Foreign exchange fraud is any trading scheme used to

defraud In law, fraud is intent (law), intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate Civil law (common law), civil law (e.g., a fraud victim may sue the fraud perpetrato ...

traders by convincing them that they can expect to gain a high profit by trading in the

foreign exchange market The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. By trading volume, ...

. Currency trading became a common form of fraud in early 2008, according to Michael Dunn of the U.S.

Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an Independent agencies of the United States government, independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures contract, fut ...

. The foreign exchange market is at best a zero-sum game, meaning that whatever one trader gains, another loses. However, brokerage commissions and other transaction costs are subtracted from the results of all traders, making foreign exchange a negative-sum game.

US government interventions

In August 2008, the CFTC set up a special task force to deal with growing foreign exchange fraud. In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on "a number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals". In 2012, Christopher Ehrman, an SEC veteran, was selected to run the new SEC Office of the Whistleblower.

Types of fraud

Frauds might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,SOFTWARE VENDOR CHARGED
CFTC News Release 4789-03, May 21, 2003 improperly managed "managed accounts",
Forex Advisory Firm and Trade Risk Management Firm Charged With Fraud false advertising,
Commodity Futures Trading Commission (CFTC) Release: 4946-0

Ponzi scheme A Ponzi scheme (, ) is a form of fraud that lures investors and pays Profit (accounting), profits to earlier investors with Funding, funds from more recent investors. Named after Italians, Italian confidence artist Charles Ponzi, this type of s ...

s, and outright fraud.Forex Fraud Investor Alert
". North American Securities Administrators Association, accessed January 12, 2008Foreign Currency Fraud Action
Commodity Futures Trading Commission (CFTC) vs. Donald O’Neill It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.FOREX Advisory
Commodity Futures Trading Commission's FOREIGN CURRENCY TRADING FRAUDS

Increase in fraud

The U.S.

(CFTC), which regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry. Between 2001 and 2006, the CFTC has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost . From 2001 to 2007, about 26,000 people lost in forex frauds.

Not beating the market

The foreign exchange market is a zero-sum game in which there are many experienced, well-capitalized professional traders (e.g. working for banks) who can devote their attention full-time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders. Retail traders are undercapitalized. Thus, they are subject to the problem of gambler's ruin: in a "fair game" (one with no information advantages) the player with the lower amount of capital has a higher probability of going bankrupt than a high-capital player. The retail trader always pays the bid/ask spread which makes their odds of winning less than those of a fair game. Additional costs may include margin interest or, if a spot position is kept open for more than one day, the trade may be "resettled" each day, each time costing the full bid/ask spread. In some variations of forex trading, the customers do not obtain normal fungible futures, but instead make a contract with some named company. Even if the company claims to act as their "forex dealer", it is financially interested in making the retail customer lose money. The contract is directly between the customer and the pseudo-dealer, so it is an off-exchange one; it cannot be normally registered and traded on

futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...

s. Although it is possible for a few experts to successfully

arbitrage Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which th ...

the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques, and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbitrages themselves are a rival good. In analogy: the total amount of buried treasure on an island is the same, regardless of how many treasure hunters have bought copies of the treasure map.

High leverage

By offering high leverage, some

market maker A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the difference, which is called the ''bid–ask spread'' or ''turn.'' Thi ...

s encourage traders to trade extremely large positions. This increases the trading volume cleared by the market maker and increases their profit, but increases the risk that the trader will receive a margin call. While professional currency dealers such as banks and

hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...

s tend to use no more than 10:1 leverage, retail clients may be offered leverage up to 1000:1.

Fraud by country

To aid with transparency, some regulatory authorities openly publish the following: list of regulated companies/firms, warnings to regulated companies, cases opened against regulated companies, fines levied to regulated companies, revocation of companies license as well as general news announcements.

United Kingdom

The Financial Conduct Authority (FCA) website lists guides to aid with avoiding fraud/scams as well as public list of warnings recorded by the FCA. * Official FCA Investment Firm Warning List * Online guide on how to avoid scams * FCA Guide on how to report a scam * FCA Investment Scam support website * FCA News on Investment Firms

Cyprus

The Cyprus Securities and Exchange Commission (CySEC) provides public access to information regarding the process fo
how to obtain a CIF authorisation
as well as listing the current and past CySEC authorised companies. * List of current 'Cyprus Investment Firms' (CIFs) * List of former Cyprus Investment Firms * List of issued CySEC Warnings * List of announced Board Decisions (including fines)

Convicted scammers

* Russell Cline * Russell Erxleben * Sterling Currency Group * Joel N. Ward * WinCapitaHelsinki Times
Over 700 criminal complaints on WinCapita -Finnish police, August 13, 2008

References

External links

US Commodity Futures Trading Commission Forex Fraud Advisory
{{Fraud, Forex LC Fraud=Rollover LC Foreign exchange market Finance fraud Confidence tricks Cyberbullying Fraud