FOREX: All it will Cost You…

“Good day. There’s a forex scam that’s going around. There are plenty but this one I experienced myself. I followed a person on Instagram and then we started to chat online. He said he’ll trade on my behalf. I invested $300 (about R4 000) and, yes, he made profits in days. The trader is from South Africa, but claims to work with a bank in the USA.

Once the profit was made he told me to send an email for me to request my login details. I did so and got my details. I logged in and there was the profit just waiting for me to withdraw it!  I decided to withdraw some of it, but in order to proceed, they said I needed to obtain an authorization code. For this, I had to pay R6 081.00. I received it and decided to continue. However, again, I had to get another code for a clearance certificate. They asked me to pay R11 000 for this.

It was at this point that I released that it was a scam, because every payment made went to a South African Bank account holder, which I was directed to by the Instagram trader. However, the address on the email claims to be a bank in the USA…”

(Source: Hello Peter, edited for ease of reading, 26 February 2019)

Stories like the above abound: a medical doctor in KwaZulu Natal claims to have lost R1 million, her friend lost an equal amount. We all want a quick way of making money. In exasperation we cast caution to the wind and search online for ideas.

Back home

So here is a scenario that played itself out a few days ago at my company: a client agreed to invest some money offshore. After we completed rigorous Regulatory due diligence, she sent her R1 million off to exchange control. I was happy, because I believed that she would grow wealth over the medium term.

Less than ten days later, her profit in Rand terms was over R44 000. By stating the assumptions, I could now claim that in a year, she could get a benefit of R1 584 000 on top of her original investment. 

The devil is in the details

Provided I put my assumptions in small print with lots of T’s and C’s, I would not be lying.

However, I would not be honest. I know the variables which I got right are unlikely to repeat itself 20 times during the following year. And that is why I won’t make such wild promises. That is why so much of our work is focused on financial literacy and advice and not so much on products and policies.

Say cheese!

This is where the allure and the rub lie when it comes to get-rich-quick schemes – they seem so thrilling! A man stands in his best suit next to a flashy car, worth a cool R2 000 000. Proudly, he proclaims that last year this time, he had less than R30 in his back pocket. Then he discovered trading in foreign currency and developed a fail-safe method to maximize profit. He has so much money now that he would like to share his success with others. The best part? You don’t have to do anything! He will do it for you whilst you sleep!

And if you don’t believe me, read the testimonials below…”

Many people fall for schemes such as the one outlined above, PRECISELY BECAUSE others seem to think it is true! After all, just look at all the testimonials (nobody lies on the internet, right?) One of the sure-fire ways to find out if something is a scam is to contact those who have benefited directly. The problem with ‘testimonials’ is that contact details are not provided.

So let’s start at the beginning

The foreign exchange market (also referred to as FOREX) is the market where one currency is traded for another. It is one of the largest markets in the world – we’re talking USD trillions on any given day.

Some of the participants in this market simply want to exchange a foreign currency for their own, like multinational corporations which do business in different countries. However, the market is also populated with a large number of currency traders who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. These traders try to take advantage of even small fluctuations in exchange rates.

This market never sleeps

Unlike many other markets, the foreign exchange market operates 24 hours per day throughout the week. Once the European session ends the Asian session or US session starts, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open.

The man with the flashy car may not have lying… entirely

Although it is possible for a few experts to successfully arbitrage (a tricky, highly technical maneuver which capitalises on price differences) the market for an unusually large return, it does not mean this can be replicated again and again, or with larger amounts, even if said specialist had the same tools and information. This has been described as follows: imagine an island with buried treasure. The amount of treasure is finite, regardless of how many people buy copies of the treasure map!

The way out of the mine field

As you can see from the above, it may feel like it would pay to keep your Financial Advisor on speed dial! Unlike the market, they might value their sleep, so these are things you can do when you receive that call with an once-in-a-lifetime offer:

  • Listen carefully to what they say. Ask to keep the notes they make while meeting with you. Make sure you get the web page address they refer to and say you want to think about it.
  • Check with the Financial Service Conduct authority if the company has an AFS registration number. Check to see who the Key Person is.
  • Phone the Financial Services Conduct Authority and give them the AFS number and ask if they are registered to sell that product to you. Provide them with the name of the Key Person.

There is another reason for following the above steps. If the company is not authorised to sell that particular product, it means that you have no claim, should the deal turn sour. Sometimes these brokerages have a license to sell funeral policies only, and then they sell you a foreign exchange package. The trading package is not covered. Should you decide to take the matter to the Ombud, the provider will often argue that they were not selling a package to make you money, but to educate you. Moreover, they will claim that education was what you received.

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