Foreign exchange fraud is any trading scheme used to

defraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...

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. It includes all aspec ...

. 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 agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange Ac ...

. The foreign exchange market is at best a

zero-sum game Zero-sum game is a mathematical representation in game theory and economic theory of a situation which involves two sides, where the result is an advantage for one side and an equivalent loss for the other. In other words, player one's gain is e ...

, meaning that whatever one trader gains, another loses. However, brokerage commissions and other

transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...

s are subtracted from the results of all traders, making foreign exchange a

negative-sum game Zero-sum game is a mathematical representation in game theory and economic theory of a situation which involves two sides, where the result is an advantage for one side and an equivalent loss for the other. In other words, player one's gain is e ...

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 The U.S. Securities and Exchange Commission (SEC) whistleblower program went into effect on July 21, 2010, when the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The same law also established a whistl ...

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 profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are comin ...

s, and outright fraud.Forex Fraud Investor Alert
".

North American Securities Administrators Association The North American Securities Administrators Association (NASAA), founded in Kansas in 1919, is the oldest international investor protection organization. NASAA is an association of state securities administrators who are charged with the responsi ...

, 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

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 The gambler's ruin is a concept in statistics. It is most commonly expressed as follows: A gambler playing a game with negative expected value will eventually go broke, regardless of their betting system. The concept was initially stated: A persi ...

: 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 In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for exam ...

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 f ...

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

arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...

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 In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is conside ...

, the arbitrages themselves are a

rival good In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is conside ...

. In analogy: the total amount of

buried treasure Buried treasure is a literary trope commonly associated with depictions of pirates, criminals, and Old West outlaws. According to popular conception, these people often buried their stolen fortunes in remote places, intending to return to them ...

on an island is the same, regardless of how many treasure hunters have bought copies of the

treasure map A treasure map is a map that marks the location of buried treasure, a lost mine, a valuable secret or a hidden locale. More common in fiction than in reality, "pirate treasure maps" are often depicted in works of fiction as hand drawn and contain ...

High leverage

By offering high

leverage Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever * ''Leverage'' (album), a 2012 album by Lyriel *Leverage (dance), a type of dance connection *Leverage (finance), using given resources to ...

, 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 ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...

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 ''Margin Call'' is a 2011 American drama film written and directed by J. C. Chandor in his feature directorial debut. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the ...

. While professional currency dealers such as banks and

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...

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 The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...

(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 The Cyprus Securities and Exchange Commission, ( gr, Επιτροπή Κεφαλαιαγοράς) better known as CySEC, is the financial regulatory agency of Cyprus. As an EU member state, CySEC's financial regulations and operations comply with ...

(CySEC) provides public access to information regarding the process fo
how to obtain a CIF authorisation
as well as listed 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 Warren Brent Cline (born about 1965) founded Orion International in 1998, a foreign currency trading firm based in Portland, Oregon. In 2003 he was charged in federal court with running a classic Ponzi scheme. Cline pleaded guilty and was i ...

Russell Erxleben Russell Erxleben (born January 13, 1957) is a former American football player and currency investor. He shares the record for the longest successful field goal in NCAA history at 67 yards (with tee), which he set in 1977 while playing for the Uni ...

Sterling Currency Group Sterling may refer to: Common meanings * Sterling silver, a grade of silver * Sterling (currency), the currency of the United Kingdom ** Pound sterling, the primary unit of that currency Places United Kingdom * Stirling, a Scottish city who ...

* Joel N. Ward *

WinCapita WinCapita, previously WinClub and GiiClub, was a Finnish Internet-based Ponzi scheme that advertised itself as a private investment club engaged in currency trading. In reality, it was a bucket shop like many other foreign exchange fraud schemes. ...

Helsinki 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