The world of forex trading isn’t immune to those running ‘get rich quick’ schemes. Some of these types of scheme are known as Ponzi schemes after Charles Ponzi, an Italian-American fraudster who sold an investment based on International Reply Coupons being bought in one country before selling them at a profit in another.
While the principle of this scheme was financially sound, the logistics made it impractical, and the dividends paid to initial investors were taken from the money paid into the scheme by new investors. This is what characterises Ponzi schemes: the scheme can only continue as long as there’s a supply of new money. Once this source dries up, the scheme becomes insolvent.
So, how do forex investors recognise Ponzi schemes and avoid getting scammed by fraudsters?
Here are a few key indicators that a forex investment is fraudulent:
Unrealistically high returns
Simply put, any investment that promises a ten percent or higher return is questionable. It’s against basic mathematics for a scheme to promise a return that high; shifts in the forex market are usually below one percent, so anything more is unrealistic without a risky level of leverage.
Similarly, the value of an investment will always fluctuate. Any scheme that promises a consistent return is basing this on unrealistic promises.
Pressure to invest
If you are told that entry into the scheme is about to close, and you need to invest quickly, you should treat this as a red flag. Always do due diligence before investing, and if you’re being rushed into investing without thoroughly investigating the scheme, walk away. A genuine investment will always be open to scrutiny, and why would anyone running a genuine scheme wait until the last minute to attract investors?
Lack of information
It’s not unreasonable to ask how the scheme functions and makes returns. If information is missing or sketchy, there probably isn’t enough to make an informed decision. Don’t invest on trust alone.
Genuine trading platforms and investments will be registered with organisations such as the Securities and Exchange Commission (SEC) or the Financial Conduct Authority (FCA). These organisations ensure that client money is kept in a separate account to prevent new investors from subsidising the returns of existing customers. These schemes are audited, so no regulation means no oversight.
While this may seem obvious, the real indicators of fraud won’t show until the fraudsters have your money. When the returns start drying up, those behind the scheme have usually disappeared, so getting your money back will be next to impossible. Ponzi schemes have proliferated, and that’s due to the level of sophistication of many of these scams.
The warning signs aren’t always obvious: firms may pose as legitimate, regulated investment schemes using ‘cloned’ details, or they may push a scam using a third-part ‘introducer’ who doesn’t have to be regulated.
Legitimate firms will always be happy to supply proof of their bona fides; they will not pressurise you, and they will have no objection to you seeking independent advice.
Trust your instincts: your money is better off in the bank than in a fraudster’s account, so if anything seems suspicious, stop and break off communication with the suspect organisation.