A STUDY ON FOREX FRAUDS AND ITS REGULATORY MECHANISMS BY – RENUGA DEVI.A & MS. VAISHALI
A
STUDY ON FOREX FRAUDS AND ITS REGULATORY MECHANISMS
AUTHORED BY – RENUGA
DEVI.A
LLM-DEPARTMENT OF PROPERTY
LAW, SCHOOL OF EXCELLENCE IN LAW, TNDALU.
CO-AUTHOR- MS. VAISHALI
B.A (Eng. Lit)., L.L.M.,
NET., Ph.D.(pursuing)
Assistant Professor of
Law, School of Excellence in Law, TNDALU.
ABSTRACT:
The Foreign exchange or
forex is considered to be a still developing platform of currency exchange and
trade. As economies began to expand and international trade grew, so too did
the need to make transactions simpler and add stability to the exchange of
currencies around the globe. Payments made using gold and silver were not only
cumbersome, but were also affected by price changes caused by shifts in supply
and demand.
Keywords: Forex, Fraud, Warning,
Scam, Prevention, Regulations.
1. INTRODUCTION:
Foreign exchange also known as
“Forex” is a global electronic market, where individuals, institutions or
business entities trade on international currencies and currency derivatives.
No physical trade takes place in the scene of a forex trade. Foreign exchange
enables the exchange of currencies of various countries for international trade
or investment. Forex is an Over the Counter (OTC) market which is used to
determine the rate of currency exchange. In forex there is no central place or
headquarters for trading, instead the market dealers and forex traders are
connected globally through computers and other electronic devices making the
forex platform as one huge e-market place through internet.
2. INTERNATIONAL TIMELINE OF
FOREX MARKET:
·
2500 BC-1500 BC: Punched coins
made out of bronze, copper, silver and gold were used in trading.
·
17th & 18th
century: Amsterdam, England and County of Holland’s (part of Roman Empire)
became active forex market.
·
1850: USA became the leading
currency trader.
·
1880: Beginning of modern forex
era. Rise of gold standard.
·
1972: Trading markets faced
severe downfall.
·
1985: European banks started to
intervene and invest in forex trade.
·
1991: Iran’s agreement on
oil-forex barter system.
3. FOREX IN INDIA:
Ø 2nd century BC- 2nd century AD: Dynasty coins,
God and Goddess characteristic minted coins.
Ø 270 BC to 30 BC:
Western Deccan and Central India used coins with motifs of fauna like
elephants, lions, bulls, horses, hills,
tree, etc.
Ø 4th -6th centuries AD: Gupta coinage
-tradition of depicting the kings Chandragupta 1, Samudra Gupta, Chandragupta
II and Kumara Gupta on the obverse and a deity on the reverse.
Ø 9th - 14th centuries AD: dynastic crests such
as the Chalukya’s boar, Pallava’s bull, Chola’s tiger, Pandya’s bow, Cheras’s
arrow and Hoysala’s lion were depicted.
Ø 1978: Indian banks were first allowed intra-day forex trading. This
was the first instance in India.
Ø 1990: India entered into the global market.
Ø 1992: The Indian Rupee rate became floating in March. It became a
in. Indian Rupee as fully floating currency leading to a
demand-supply-based forex exchange.
Ø 1996: Reforms were made in the Indian forex market to regulate and
curb illegal trading.
4. FOREX FRAUD:
Foreign exchange fraud or forex fraud
which refers to scams or practices that are deceptive in foreign exchange
market. These scams always target naïve and unsuspecting investors. Forex scams
always lead to severe financial loss to the investor as well as society’s
economy as a whole[3],[4].
5. TYPES OF FOREX FRAUDS:
5.1 PONZI SCHEME
Ponzi scheme is a type of scam in
which the investors are incited with unusual high returns of interest. The Ponzi
scam was named after Charles Ponzi[5],
an Italian business man and a con artist who started to swindle people by “Rob
Peter to pay Paul” method. He promised his client of 50% profit within 45
days or 100% profit interest and payments within 90 days for the IRC they
invest.
In reality he paid the early
investors of the amount he collected from later investors and soon he ran out
of money to pay the investors and his scam came into the light. His scam ran
over for a year costing his clients over 20 million dollars. Charles Ponzi was
found guilty and was charges with 86 counts of fraud, mail scam and other offences.
He was sentenced with life imprisonment.
CHARACTERISTICS:
·
Misleading investors
·
Promise of high returns
·
Lack of transparency
·
No actual investment
·
Unlicensed individuals
·
New investor’s investments are
used for returns
·
Inevitable loss and collapse of
economy
5.2 SIGNAL SELLING SCAMS
Signal selling scams are
Forex scams where fraudsters claim to offer highly profitable trading signals
or advice which requires a fee or subscription. These signals are always false
and misleading[6].
The scammer's goal is to deceive victims by making them to pay for the signals
and pushing them by investing in their recommended trades[7].
The scammer’s often ask the victims
to pay the fee monthly, quarterly or even annually. It is to be noted that the
average fee of subscription is Rs.2000 and it raises from here with the type of
investment the victims are falling into.
CHARATERISTICS:
·
False promises
·
False and misleading
advertisements
·
No true knowledge about trading
signals
·
Lack of transparency
·
High pressure scale tactics
urging the investors to buy
·
Unregistered and unlicensed
brokers.
5.3 ROBOT SCAMS
Robot scams or automated trading
system scam is a trending forex scam in which the malicious bots are programmed
to perform online fraud activities. These frauds are also known as Trading bot
scams. Bots are software programs that perform
automated, repetitive, pre-defined tasks. They can be much faster than
human users, which is an advantage that cybercriminals can exploit[8].
TYPES[9]:
·
Trading bot scam: These are automated bots or software used in trading to steal money
which uses preset algorithms to manipulate trades, steal funds or gather
sensitive information.
·
Bot-driven ad fraud: These are click bots that uses fake click digital ads which imitates
real users.
·
Robocall scam: These automated calls are pre-recorded voice calls which imitates
human like voice to scam people.
CHARACTERISTICS:
·
False promises
·
Misleading advertisements
·
Lack of transparency
·
Unregistered or unlicensed
brokers.
5.4 PRICE MANIPULATION
Price manipulation refers to
international interference with the functions of foreign exchange market to
influence the currency, price in the forex market[10].
The people involved in this scam are banks, brokers as well as individual
traders[11].
TYPES:
·
Layering: the process of
layering involves placing multiple orders at different prices to create a false
impression of the market.
·
Spoofing: spoofing creates
false impression in the markets of demand and supply by placing multiple orders
without execution of that order.
5.5 FALSE ADVERTISING
It is an act of making false claims,
transmitting, publishing of misleading or untrue information or deceptive
claims of a product, service or business[12].
The deceptive methods employed in false advertising are as follows:
1.
Misrepresenting facts: Making
false claims about a product's features, benefits, or performance.
2.
Omitting important information:
Failing to disclose important information about a product or service, such as
side effects or limitations.
3.
Using deceptive language: Using
language that is intended to deceive or mislead consumers, such as using fine
print or complex terminology to hide important information.
4.
Making unsubstantiated claims:
Making claims about a product or service that are not supported by evidence or
scientific research.
5.6 PHISHING SCAMS
Phishing scam a type of cybercrime in which
the attackers send fake messages, emails, or texts similar that of a legitimate one such as a bank, online
retailer, or social media platform. These scams trick victims into revealing
sensitive information, such as login credentials, financial information, or
personal data[13],[14].
TYPES:
1.
Email Phishing: Scammers send fake emails that appear to be from a
legitimate source, asking victims to provide sensitive information or click on
malicious links.
2.
Spear Phishing: Scammers target specific individuals or
organizations with tailored emails or messages that appear to be from a trusted
source.
3.
Whaling: Scammers target high-level executives or officials with
sophisticated phishing emails or messages.
4.
Smishing: Scammers send fake text messages (SMS) that appear to be
from a legitimate source, asking victims to provide sensitive information or
click on malicious links.
5.
Vishing: Scammers use voice calls to trick victims into revealing
sensitive information or providing financial information.
6. WARNING SINGS OF FOREX
FRAUDS[15]
a)
Unrealistic promises: Be wary
of promises that seem too good to be true, such as unusually high returns or guaranteed
profits.
b)
Unregistered or unlicensed:
Check if the Forex broker or investment opportunity is registered and licensed
with regulatory bodies such as the Commodity Futures Trading Commission
(CFTC) or the National Futures Association (NFA).
c)
Lack of transparency: Be cautious
if the Forex broker or investment opportunity is unclear about their trading
strategies, fees, or risks involved.
d)
High-pressure sales tactics: Be
wary of sales representatives who use high-pressure tactics to convince you to
invest or trade.
e)
Unusual or complex investment
strategies: Be cautious of investment strategies that seem unusual or complex,
such as "secret" trading algorithms or "guaranteed"
profit-making schemes[16].
f)
Unsolicited investment offers:
Be wary of unsolicited investment offers, especially if they come from unknown
or unverified sources.
g)
Fake or misleading credentials:
Verify the credentials and qualifications of the Forex broker or investment
opportunity, and be wary of fake or misleading credentials.
h)
Unusual or excessive fees: Be
cautious of unusual or excessive fees, such as high commissions or management
fees.
i)
Difficulty withdrawing funds:
Be wary if you experience difficulty withdrawing funds from your account or if
the Forex broker or investment opportunity makes excuses for delays.
j)
Poor or unresponsive customer
service: Be cautious if the Forex broker or investment opportunity has poor or
unresponsive customer service, as this can be a sign of a scam.
k)
Unrealistic or inconsistent
trading results: Be wary of trading results that seem unrealistic or
inconsistent, as this can be a sign of a scam.
l)
Lack of regulatory oversight:
Be cautious if the Forex broker or investment opportunity is not subject to
regulatory oversight or is not registered with regulatory bodies.
7. THE FOREIGN EXCHANGE
REGULATION ACT, 1973
The key highlights of the FERA, 1973
are as given below,
The Foreign Exchange Regulation Act (FERA),
1973[17]
treated foreign exchange as a limited
resource that required strict control. It was intended to regulate
foreign exchange to maintain the country's foreign reserves. Violations of
FERA were considered criminal offenses, and the punishment was imprisonment. The
Reserve Bank of India (RBI) grants permission to any person or corporation to
deal in foreign exchange.
The Reserve Bank of India permits
dealers to transact in foreign currencies, subject to review and cancellation
in the event of non-compliance. Money changers are permitted to convert
currencies at the rates set by the RBI[18].
Import/export restrictions were
imposed on currencies. Persons other than authorized dealers are prohibited
from engaging in financial currency transactions. Outside India, there are
restrictions on owning or acquiring immovable assets. Payment restrictions
when sending/receiving money from/to a non-Indian resident The RBI’s
authority to request information and confiscate documents whenever and wherever
it is needed[19].
The Foreign Exchange Regulation
Act (FERA) had become incompatible with the pro-liberalization policies of
the Government of India. Hence it was repealed in 1999 and replaced by
FEMA which came into force in the same year from the month of June.
8. THE FOREIGN EXCHANGE
MANAGEMENT ACT,1999
The Foreign Exchange Management Act
(FEMA) was passed on 29 December 1999 in parliament, replacing the Foreign
Exchange Regulation Act (FERA),1973. This act makes
offences related to foreign exchange civil offenses. It extends to the
whole of India[20].
It also paved the way for the
introduction of the Prevention of Money Laundering Act, 2002, which came
into effect on 1 July 2005. It enabled a new foreign
exchange management regime consistent with the emerging framework of
the World Trade Organization (WTO).
FEMA enables the Reserve Bank of
India to pass regulations and the Central Government to pass rules relating to
foreign exchange in tune with the Foreign Trade policy of India.
OFFICE:
a)
The Head Office of FEMA, also
known as the Enforcement Directorate, headed by the Director is located in New
Delhi.
b)
There are 5 zonal offices in
Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office is headed by a
Deputy Director.
c)
Every 5 zones are further
divided into 7 sub-zonal offices headed by Assistant Directors and 5 field
units headed by Chief Enforcement Officers.
KEY STRUCTURE OF THE ACT:
i.
The Act consist of VII
Chapters, 49 Sections and 8 sections are omitted.
ii.
As per section 3, all financial
transactions concerning foreign securities or exchange cannot be carried out
without the approval of FEMA.
iii.
All transactions must be
carried out through Authorized Persons [Sec 2(c)].
iv.
Section 4 states that no Indian
resident can acquire, hold, own, possess or transfer any foreign exchange,
foreign security or any immovable property situated outside India.
v.
Section 5 empowers RBI to
impose reasonable restrictions for current account transactions in public interest.
vi.
U/s 6, Indians residing in
India, have the permission to conduct a foreign exchange, foreign security
transactions or the right to hold or own immovable property in a foreign
country in case security, property, or currency was acquired, or owned when the
individual was based outside of the country, or when they inherit the property
from individual staying outside the country[21].
vii.
U/s 13, the adjudicator (an
officer with the ED) can impose a penalty three times the size of the
contravention involved where the sum is quantifiable. In case the contravention
is not quantifiable, the penalty is set at Rs 2 lakh. Further, where the
violation is a continuing one, an additional penalty of Rs 5,000 per day of
contravention can be imposed.
9. INTERNATIONAL CASES
1.
Charles
Ponzi’s Ponzi scheme, 1920
In 1920 Ponzi started a company –
Security Exchange Co. in which he sold stock & promissory notes and
advertised that the investors would get a 50% interest in 90 days for stocks
they invested. He then used new investor’s fund to pay old investors. It was estimated
that Charles Ponzi raked about $15 million dollars in just
8 months in 1920. He faced two federal indictments and life
imprisonment[22].
2.
Bernie
Madoff scams, 1990
Bernard Lawrence "Bernie"
Madoff is an American financier who executed the largest Ponzi scam in history.
He defrauded $65 billion in 17 years. He was the Chairman of Nasdaq Stock
exchange in 1990's. Since he's an expert people trusted the front, he created.
His returns were initially high but later on, Madoff swindled investors’ money.
3.
Allen
Stanford scam, 2012
Allan Stanford was a former banker
and businessman who was convicted 110 years of imprisonment in 2012. He
committed security fraud of $7 billon and misinformed over 50,000 investors
about professional management on investing.
Allan and his associates were also
suspected on Mexican drug cartel dealings. Allan created false certificate of
deposits. Antigua relied heavily on Allan's business but later stripped him of
his Knighthood as people of Antigua severely lost money because of his scam and
faced financial loss until 2009. He was sentenced to 150 years in
prison for money felonies laundering, securities fraud
and other felonies.
4.
Scott
Rothstein's Scheme, 2009
Scott W. Rothstein was disbarred
lawyer, who committed $1.2 billion Ponzi scheme. He involved fabricated
settlements in legal cases in which people sold large settlements to him for
lump sum of cash. Later Alan Sakowitz, a land developer, attorney of real
estate contacted FBI regarding Scott’s activities with concern. The federal
police and FBI found his scam and he was incarcerated to 50 years in an
unknown federal prison
10. INDIAN CASES
a. Sahara Forex Scam (2011)
The case was
between Sahara real estate corporation along with Sahara Housing Investment
against SEBI. Sahara raised funds from investors through fully convertible
debentures OFCD which was not permitted by SEBI. In 2012, Hon’ble Supreme Court
ordered Sahara to refund of 24,000 crores with 15% of interest to over 2 Crore investors who invested between 2008-11. In 2020
SEBI filed against Sahara & Subrata Roy seeking Rs.62,000 crores[23].
b. Speak Asia Forex Scam (2011)
This scam
involved earning money through online and lured investors to purchase web
subscriptions of Rs.11000 each. Subscribers were provided that they'll earn
money by filling out online forms etc. CID Found 2276 crores being duped from
over 27 lakh people and arrested the mastermind Ram Sumiran Pal and the
other people involved in this scam[24].
c. Stock Guru India Forex Scam (2011)
Self-styled investment
adviser duped Rs.1000 Crores. More than 2 Lakh investors lost their money. This
scam promised 20% interest a month. The scammers offered solutions for
insurance and mutual funds, offered trading solutions and other portfolios for
management. Investors paid Rs.1000 as registration, investments with a minimum
of Rs.10,000 for investments[25].
d. Axis Forex Scam (2018)
The scammers
involved in this scam shared investors data and investments related sensitive
information in exchange for kickbacks from brokers in Dubai. ED
arrested Joshi, the main accused and seized his assets[26].
e.
Pune Forex Scam (2019)
An app operator swindled over 500
individuals with impaired speech and other disabilities. He lured others in
pretense of making money by recruiting others. The complainant Harshal Santaram
Purjan received links & videos through acquaintance on forex trading, he
was led by nose by the promise of doubling or tripling money. Purjan pledged
his gold for 8 lakhs only to lose what he invested. It was later found that the
mastermind behind the scam was a Dubai based swindler Vinod Kunde businessman
Ponzi Scheme, money laundering and forex scam. He was arrested and ED attached
his properties in Dubai[27].
f.
Kerala Forex Scam (2020)
The Tamil Nadu cyber wing arrested a
man from Malappuram, who rented his bank account as a mule account in the name
of a feed agency for cyber fraudsters. He received Rs.1 lakh every month &
received Rs.40,000 in advance. The
victim stated that the fraud gang contacted him on pretense of forex traders
& would yield multiple profit. The company was SEBI approved and victim
invested Rs.2.22 crores[28].
11. CONCLUSION
Forex
transactions are either spot or forward which refers to the delivery, or
settlement, date whereby the exchange of currencies takes place. They normally
carry different rates of exchange. Every rate varies from second to second.
This shows that the trade markets are not always stable. It becomes the
investors liability by either investing in the forex markets or when losing the
investments. Even though the regulatory bodies take necessary actions against
the scams and advises people time to time to be aware of such fraudulent
activities, it is the public who should be aware of the fake markets and
scammers. In my opinion the punishments for scamming and fooling out the
innocent people must be much stricter than he current codes.
12. REFERECE
·
https://www.worldbank.org/en/archive/history/exhibits/Bretton-Woods-and-the-Birth-of-the-World-Bank
·
Reserve Bank of India-
https://www.rbi.org.in/commonman/english/Currency/Scripts/Ancient.aspx#:~:text=The%20first%20documented%20coinage%20is,dynastic%20coin%20issues%20is%20controversial.
·
https://www.hdfcbank.com/personal/resources/learning-centre/pay/know-what-is-foreign-exchange
·
https://www.forexbrokers.com/education/types-of-forex-scams
·
The Rise of Mr. Ponzi,
Inkwell Publishers, Ltd. (Mark Mathosian), (2 July 2001)
·
https://www.cftc.gov/
·
https://www.avatrade.com/education/trading-for-beginners/forex-scams
·
https://seon.io/resources/dictionary/trading-bot-scams/#:~:text=This%20is%20where%20trading%20bot,%2C%20goodbye%20platform%2C%20goodbye%20money.
·
https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/market-manipulation/
·
https://natlawreview.com/article/what-market-manipulation
·
https://dcba.lacounty.gov/portfolio/false-advertising/
·
https://www.sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-prohibition-of-fraudulent-and-unfair-trade-practices-relating-to-securities-market-regulations-2003-last-amended-on-january-25-2022-_55604.html
·
https://consumer.ftc.gov/features/robocall-scam-examples
·
https://www.indiacode.nic.in/repealedfileopen?rfilename=A1973-46.pdf
·
https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?SID=6
·
https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=3347
·
https://www.indiacode.nic.in/bitstream/123456789/1988/1/A1999_42.pdf
·
https://www.ftc.gov/news-events/topics/identity-theft/phishing-scams
·
https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=2438
·
https://www.sebi.gov.in/acts/futpfinal.html
Ponzi's Scheme,
·Mitchell Zuckoff, Penguin Random House
·
C.A NO. 9833 OF 2011, https://www.sebi.gov.in/sebi_data/attachdocs/1351500106870.pdf
·
https://www.deccanherald.com/content/371301/rs-2276-crore-speak-asia.html
·
https://www.thehindubusinessline.com/markets/stock-markets/stock-guru-scam-ed-to-attach-properties-of-accused-couple/article23107670.ece
·
https://timesofindia.indiatimes.com/business/india-business/ed-seizes-rs-12-96-lakh-in-foreign-currency-after-raids-against-former-axis-bank-mutual-fund-manager/articleshow/113267844.cms
·
https://theprint.in/india/how-a-pune-investors-complaint-blew-lid-off-rs-900-cr-fraud-linked-to-octafx-forex-trading-platform/2316478/
[1]
https://www.worldbank.org/en/archive/history/exhibits/Bretton-Woods-and-the-Birth-of-the-World-Bank
[2] Reserve Bank of India-
https://www.rbi.org.in/commonman/english/Currency/Scripts/Ancient.aspx#:~:text=The%20first%20documented%20coinage%20is,dynastic%20coin%20issues%20is%20controversial.
[3]
https://www.hdfcbank.com/personal/resources/learning-centre/pay/know-what-is-foreign-exchange
[4]
https://www.forexbrokers.com/education/types-of-forex-scams
[5] The Rise of Mr. Ponzi,
Inkwell Publishers, Ltd. (Mark Mathosian); First electronic edition (2 July
2001)
[6] https://www.cftc.gov/
[7]
https://www.avatrade.com/education/trading-for-beginners/forex-scams
[8]
https://seon.io/resources/dictionary/trading-bot-scams/#:~:text=This%20is%20where%20trading%20bot,%2C%20goodbye%20platform%2C%20goodbye%20money.
[9]
https://consumer.ftc.gov/features/robocall-scam-examples
[10]
https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/market-manipulation/
[11]
https://natlawreview.com/article/what-market-manipulation
[12]
https://dcba.lacounty.gov/portfolio/false-advertising/
[13]
https://www.ftc.gov/news-events/topics/identity-theft/phishing-scams
[14]
https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=2438
[15]
https://www.sebi.gov.in/acts/futpfinal.html
[16]
https://www.sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-prohibition-of-fraudulent-and-unfair-trade-practices-relating-to-securities-market-regulations-2003-last-amended-on-january-25-2022-_55604.html
[17]
https://www.indiacode.nic.in/repealedfileopen?rfilename=A1973-46.pdf
[18]
https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?SID=6
[19] https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=3347
[20]
https://www.indiacode.nic.in/bitstream/123456789/1988/1/A1999_42.pdf
[21]
https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?SID=6
[23] CIVIL APPEAL NO. 9833 OF 2011, https://www.sebi.gov.in/sebi_data/attachdocs/1351500106870.pdf
[24] https://www.deccanherald.com/content/371301/rs-2276-crore-speak-asia.html
[25] https://www.thehindubusinessline.com/markets/stock-markets/stock-guru-scam-ed-to-attach-properties-of-accused-couple/article23107670.ece
[26] https://timesofindia.indiatimes.com/business/india-business/ed-seizes-rs-12-96-lakh-in-foreign-currency-after-raids-against-former-axis-bank-mutual-fund-manager/articleshow/113267844.cms
[27] https://theprint.in/india/how-a-pune-investors-complaint-blew-lid-off-rs-900-cr-fraud-linked-to-octafx-forex-trading-platform/2316478/
[28] https://www.thehindu.com/news/cities/chennai/salem-businessman-loses-222-crore-man-from-kerala-held-for-online-trading-investment-scam/article68875993.ece#:~:text=According%20to%20the%20police%2C%20the,Trading'%20would%20yield%20multiple%20profit.