pips
Skilling forex broker logoYour capital is at risk US Clients: Regulated : Yes $100
Sign Up 69% of retail investor accounts lose money when trading CFDs with this provider.
Exness logoYour capital is at risk US Clients: No Regulated : Yes
  • Instant automated withdrawals 24/7
  • Commission-free Standard accounts
  • Some of the lowest spreads on the markets and stable execution
  • Unlimited leverage
  • Free VPS Hosting
Starting from $10 on Standard and $200 on Professional accountsAs low as 0 on Raw Spread and Zero accounts

    To conclude, all unregulated offshore brokers are not illegal. Several genuine brokers with registered offices in the UK, Europe, Australia, Singapore, etc., operate from these destinations simply because of the low tax rates and the ease of doing business. Besides, in regulated jurisdictions like the UK or Europe, brokers are primarily authorized to provide services only to the residents. Whereas setting up offices offshore allows them to offer trading to a much larger clientele.

    However, some brokers operate only to scam customers by enticing them with unrealistic offers. So, the best choice is to go with a regulated broker, pay a little more fees, use the small leverage they provide, and grow your capital gradually. But, if you still prefer an unregulated offshore broker, the best option would be someone operating in regulated jurisdictions under a stringent financial markets regulator.