Investment-Fraud as global Cybercrime

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What please is the difference between an online broker for binary options and a boiler room-scammer-gang?

Sometimes one encounters new forms of fraudulent cybercrime which are as lucrative as they are damaging. Some of them are so new that in some languages it is a true struggle to find a proper word describing them. Of course, everybody knows what a “boiler-room scammer gang” is in the English speaking world whereas Spanish and German currently do not even have a word it.

The ´boiler room´ refers to the working conditions of lower level fraudsters. Often, at the beginning of their careers it takes them some months spent in well disguised, narrow subterranean cube farms before they notice that they have not turned into that type of questionable call-center agents who sell newspaper subscriptions to the elderly but are rather flogging non-existent securities or other faked investment products (see: „Lifting the Lid von Boilerroom-Scams“ by Tony Levene, The Guardian, Feb. 3rd, 2007).

If you are the victim of fraud by a bank or a ´real´ broker how to proceed is clear.

Over the last few years one has come to learn that even so-called ´global´ banks can go bankrupt, that they manipulate international interest and currency exchange rates or commit tax fraud with carbon-oxygen derivates. However, at least one can be certain that the skyscrapers housing their headquarters exist. Once the scandal becomes public most people involved in it will have already left the institution but at least they had real names, business cards and only slightly sugarcoated photos. Press releases and public speeches originate from real world CEOS and not from actors.

There are real office and headquarter addresses upon which a legal complaint can be served, which can seized by public prosecutors and where computers and files can be seized. Taking the perspective of a prosecutor one does not have to file more than one or two official requests for judicial assistance with law enforcement agencies in other jurisdictions. The private victim does not have to make a huge upfront payment for legal fees, forensic IT-experts, security services and lastly translators.

Victims of boiler room scammer gangs are at a disadvantage.

All of this is different if, after months or even years of trading in securities of IT-companies, which only produce spam-, virus- or at best surveillance software; after trading in binary options, which are not related to any type of real securities or commodity market; or in foreign currencies, for which the so-called ´broker´ just invents its own current exchange rate or even after investing in ice-derivates in the Antarctic; you finally realize that you have become the victim of a boiler room scammer gang.

Most frequently this happens as soon as the investor wants to withdraw the money he can see in his account online. All of a sudden all these “brokers”, “senior executive account managers” or even “compliance officers” with all these English, Slavic or Asian names sounding so cosmopolitan, just disappear. Over all this time they did not write many emails in order to protect themselves from geo-location, but they had always been keen on nice and pleasant conversations over the phone or via Skype which makes it hard to prove these conversations ever took place.

In the best case scenario they might refer to their standard terms of contracts, which one never had a chance to read let alone to accept, and point out that according to them any withdrawal requires that the balance in the account is e.g. sixty times higher than the initial deposit. This violates the laws even of the Republic of Cyprus, that EU jurisdiction where many but not all of these brokers are regulated (see CySEC-Circular, number 65, from April 8th, 2015).

To save the honor of the CySEC and its ombudsman it must be said that they are more professional than Central European or Anglo American prejudice might dictate: If enough formal complaints are received accompanied by media campaigns they do initiate an official investigation - (most recently against Iron-Fx according to CySEC Announcement August 6th, 2015, a case that has since been settled with a fine of Euro 335,000).

How can I check if my broker is running a scam?

Nobody will transfer several thousand Euro or dollars to an unknown financial service provider without giving it a quick look on Google. However, in the case of a scam especially the first few hits or even adwords - advertisements are likely to be misleading as these “companies” have established entire fake marketing departments whose job is to produce faked ratings. There are some consumer- or industry-based online forums in which one can check for bad experiences had by others in the past like the “Forex-Peace-Army”, “complaintsboard”, “binaryoptionswatchdog”, or “Ripoffreport”. Amazingly even their administrators sometimes find it hard to distinguish between authentic complaints, ratings and reports and forged ones.

What you should really do is check all office addresses that are revealed to the public by the broker: Is it likely that these are real offices or can anybody hire virtual office space there? The better the reputation of the official address is, the more likely it is that the latter will be the case.

Only make the minimum deposit, make some profit/loss neutral test trades and try to withdraw the initial deposit.

Most victims are cautious enough not to invest more than the minimum deposit at the very beginning. However, this is not sufficient, as these sales agents are well trained to talk you into investing more and more and to make you forget your initial doubts very easily. Far more important than limiting yourself to the minimum initial deposit is that you should print out your credit card or bank account statement and stare at it for at least three minutes: Can the cash-flow be traced to the alleged recipient? Is what one sees really an account number, maybe from a foreign banking system which in itself is okay, but is this really an IBAN-, SEPA- or ABA-Code or is it more like a local or foreign phone number? Is there a slight variation in the company name of the recipient and the broker like XYZ Ltd. instead of XYZ Inc.? If this is the case: Stop.

If all of this is not the case you should make some profit-neutral test trades and try to withdraw the minimum deposit. If this works everything´s fine, if it doesn´t stop and maybe even forget about the minimum deposit.

As soon as a broker offers a bonus likewise stop. Not all brokers call this a bonus; some use terms like “marketing program”, “VIP-customer service” or “Signaling Fee”. This is just a trick to make withdrawal harder because the funds from the bonus program and the real money invested are routinely commingled in the same account.

Check the registration and the place of incorporation of the Broker

A registration of the broker at the CySEC should of course secure compliance with certain minimum industry standards. For investors from the E.U. this is indeed at least a more trustworthy jurisdiction than places of incorporation in the Caribbean Sea (BVI, Sychelles, Anguilla, Belize, the Cayman Islands), where it is almost impossible to get access even to the articles of incorporation.

You should also be on the safe side if the broker is also registered in England and in Australia because law enforcement agencies there are more familiar with the criminal scheme of running a boiler room scammer gang than their Central European counterparts.

Even if it has been possible to withdraw the initial deposit you should still continue to save all emails, even if only very few will have been exchanged and as a precaution against any future emergency it would not harm to record all those pleasant phone or skype conversations, if the local laws at your place of residence allow this without prior consent of the other party.

What to do if you do not get your money back?

The best chance for accomplishing this exist if the period in which a credit card company or a bank can cancel a transfer in cases of consumer fraud has not yet expired. Unfortunately in most cases this relatively short period of usually just 30 days will have expired before the damage is discovered. If it has not, then the first thing you should do is to file a complaint with the credit card company or the bank.

If it is too late for that, the most important task is as always to save the evidence. What this means here is this:

1.) Stop trading with the other party but do not stop the phone and email communication. If it is technically possible and legally allowed in your country record them from now on. An alternative which does not seem to be prohibited anywhere is to turn the phone´s loudspeakers on and have a witness present who writes down the conversation. Do not delete your phone´s memory but at least write down each and every number used by the other side. Mostly this will just lead to be anonymous and probably local call centers which pretend that the person calling is calling from the same country as you, but in some instances it is possible to trace these calls.

2.) Save all emails and sort them. Check their headers which you see in the native view option of your email account for the originating IP-addresses of the sender. Geolocation tools, that are available to the public, will rarely produce a street address but at least it is possible to locate a country, region or even city of the sender.

3.) Get a ”Down-Them-All-Tool” as a Browser Plugin and save the current version of the broker´s homepage. These tend to change constantly. Though it is possible to purchase the old versions of a homepage later, at least these costs can be saved.

4.) Run a ”Google-Reverse-Picture-Search” for all people you have been in touch with if you can find any pictures of them on social media. It might be possible to get a little bit closer to the true identity of your “account manager” with this.

5.) Try to obtain abstracts from the commercial registry for all companies under which your broker claims to operate. In many countries like the U.K. the commercial registry can be checked online and free of charge. For this reason most brokers prefer to incorporate in places where it is harder to obtain these files like in many islands in the Carribean Sea or sometimes even impossible unless one is a public prosecutor.

What are the legal options?

According to uncertified but trustworthy sources the average victim of a boiler room scammer gang loses GBP 10,000. In spite of this the legal options for recovering this money are very limited. The main reason for this is that the people running such a gang are well aware of the procedural and legal obstacles still in the way of international cooperation in criminal matters . For example, most brokers will accept customers from all over the world with the exception of the one and only country where their call centers are physically located. This has quite frequently been Spain in the last decade. Nowadays other countries seem to be en vogue.

The EU Small Claims Guideline (if damage < € 2.000,-) or The Financial Ombudsman of the Republic of Cyprus (if damage < € 50.000,-).

On the other hand the damaged investor will not care that much about whether anybody ever goes to jail for this; he just wants his savings back and when it comes to real fraud cases this becomes rather more difficult the deeper the government is involved. If the victim resides in a country with strong consumer protection laws which allow every consumer to sue at his local place of residence or which has a small claims statute in force this would be an option to consider. For brokers regulated in Cyprus the Ombudsman of the Republic of Cyprus is worth contacting.

However, many of these formal proceedings require that the victim holds some real writing signed by an official director of the broker in his hands or that the broker has not responded to an official demand letter within a defined period of time –(generally three months) - and this very first hurdle is where many lay people will fall down, as in many jurisdictions they will have to show that the broker has actually received the demand letter. Even finding their official address often requires some research in commercial registries.

For all these reasons hiring a lawyer on this certainly can at the very least do no harm. On the other hand nobody should expect too much from it as private law firms do not have the investigative resources that would be necessary to accomplish something more than just recover at least a substantial portion of the lost money.

Successful investigations in the U.S., the U.K. and most recently Cyprus

Naturally, there is more dramatic excitement on the criminal side of all this. To date, only the US SEC and the Serious Fraud Office of the UK have something like a proven track record for investigating this type of crime (for the U.S.: SEC v. Banc de Binary, Fed. Dis. Ct. of Nevada, Case-Number 2:13-CV-00992-MMD-VCF and for the UK the BBC report: „Nottingham boiler room scam gang made GBP 3 Mill“ from May 29th 2015 dealing with a relatively unsophisticated gang operating from Mallorca which targeted the UK only.). The CySEC has also at least imposed a fine quite recently against a broker regulated there (against Iron-Fx, see CySEC Board Decision from Nov. 27th. 2015). We will have to wait and see whether the counterparts of these institutions in other countries will investigate similar cases in the future. To some extent this will of course also simply depend upon the number of criminal complaints received.

von astrachan am 16.12.2015 12:17:31# 1
The author would like to add that there is also the phenomenon of "recovery room fraud". Lists of victims from "brokers" –(so-called suckers lists)- are handed over to "recovery room teams" pretending to be debt collection agencies, tax advisors or even law firms. They will either pretend to be able to resell the worthless securities or to offer legal services in collecting the funds invested previously (see for example: the FSMA Belgium warning letters against some companies doing this from March 16th and October 12th, 2015). When you are cold-called from anyone pretending to able to this be very aware, especially if their homepages can also only be traced to typical tax haven jurisdictions.
von astrachan am 13.01.2016 20:16:41# 2
As the investigation has advanced now I would like to add something to the issue: How you can tell if your broker is a scam?

Another lawyer phrased it this way: „The presumption is that any broker is guilty unless they convince you of the contrary". This has some merit to it, because to some extent one could say that the whole business model of a binary options broker is in a way an institutionalalized Ponzi-Scheme as they do not have a liquidity provider such as a real bank or broker for institutional investors. They only have client funds and no other assets. Besides, their quotes, share values and currency rates are just invented by themselves and not linked to any real market in existence outside the relation broker-client.

I have spent some time with this whole complex not and I am taking a slightly different look. Sofar I would like to separate them in three categories.

Type I: The Bad Brokers: Only a few!

The first type consist of the "the bad ones" but they have at least a physical headquarter at a publicly known address –(as opposed to a dozens of virtual office addresses). The names, that sign their real correspondence or their official press releases are the same as those, that appear in the company registry. They will also give you the bank details of their own bank accounts. (This is the most crucial point!).

Unfortunatedly not many BO brokers fall in this category. You might encounter withdrawal problems with them or if they are themselves hit by some global economic event they start to behave in irregular ways but at least you can expect to get your money back trough legal action or that they file for insolvency if they are insolvent.

(Ironically, for Cyprus regulated brokers and consumer with losses below €20.000,- this is the best scenario at all, because the claims of consumer investors will then be settled through an institutional EU-fund. For businessman insolvency is not of course not nice but on the other hand it s something that happens every day.)

Type 2: The Very Bad Brokers (the far majority sofar)

The second type of broker consists of the "very bad ones". The far majority of BO brokers fall into this category. There you do not know if any piece of information they reveal voluntarily is correct: The names, the addresses, the press releases etc. They might have just a small "call-center" and a data room and some location which they try to hide through all possible means which makes it hard but not impossible to figure out where they are.

Your alarm bells should ring if you do not have the information of their own bank accounts such as a Sepa/IBAN/or ABA-Code. I have seen some transfers being made to accounts which only had a cell phone number as recipient and some third party company incorporated in one of the handful of notorious tax haven jurisdictions. This is a very clear red flag because they want to make the tracing of their funds and assets as difficult as possible. With these brokers the most healthy way is to forget your money at all. You might be able to get some funds back through legal action but this long and cost-intensive. I would estimate that far less than 10% of damaged persons really go this way to its end.

3 Type: The very, very bad Brokers (Sofar not many).

The third ones are the very, very bad ones. They fall in the same category as the type 2-broker. The only difference is that with some resources it is possible to figure out that they have direct links to some organized crime scene or even pertinent prior convictions.

von astrachan am 28.01.2016 16:04:25# 3
A criminal offense also showing up in this field sometimes is identity theft: At least it has been to possibe to show this in one case of a broker from New Zealand, who had used the portray of a Chinese Professor on its homepage.
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