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Beware of Foreign
Currency Trading Frauds
Have you been solicited
to trade foreign currency contracts (also known as
"FOREX")?
If so, you need to know how to spot foreign currency
trading frauds.
A new federal law, the Commodity Futures Modernization
Act of 2000, makes clear that the United States
Commodity Futures Trading Commission (CFTC) has the
jurisdiction and authority to investigate and take legal
action to close down a wide assortment of unregulated
firms offering or selling foreign currency futures and
options contracts to the general public. In addition,
the CFTC has jurisdiction to investigate and prosecute
foreign currency fraud occurring in its registered firms
and their affiliates.
The CFTC has witnessed the increasing numbers and
growing complexity of financial investment opportunities
in recent years, including a sharp rise in foreign
currency trading scams. While much foreign currency
trading is legitimate, various forms of foreign currency
trading have been touted in recent years to defraud
members of the public.
Currency trading scams often attract customers through
advertisements in local newspapers, radio promotions or
attractive Internet sites. These advertisements may tout
high-return, low-risk investment opportunities in
foreign currency trading, or even highly-paid
currency-trading employment opportunities. The CFTC
urges you to be skeptical when promoters of foreign
currency trading claim that their services or account
management will earn high profits with minimal risks, or
that employment as a currency trader will make you
wealthy quickly.
Understanding Legitimate Foreign Currency Operations
Generally speaking, foreign currency futures and options
contracts may be traded legally 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 or board of trade, the
trading can be conducted legally where, generally
speaking, one or both parties to the trading is (or is a
regulated affiliate of) a bank, insurance company,
registered securities broker-dealer, futures commission
merchant or other financial 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 above and engage in foreign
currency futures and options transactions with or for
retail customers who do not have high net worths, the
CFTC has jurisdiction over those firms and their
transactions.
Warning Signs of
Fraud
If you are solicited by a company that claims to trade
foreign currencies and asks you to commit funds for
those purposes, you should be very careful. Watch for
the warning signs listed below, and take the following
precautions before placing your funds with any currency
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 be frauds.
Always remember that there is no such thing as a "free
lunch." Be especially cautious if you have acquired a
large sum of cash recently and are looking for a safe
investment vehicle. In particular, retirees with access
to their retirement funds may be attractive targets for
fraudulent operators. Getting your money back once it is
gone can be 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 high performance. In many cases,
those claims are false.
The following are examples of statements that either are
or most likely are fraudulent:
"Whether the market moves up or down, in the currency
market you will make a profit."
"Make $1000 per week, every week"
"We are out-performing 90% of domestic investments."
"The main advantage of the forex markets is that there
is no bear market."
"We guarantee you will make at least a 30-40% rate of
return 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 disclosure statements are routine
formalities imposed by the government.
The currency futures and options markets are volatile
and contain substantial risks for unsophisticated
customers. The currency futures and options markets are
not the place to put any funds that you cannot afford to
lose. For example, retirement funds should not be used
for currency trading. You can lose most or all of those
funds very quickly trading foreign currency futures or
options contracts. Therefore, beware of companies that
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 the dollar amount you deposited.
Many currency traders ask customers to give them money,
which they sometimes refer to as "margin," often sums in
the range of $1,000 to $5,000. However, those amounts,
which are relatively small in the currency markets,
actually control far larger dollar 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 are prepared to accept losses that
exceed the margin amounts you paid.
5. Question Firms That Claim To Trade in the
"Interbank Market"
Be wary of firms that claim that you can or should trade
in the "interbank market," or that they will do so on
your behalf.
Unregulated, fraudulent currency trading firms often
tell retail customers that their funds 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 be banks, investment banks
and large corporations, since the term "interbank
market" refers simply to a loose network of currency
transactions negotiated between financial institutions
and other large companies.
6. Be Wary of Sending or Transferring Cash on the
Internet, By Mail or Otherwise
Be especially alert to the dangers of trading on-line;
it is very easy to transfer funds 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 of millions of persons, and
phony currency trading firms have seized upon the
Internet as an inexpensive and effective way of reaching
a large pool of potential customers.
Many companies offering currency trading on-line are not
located within the United States and may not display an
address or any other information identifying their
nationality on their Web site. Be aware that if you
transfer funds to those foreign firms, 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,
through advertisements in ethnic newspapers and
television "infomercials."
Sometimes those advertisements offer so-called "job
opportunities" for "account executives" to trade foreign
currencies. Be aware that "account executives" that are
hired might be expected to use their own money for
currency trading, as well as to recruit their family and
friends to do likewise. What appears to be a promising
job opportunity often is another way many of these
companies lure customers 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's performance record on behalf of other
clients. You should be aware, however, that It may be
difficult or impossible to do so, or to verify the
information you receive. While firms and individuals are
not required to provide this information, you should be
wary of any 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-looking charts, that the information they
contain might be false.
9. Don't Deal With Anyone Who Won't Give You Their
Background
Plan to do a lot of checking of any information you
receive to be sure that the company is and does exactly
what it says.
Get the background of the persons running or promoting
the company, if possible. Do not rely solely on oral
statements or promises from the firm's employees. Ask
for all information in written form.
If you cannot satisfy yourself that the persons with
whom you are dealing are completely legitimate and
above-board, the wisest course of action is to avoid
trading foreign 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 signs listed below:
- Avoid any company that
predicts or guarantees large profits with little or no
financial risk.
- Be wary of
high-pressure tactics to convince you to send or
transfer cash immediately to the firm, via overnight
delivery companies, the internet, by mail, or
otherwise.
- Be skeptical about
unsolicited phone calls about investments from
offshore salespersons or companies with which you are
unfamiliar.
Actions to take before
investing with a FOREX firm.
Contact the National Futures Association to see whether
the company is registered with the CFTC or is a members
of the National Futures Association (NFA). You can do
this easily by calling the NFA (800-621-3570 or
800-676-4NFA) or by checking the NFA's registration and
membership information on its website at
www.nfa.futures.org/basicnet/. While registration
may not be required, you might want to confirm the
status and disciplinary record of a particular company
or salesperson.
Get in touch with other
authorities, including your state's securities
commissioner (www.nasaa.org),
Attorney General's consumer protection bureau (www.naag.org/),
the Better Business Bureau (www.bbb.org)
and the National Futures Association (www.nfa.futures.org).
Be sure you get all
information about the company and verify that data, if
possible. If you can, check the company's materials with
someone 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 get solid information about the
company, the salesperson, and the investment, you may
not want to risk your money.
Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for
everyone.
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