Currency trading scams can take many forms. Essentially it means defrauding individual traders by convincing them that they can make huge profits by trading in foreign currency.

A retail trader can be asked to pay commissions, buy some sort of software promising high profits, participating in fake managed accounts, false advertising, ponzi or HYIP schemes and plain fraud. All of these will constitute currency scams.

Foreign currency trading involves equal potential for both profits and losses. If somebody claims that there is minimal risk and great profit potential in forex trading, that is also forex scam. Forex scams mostly occur with non-bank forex traders. The main reason being ignorance of individuals, greed, lack of education, improper selection of brokers or trading platforms and lack of control.

One main reason for forex frauds is that this is a highly unregulated market. There is no central agency which regulates it nor is there any central clearing agency.

There is some regulation of forex market in US by the US Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA), but it is quite loose. CFTC has reported an increase in dishonest practices in non-bank forex trading.

Individual forex currency trading has increased significantly over the last few years and so have fraudulent activities. This may continue like that unless there is further regulation.

According to CFTC, about 23,000 customers were defrauded to the extent of $300 million between 2001 and 2006, leading to the prosecution of 80 people mostly in managed accounts.

Since there is no central currency market, it is very difficult to prove scams and frauds. Technical, over the counter (OTC) and unregulated nature of the forex market make currency trading vulnerable to fraud.

CFTC has recommended 9 guidelines that every individual forex trader should follow while trading foreign exchange. These are:

1. Beware of companies which promise huge profits with minimal risk.

2. There are no guaranteed profits. One should avoid any scheme which promises a fixed amount of return or any other guaranteed level of returns.

3. Avoid companies which guarantee no or least amount of risk. Don’t risk your retirement funds in a forex market.

4. Watch your investments in inter bank market. If some forex brokers claim to be engaged in such a market, be cautious and ask for full information.

5. Don’t trade on margin. One should understand that one can lose amounts much larger than margin amounts that one pays. One should clearly understand margins, before committing.

6. Don’t send or transfer cash on the internet as it can be lost for ever. It is highly unsafe. Many companies do not indicate their addresses or contact numbers on their websites. Avoid these companies.

7. Members of ethnic minorities like Russian, Chinese and Indian should particularly beware of fraudulent companies. They should not trade with their own funds if appointed on these companies as company executives etc.

8. Before committing with any company, one should obtain as much information about the company as possible. It should be verified from 3rd party sources.

9. Avoid dealing with anyone who refuses to divulge their background.

by Altaf Sahibzada