Forex Fraud: the Tell-tale Signs of a Scam

2010-01-17

One of the most fearsome dangers of forex trading is fraud. Arguably nothing worries traders as much as the possibility of fraud, and for good reasons. Still, there are some simple guidelines that can be followed to protect your account from the worst possible results, and the following questions are very helpful in establishing them.

Where is it registered?

Some of the worst brokers choose to be registered in places such as Cyprus, British Virgin Islands, and Switzerland. Of these three, Switzerland and Cyprus have made considerable improvement in their oversight of forex broker activities, but they are still highly favored by mostly Eastern European or Russian scammers. Switzerland, with its almost non-existent forex regulation framework, is a particular favorite of Russian crooks due its perceived status as a safe location.

The British Virgin Islands is a tiny entity east of Puerto Rico that derives about 40 percent of its revenues from tourism and 50 percent from the registration of offshore companies. There is barely any regulation over the activities of the companies registered, which makes the BVI an ideal place for crooks and thieves who seek to perform their activities incognito.

How long has it been in operation?

In some of the worst examples of forex fraud, such as that related to the collapse of Refco, the fraud was perpetrated by well-established firms with a long history. However, in many of those cases the history of the firm in question was full of lawsuits, complaints and fines by authorities in response to mostly minor infringements of the law. A new trader would do well to check the background of any broker before committing any capital, and only trading with firms that have a long history with a clean track record.

Is it regulated?

Of course, you need to ensure that your broker is regulated. Regulation is a huge advantage for any broker for marketing purposes, so if a firm deliberately avoids getting the regulator’s approval, suspicion must arise about its legitimacy immediately.

Unfortunately none of the above can constitute a fool-proof method of protecting your assets or account. There have been some high-profile cases of fore fraud where the condemned company had a long history, and established status among brokers while being under official oversight and regulation. The best way of ensuring against forex fraud is diversifying your broker choices. Do not put all your eggs in the same basket. Besides, by trading with more than one company, you'll have greater access to forex trading software which you can test in time or use in the context of different strategies as the need arises.

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