COMMISSION ADVISORY
BEWARE OF
FOREIGN CURRENCY TRADINGFRAUDS
- Have you been solicited totrade foreign currency contracts (also known as "forex")?
- If so, you need to know howto spot foreign currency trading frauds.
The United States Commodity Futures Trading Commission (CFTC), the federal agencythat regulates commodity futures and options markets in the United States, warnsconsumers to take special care to protect themselves from the various kinds of fraudsbeing perpetrated in today's financial markets, including those involving so-called"foreign currency trading."
A new federal law, the Commodity Futures Modernization Act of 2000, makes clear thatthe CFTC has the jurisdiction and authority to investigate and take legal action to closedown a wide assortment of unregulated firms offering or selling foreign currency futuresand options contracts to the general public. In addition, the CFTC has jurisdiction toinvestigate and prosecute foreign currency fraud occurring in its registered firms andtheir affiliates.
The CFTC has witnessed the increasing numbers and growing complexity of financialinvestment opportunities in recent years, including a sharp rise in foreign currencytrading scams. While much foreign currency trading is legitimate, various forms offoreign currency trading have been touted in recent years to defraud members of thepublic.
Currency trading scams often attract customers through advertisem*nts in localnewspapers, radio promotions or attractive Internet sites. These advertisem*nts may touthigh-return, low-risk investment opportunities in foreign currency trading, or evenhighly-paid currency-trading employment opportunities. The CFTC urges you to be skepticalwhen promoters of foreign currency trading claim that their services or accountmanagement will earn high profits with minimal risks, or that employment as a currencytrader will make you wealthy quickly.
Understanding Legitimate Foreign Currency Operations
Generally speaking, foreign currency futures and options contracts may be tradedlegally on an exchange or board of trade that has been approved by the CFTC.
Even where currency trading does not occur on a Commission-approved exchange orboard of trade, the trading can be conducted legally where, generally speaking, one orboth parties to the trading is (or is a regulated affiliate of) a bank, insurancecompany, registered securities broker-dealer, futures commission merchant or otherfinancial institution, or is an individual or entity with a high net worth.
Where forex firms do not fall into the categories of regulated entities outlined aboveand engage in foreign currency futures and options transactions with or for retailcustomers who do not have high net worths, the CFTC has jurisdiction over those firms andtheir transactions.
Warning Signs of Fraud
If you are solicited by a company that claims to trade foreign currencies and asks youto commit funds for those purposes, you should be very careful. Watch for the warningsigns listed below, and take the following precautions before placing your funds with anycurrency trading company.
1. Stay Away From Opportunities That Sound Too Good to Be True
Get-rich-quick schemes, including those involving foreign currency trading, tend to befrauds.
Always remember that there is no such thing as a "free lunch." Be especiallycautious if you have acquired a large sum of cash recently and are looking for a safeinvestment vehicle. In particular, retirees with access to their retirement funds may beattractive targets for fraudulent operators. Getting your money back once it is gone canbe difficult or impossible.
2. Avoid Any Company that Predicts or Guarantees Large Profits
Be extremely wary of companies that guarantee profits, or that tout extremely highperformance. In many cases, those claims are false.
The following are examples of statements that either are or most likely arefraudulent:
- "Whether the market moves up or down, in the currencymarket you will make a profit."
- "Make $1000 per week, every week"
- "We are out-performing 90% of domesticinvestments."
- "The main advantage of the forex markets is that thereis no bear market."
- "We guarantee you will make at least a 30-40% rate ofreturn within two months."
3. Stay Away From Companies That Promise Little or No Financial Risk
Be suspicious of companies that downplay risks or state that written risk disclosurestatements are routine formalities imposed by the government.
The currency futures and options markets are volatile and contain substantial risksfor unsophisticated customers. The currency futures and options markets are not the placeto put any funds that you cannot afford to lose. For example, retirement funds should notbe used for currency trading. You can lose most or all of those funds very quicklytrading foreign currency futures or options contracts. Therefore, beware of companiesthat make the following types of statements:
- "With a $10,000 deposit, the maximum you can lose is$200 to $250 per day."
- "We promise to recover any losses you have."
- "Your investment is secure."
4. Don't Trade on Margin Unless You Understand What It Means
Margin trading can make you responsible for losses that greatly exceed thedollar amount you deposited.
Many currency traders ask customers to give them money, which they sometimes refer toas "margin," often sums in the range of $1,000 to $5,000. However, thoseamounts, which are relatively small in the currency markets, actually control far largerdollar amounts of trading, a fact that often is poorly explained to customers.
Don't trade on margin unless you fully understand what you are doing and areprepared to accept losses that exceed the margin amounts you paid.
5. Question Firms That Claim To Trade in the "InterbankMarket"
Be wary of firms that claim that you can or should trade in the "interbankmarket," or that they will do so on your behalf.
Unregulated, fraudulent currency trading firms often tell retail customers that theirfunds are traded in the "interbank market," where good prices can be obtained.Firms that trade currencies in the interbank market, however, are most likely to bebanks, investment banks and large corporations, since the term "interbankmarket" refers simply to a loose network of currency transactions negotiated betweenfinancial institutions and other large companies.
6. Be Wary of Sending or Transferring Cash on the Internet, By Mail orOtherwise
Be especially alert to the dangers of trading on-line; it is very easy to transferfunds on-line, but often can be impossible to get a refund.
It costs an Internet advertiser just pennies per day to reach a potential audience ofmillions of persons, and phony currency trading firms have seized upon the Internet as aninexpensive and effective way of reaching a large pool of potential customers.
Many companies offering currency trading on-line are not located within the UnitedStates and may not display an address or any other information identifying theirnationality on their Web site. Be aware that if you transfer funds to those foreignfirms, it may be very difficult or impossible to recover your funds.
7. Currency Scams Often Target Members of Ethnic Minorities
Some currency trading scams target potential customers in ethnic communities,particularly persons in the Russian, Chinese and Indian immigrant communities, throughadvertisem*nts in ethnic newspapers and television "infomercials."
Sometimes those advertisem*nts offer so-called "job opportunities" for"account executives" to trade foreign currencies. Be aware that "accountexecutives" that are hired might be expected to use their own money for currencytrading, as well as to recruit their family and friends to do likewise. What appears tobe a promising job opportunity often is another way many of these companies lurecustomers into parting with their cash.
8. Be Sure You Get the Company's Performance Track Record
Get as much information as possible about the firm's or individual'sperformance record on behalf of other clients. You should be aware, however, that It maybe difficult or impossible to do so, or to verify the information you receive. Whilefirms and individuals are not required to provide this information, you should be wary ofany person who is not willing to do so or who provides you with incomplete information.However, keep in mind, even if you do receive a glossy brochure or sophisticated-lookingcharts, that the information they contain might be false.
9. Don't Deal With Anyone Who Won't Give You TheirBackground
Plan to do a lot of checking of any information you receive to be sure that thecompany is and does exactly what it says.
Get the background of the persons running or promoting the company, if possible. Donot rely solely on oral statements or promises from the firm's employees. Ask for allinformation in written form.
If you cannot satisfy yourself that the persons with whom you are dealing arecompletely legitimate and above-board, the wisest course of action is to avoid tradingforeign currencies through those companies.
10. Warning Signs Of Commodity "Come-Ons"
If you are solicited by a company to purchase commodities, watch for the warning signslisted below:
- Avoid any company that predicts or guarantees largeprofits with little or no financial risk.
- Be wary of high-pressure tactics to convince you tosend or transfer cash immediately to the firm, via overnight delivery companies, theinternet, by mail, or otherwise.
- Be skeptical about unsolicited phone calls aboutinvestments from offshore salespersons or companies with which you are unfamiliar.
- Prior to purchasing:
- Contact the CFTC.
- Visit the CFTC's forexfraud web page.
- Contact the National Futures Association to seewhether the company is registered with the CFTC or is a members of the National FuturesAssociation (NFA). You can do this easily by calling the NFA (800-621-3570 or800-676-4NFA) or by checking the NFA's registration and membership information on itswebsite at www.nfa.futures.org/basicnet/.While registration may not be required, you might want to confirm the status anddisciplinary record of a particular company or salesperson.
- Get in touch with other authorities, including yourstate's securities commissioner (www.nasaa.org), Attorney General'sconsumer protection bureau (www.naag.org/), the Better BusinessBureau (www.bbb.org) and theNational Futures Association (www.nfa.futures.org).
- Be sure you get all information about the companyand verify that data, if possible. If you can, check the company's materials withsomeone whose financial advice you trust.
- Learn all possible information about fees charged,and the basis for each of these charges.
- If in doubt, don't invest. If you can't getsolid information about the company, the salesperson, and the investment, you may notwant to risk your money.
- Contact the CFTC.
11. More Information and Contacts
- Questions concerning this advisory may be addressed to theCFTC's Office of Public Affairs at (202) 418-5080.
Commodity Futures Trading Commission
Three LaFayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581
- The Commodity Futures Modernization Act is available in ourLaw and Regulation page.
(requires an Adobe Acrobat reader, which can be downloaded for free from www.adobe.com and numerous other siteson the Internet)
- For other consumer advisories concerning possiblefraudulent activity in the commodity futures and options industry, click on the Customer Protection page.
- Contact the National Fraud Information Center (www.fraud.org).
- The CFTC's website also offers general informationabout trading in the commodity futures and options markets. You may wish to visit ourBefore You Trade page.
- To find out whether firms or counterparties with whom youplan to trade are registered or regulated institutions or entities that are outside theCFTC's jurisdiction, you can check the lists of regulated institutions on thefollowing websites. Some institutions outside the CFTC's jurisdiction do not appearon any of these lists or in other readily-available places:
- Federal Reserve Board (www.federalreserve.gov)
- Federal Financial Institutions Examination Council(www.ffiec.gov)
- Federal Deposit Insurance Corporation (www.fdic.gov)
- U.S. Securities and Exchange Commission (www.sec.gov)
- The Office of the Comptroller of the Currency (www.occ.treas.gov)
- Office of Thrift Supervision (www.ots.treas.gov)
- National Credit Union Association (www.ncua.gov)
- National Association of Securities Dealers Regulation, Inc.(www.nasdr.com)
- All U.S. Government web sites can be located through linksat www.firstgov.gov
- Your state Attorney General's office and state banking,insurance and securities regulators (which often have their own web sites).
