How to avoid forex scams

If these companies could really generate 10%-20% in returns per month, why would they share it with you?

SCAMS that involve investing in foreign currencies could have resulted in losses exceeding thousands of Ringgit by Malaysians each year. The figure could even run into millions of Ringgit.

Often, the unwary are tempted by the promise of sky-high returns but these get-rich-quick schemes are often nothing more but delicious bait. 

Forex scams include the buying or selling of foreign currencies by a company that is not licensed by Bank Negara Malaysia. 

Some Malaysians have their lifetime savings wiped out because of it. Others are jumping from the frying pan into the fire when they try to recoup their losses by borrowing money from friends, family or Ah Long (loan sharks) and end up deeper in debt. 

Don’t allow this to happen to you.

So, what are the tell-tale signs of a forex scam? 

1. Companies, headquarters and bank accounts that are registered in countries where the banking rules and tax regime are loosely controlled. This is a major red flag as it is nearly impossible to get your money back once it has left Malaysia.

2. Scammers want your bank details and signatures, but their side of paperwork and signatures is always “almost coming”. That is because they don’t like providing evidence of their shady operations. Their supposed overseas headquarter is an excuse they will use very often. 

3. Their offices look extremely professional. They will deck their space out with expensive furniture and TV screens which show currency movements. This is to trick you into believing that actual, legitimate business activities are being undertaken at the premise.

4. If you get a “demonstration”, it is most likely with fake transactions in a controlled environment and not on the real, open, currency markets, where real risks exist and profits are far from guaranteed. These demonstrations have the same value as rigged slot machines: they don’t prove anything.

5. Fake testimonials and pictures of people with huge amounts of cash or luxury items. This is worthless evidence and proves nothing, except maybe a proud display of the cash they have stolen from their previous victims. 

6. The scammers might even pay out the first return on a small investment as a lure to get you to agree to a larger investment. Once you agree, your money and the scammers vanish.

7. An introduction from family or friends. These scams often work because they depend on victims to recruit their friends and families. As difficult as it will be: if tell-tale signs point to it being a scam, don’t listen to your friends and family.

8. In their (online) ads and recruiting events the scammers flaunt all the status symbols that we (secretly) crave for: expensive cars, clothing, watches, alcohol. They will try to seduce you with “wine and trade” sessions. Greed and jealousy reduce your capacity for rational thinking. Don’t fall for it.

Besides these eight tell-tale signs, mere logic should warn us for a couple of reasons:

If these companies could really generate 10%-20% in returns per month, why would they share it with you?. There must be a catch, which is that you are being cheated.

The volatility of exchange rates is much smaller than the returns they are offering you. How can scammers give you twice to four times your investment, often within a few weeks or months, if exchange rates typically move only a few percent?

Why would anyone offer you an exchange rate for any currency that is better than the market? Why would they sell it to you at a discount, if they could get a better price on the open market? The scammers will likely come up with some excuse in a legally grey area. Don’t fall for it.

Even if there is volatility in exchange rates, how would an investor be able to always end up on the right side of a transaction and always make a profit?

Is trading in foreign currencies always a scam? No, but it is a risky investment even if you buy and sell currencies directly from your bank. 

Here is why. If you had bought US dollars in 2012, you would have paid around RM3 per US dollar. Today, you would be able to sell these US dollars again for around RM 4 per US dollar. A healthy return of 33% over 4 years, or 7.5% annually (only slightly better than your much, much safer EPF). 

Here is the catch: in 2012 no one knew what would happen with the dollar-ringgit exchange rate. 

Shorter investment periods drastically reduce the price fluctuations to a few percent, which are quickly outweighed by transaction costs. 

Short term movements are nothing more than unpredictable noise, which only shows a direction in the longer term. Currencies are more a lottery than an investment.

Mark Reijman is co-founder and managing director of http://www.comparehero.my/ dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.