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Why Forex Scams Are Still a Major Threat Despite Regulations

Forex is the largest financial market in the world, trading over $6.6 trillion per day. The overwhelming size of the foreign exchange market has resulted in more forex fraud. Forex scams since COVID-19 began have grown at a more rapid pace than before. This is true despite governments stepping up regulations.

Why didn’t forex regulations governments have adopted in the past few years prevent the proliferation of forex scams?

Forex Scams–The Epidemic Within the Pandemic

It is natural for scam artists to take advantage of both positive and negative events. This was particularly true of forex scams during the Covid-19 crisis. The increase year over year of cyber scams ranged from 70% to 90% depending on the type of scam. 

One factor for this increase was the amount of time people spent online. Since many people were unemployed or working from home, they had more time to spend online and were easy targets for all kinds of cyber scams. 

The other factor was a deep financial need. Unemployment and economic decline in many countries reached levels that had not been seen in decades. As people waited for stimulus checks from the government, they were searching online for ways to make money fast. 

Forex scam artists took advantage of this desperation and offered money-making schemes that actually turned out to be money-taking scams. 

One infamous example was a scammer named Kenzley Ramos from Georgia who promised they would make large amounts of money during the coronavirus pandemic trading forex. Ramos promised huge returns to investors who entrusted their money to him and his forex trades. However, Ramos did not trade any of the money but pocketed it. Ramos surrendered to authorities and was charged with commodities fraud. 

This example is only one of many forex scams that proliferated since the beginning of COVID-19 and even as restrictions are relaxed and life returns to normal, forex scams are expected to increase as long as people are looking to regain their losses and make extra money. 

Governments and financial regulators warn the public against these get-rich-quick schemes and have regulations in place. So why then have forex scams increased? Aren’t regulations working? 

Government Regulation of the Forex Market–Are They Working? 

If there are many forex scams, it would seem logical that governments should tightly regulate the forex market. Although the United Sates, Europe, and other areas of the world have regulatory bodies that are intended to oversee brokers and other forex services, there is still plenty of fraud. This seems counterintuitive but it makes sense looking carefully at the nature of the forex market. 

Unlike stocks, forex is not traded on a central exchange that can be easily regulated. Therefore, the government can try to create rules for forex trading, but these rules may not have the kind of a bite and practical application as laws against speeding, for example. If the speed limit changes in a certain place, the police can clock someone speeding, prove it and issue them with a ticket. 

However, forex is not traded on a specific “highway” or an exchange. There is a “police officer” who is given the authority to patrol a certain area and execute laws. The most that can be done about forex trading is to set up regulatory bodies that can create rules for forex trading and products, can license brokers, take action against brokers who violate the rules by suspending licenses, and alerting legal authorities to fraud and other crimes they investigate. 

There are many regulatory agencies in countries all over the world that are given the authority to make rules that protect consumers and can take action against fraudulent behavior when it happens. Some of these organizations are the FCA or the Financial Conduct Authority in the U.K., National Futures Association (NFA) in the U.S., and the MiFiD or Markets in Financial Instruments Directive, which governs the EU. In addition to the MiFID, there are regulatory bodies located in individual European countries. 

Examples of rules these regulators require of forex services and brokers include:

  • Conforming to the precise definition of individual and institutional investor
  • Maximum rates of leverage
  • Requiring separate accounts of the companies and clients
  • Mandating minimum market capitalization
  • Client compensation in case of company or broker insolvency 
  • Require record keeping, reporting, and inspection
  • Security deposit requirements
  • Negative balance protection

These are just a few of the regulations these organizations may require from companies and brokers registered with them. The list of requirements should be more than sufficient for protecting consumers against frauds and ensure they will recover their funds in case the company or broker suffers a financial crisis.

If These Regulators Are So Effective, Why Are There So Many Forex Scams?

Returning to the original question, simply put, there are so many forex scams, despite thorough regulation because forex is not something that can be centrally located, since it is not connected to a specific exchange and because many brokers and forex services avoid or can’t qualify to become licensed. Therefore, they are not under the authority of these regulators. 

Technically, it isn’t legal for these brokers and companies not to get a license to trade forex. However, as long as consumers do not do their due diligence or are unaware that licenses are important, the more these forex scams will thrive. 

The bottom line is, the regulators can only do their part, but if the consumer remains indifferent or uninformed about how essential working with a licensed forex broker or a legitimate forex company is, the regulators are not able to protect them from scams. 

Trader Defense Advisory works with many clients who entrusted their money with an unregulated broker. The results are almost never good. We strongly advise consumers to research forex brokers thoroughly by reading our broker reviews and asking our experts questions they may have about forex brokers. If you have lost money in a forex scam, consult with us and we can create a fund recovery strategy. 

If You Have Been the Target of a Forex Scam, Talk to Trader Defense Advisory. 

Trader Defense Advisory professionals are well-versed in the process of reporting fraudulent brokers, forex scams, and identity theft. They help clients individually through the procedure of filing a claim and reporting their case to the authorities. TDA experts have combined decades of experience with banks and financial regulators that can track down fraudulent parties and help clients recover from identity theft and other types of fraud. We have a proven track record of success in assisting clients with winning claims and helping clients reclaim their identity.

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