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.
- "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.
- Prior to purchasing:
- Contact the CFTC.
- Visit the CFTC's forex fraud web page.
- 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.
11. More Information and Contacts
- Questions concerning this advisory may be addressed to the CFTC'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