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Forex co-mingling scams: the tell-tale signs

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What is co-mingling?

  • Co-mingling refers to the bringing together of funds from various sources, on the part of a foreign exchange broker, and placing them into the same account or area.
  • It occurs without the agreement of all parties and constitutes a breach of trust, which can cause a trader to lose cash.
  • Co-mingling can be potentially fraudulent and should lead the trader to think twice about whether or not to work with that broker again.

The basics of a co-mingling scam

As the name suggests, co-mingling is when trader funds are brought together from different deposits or assets, which are then placed in the same account or other ring-fenced destination. Co-mingling is always bad practice, but it’s not always necessarily a scam. However, when it occurs without the knowledge or consent of all involved, then it is almost certainly fraudulent.

When it comes to co-mingling, the reason why many investors find themselves getting fooled is because they may not have access to the necessary information to educate and alert them of a scam. In order to remain vigilant and spot the indicators, it’s worth ensuring that traders watch out for any headline rates that are too good to be true — as often, they are.

The appeal and allure of potential profits is another reason why investors may find themselves caught out. As an example, an organisation may state that high returns are available if traders deposit their cash. For a trader who is short on assets or desperate for a quick win, this kind of situation can be a little too alluring. However, in reality, these ‘returns’ may well be achieved by the organisation dipping into company or operational funds. Often, a broker that is careless with its clients is likely to be careless about other aspects.

In developed economies, there are laws in place that govern what is often referred to as the ‘segregation of client funds’. This is underpinned by a more profound legal concept known as ‘fiduciary duty’, which states that financial service providers must behave in the best interest of their clients’ assets. In legal terms, it can be construed as a breach of trust to place client deposits in a risky destination, it can also be deemed a breach of contract. Often, it is stated in an organisation’s terms & conditions or other client-facing documents that funds will not be co-mingled.

This creates a situation in which the deposits made by clients are kept in bank accounts, which are usually distinct and demarcated from the bank accounts that provide funding for the operational costs of the organisation. Examples include the bank account reserved for the paying of staff members or the account for the payment of insurance premiums. That way, if the firm goes out of business, the trader will not be out of pocket. For a foreign exchange trader, the scenario is simple. Any organisation that seeks to take a trader’s investment cash ought to have a policy in place that prevents the mixing of operational funds and client deposits.

How can you avoid this scam?

While it is difficult to avoid being scammed, the good news is that it is certainly possible to reduce the chances. Always double-check with a provider that it subscribes to the relevant rules outlined by the Financial Conduct Authority (FCA). Browsing the FCA’s website is a wise move. If there is no mention anywhere on the client’s website of a segregation of funds, alarm bells should immediately ring.

The risk of forex co-mingling fraud is no reason to avoid trading altogether. However, it is important to read forex broker reviews and to pay particular attention to the sections that explain the ease of withdrawal. If previous traders have pointed out serious irregularities in terms of how easy it was to get their cash back, then avoid at all costs. You can also do small experimental trades with some suppliers to test the water. If a red flag appears, then you know to not use them again.

It is worth watching out for any headline rates that appear to be too good to be true. Traders should also keep a close eye on any overblown promises, ensuring they avoid any broker that claims its rates of return are particularly competitive and that its fees are distinctively low, for example. Forex brokers should always carry a clear, obvious and public warning that informs a trader that the value of a deposit can go down as well as up. If such a warning is absent and is instead replaced by promises of high returns, the broker should be avoided as they may well be funding these high returns through an unsustainable and fraudulent forex co-mingling scam.

Conclusion

When co-mingling is perpetrated in the forex markets, it can cause significant issues for a trader and can lead to demonstrable material losses, especially in a long-term trade. If a trader wishes to remain vigilant, then they should be aware of their rights. The Financial Conduct Authority regularly publicises details of the rules and legislation surrounding the co-mingling of funds. Secondly, it’s wise to be strategic about withdrawals. While this may be a time drain and detrimental to finances, it could be a lifesaver if it alerts a trader to the prospect of fraud. By generally remaining cautious and ensuring that greed doesn’t become a motivator, a trader can adopt a sensible strategy.

There is no sure-fire way to avoid falling victim to a foreign exchange co-mingling fraud — or any other form of forex scam. What the trader can do is to take as many steps as possible to reduce the risk. In this way, the trader can increase the chances that they’ll associate themselves with reputable brokers who abide by their duty to have their clients’ best interests at heart.