Common Foreign Exchange Scams

Package of foreign money

International trade has made the world a global village; countries are constantly engaged in the buying and selling of goods and services by breaking all trade barriers that previously existed. Economies thrive by leveraging the comparative and competitive advantage they have over one another by exporting (selling) and importing (buying) to meet their needs. This trading across borders also facilitates the flow of foreign currencies, and that is exactly where the concept of foreign exchange steps in.

What is a foreign exchange?

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So in order to facilitate trade between countries, a denomination system had to be devised. A worldwide institution to simplify these transactions is known as the foreign exchange rate. Values are assigned to currencies. For example, if you are a US citizen and wish to purchase Pounds Sterling, then the current exchange rate is 0.72. This means the market value of a single dollar is tantamount to 0.72 Great Britain pounds. If you pay 100 US dollars, you will get 72 pounds in return.

Foreign exchange is essentially the conversion of one currency to another. The foreign exchange market is a global network which involves financial institutions like banks. Besides interbank transactions, individuals can also purchase and dispose of foreign currency over the counter with money changers.

The barter of foreign exchange is not just a market though. It is an industry that is based in every country which conducts business with others. This is why there is immense potential for fraudulent activity relating to the foreign exchange. The global foreign currency market trades 1.65 trillion dollars a day which becomes 5 trillion if you include currency options.


Foreign Money

A foreign exchange scam is any illegitimate or illegal activity that tricks the traders into trading in the foreign exchange market by enticing them with the potential gains and rewards associated with this activity. The scourge of foreign currency fraud has been in the currency market for the last decade. We will highlight some common techniques employed by scammers worldwide to warn and save you from falling victim to this peril.

Signal Sellers

Novice foreign currency traders should mind signal sellers. A signal seller is defined as someone who offers to recognize encouraging patterns for buying and selling currencies. They may advertise a particular method they have devised to comprehend the best times to invest. This system can be either a manual program or an automated algorithm. These calculations may be derived from technical knowledge or the latest news.

The business practices of signal sellers are considered precarious and questionable at best by industry experts. A common critique aired in reference to signal sellers is that if they had pioneered a scheme where they could make such recommendations, they would not share such intellectual property with others. Instead, an intelligent strategy would be to use the system for personal gain and reap the rewards.

Furthermore, Nobel Prize-winning economist Eugene Fama argues in his acclaimed work Efficient Market Hypothesis that finding moments which can be exploited is not really possible. For instance, a signal seller may predict how Brexit or the American presidential election might affect specific exchange rates. To gauge the impact of such historic events would require conventional wisdom as opposed to a purpose-built system.

Furthermore, another erudite personality, economist Robert Shiller, who is also a recipient of the Nobel Prize for his contributions, has a contrasting opinion. His assessment is that investor sentiment can create gaps and loopholes like a surge or decline in the value of foreign currency, which presents foreign exchange investors with an opportunity to profit.

The ideal approach is, to begin with a practice trading account with a reputed seller of foreign currency. This would allow investors to know if patterns predicted by signal sellers are true or false.

Signal selling is a modern day scam. They may operate as retail firms, asset managers or account management ventures and offer their services. A customary fee will be applicable in exchange for their expertise. They may tout their market experience and excellent customer reviews as reasons why you should invest with them. Susceptible investors may give in to the attraction of making quick money and may make a deposit in haste.

However, as advised, customers should not hastily invest their money in such endeavors, since scammers may make promises based on their professional recommendations but in reality, they will be looking to defraud investors. They may only yield profits for customers sporadically or they might disappear altogether.

Fake Forex Investment Management Companies

Like we alluded to earlier, foreign exchange scams have increased manifold in recent years. An example of a popular scam is designated foreign exchange investment funds. In most cases, these companies are a hoax. They promote themselves as skilled foreign currency managers who handle investor's funds in return for a share of profits.

The main disadvantage of this business venture is that the investor loses autonomy of all his funds, which are entirely controlled by the company. This is a terrible idea in any case, especially is the other party has malicious intent. The investors may end up empty-handed while the supposed managers will enjoy their newfound wealth.

It is advised to proceed with caution when money is involved, even more so when a lump sum is at stake. A rule of thumb that should be applied in all dealings is that if a business proposition seems too good to be true, then it most certainly is.

Deceptive Brokers

The lack of a central regulatory body is critical in the foreign currency market, since it enables shady dealers to operate freely. Brokers are not subject to authority. A direct consequence of no governing body is that they do not have adequate business practices and may treat customers unfairly.

Investors should have the foresight to steer clear of dishonest agents if they are suspicious. Investors who do their research and look up the foreign exchange service will be in a much better position. Another suggestion is to engage with brokers who also deal in alternative business enterprises like stock market trades. These are subject to oversight from administrative forces like the Securities and Exchange Commission (SEC). This will eliminate the chances of working with a dubious broker.

Final Verdict

The foreign exchange market ensures liquidity but it also has plenty of uncertainty. The aforementioned scenarios may arise but can be averted if investors show awareness and anticipation.

Posted On June 12, 2018